Finc 355 and 430 week 5

Quiz 5

NAME ____________________________ Due Date: July 6, 2014 (in assignment folder)

Please provide name above and provide answers in the chart below and submitting homework in MS Word in assignment folder for Quiz 5. (I’ll deduct points if you don’t).

1. Which of the following are requirements related to having a Keogh plan?

(1) participants must be self-employed

(2) business must be unincorporated

(3) more than 5% owners may not contribute to a plan

(4) employment income can be contributed, but only accompanied by self-employment income

A. (1) only

B. (1) and (2) only

C. (1) (2) and (3) only

D. (2) (3) and (4) only

2. In a defined contribution plan Keogh, what is the maximum percentage of participant income allowable for annual deductible plan contributions?

A. 10

B. 15

C. 25

D. 30

3. An individual who has a Keogh plan cannot also invest in a traditional or Roth IRA.

A. True

B. False

4. For the self-employed owner of an unincorporated business, advantages of a Keogh plan over a traditional IRA include which of the following?

A. employees of the business may be excluded from participation in the plan

B. contribution limits for a Keogh are higher than limits for a traditional IRA

C. income generated by investments in a Keogh are tax-deferred until withdrawn from the plan

D. A and B

E. B and C

5. Winston Cantrell earns $70,000 annually as a business professor at Greenlaw University. Winston is a participant in the university’s defined benefit plan. Five years ago, he began doing some management and marketing consulting for small business owners. He now earns $35,000 a year as a self-employed person in addition to his university income. Winston is considering adopting a money purchase Keogh for this self-employed business. As his financial advisor, you tell Winston

A. he cannot establish a Keogh plan because he has a qualified plan in the job where he earns the most

B. he can establish a Keogh plan and deduct up to 25% of his total earnings

C. he can establish a Keogh plan and deduct up to 25% of his gross self-employment earnings

D. he can establish a Keogh plan and deduct up to the statutory limit as counted by his total income

E. he can establish a Keogh plan and deduct up to 25% of earned income from self-employment

6. What is the maximum amount an eligible employee can contribute (in 2013) to a SIMPLE IRA (not including any catch-up) contributions?

A. $4,000

B. $5,000

C. $8,000

D. $12,000

7. Which of the following are requirements for an employer wishing to implement a SIMPLE IRA?

(1) the only additional plan an employer may maintain for the year is a SEP

(2) employer must have 100 or fewer employees

(3) employee contributions must be made through salary reductions

(4) employer may make a dollar-for-dollar matching contribution of up to 10% of employee’s compensation

A. (1) and (4) only

B. (2) and (3) only

C. (1) (2) and (3) only

D. (1) (2) (3) and (4)

8. Advantages of a SIMPLE IRA from the viewpoint of the employee include

A. benefits are easily portable

B. contribution limits are higher than in a traditional or Roth IRA

C. contributions and earnings are tax deferred

D. only B and C

E. all of the choices are correct

9. Bob Jolly is 73 this year. He has been a key employee of Appleton Bookkeeping Services since he joined the company 50 years ago. The owner of Appleton would love it if Bob stayed on indefinitely. Bob is in excellent health and has developed a wide clientele that enjoys his wit and charm as well as his broad experience and expertise. Bob says he’ll retire at 75 “while he still has some time to enjoy retirement.” Appleton Bookkeeping established SIMPLE IRAs for employees 5 years ago. Which of the following is (are) true for Bob?

A. Bob can make a deductible contribution to his own traditional IRA

B. Appleton cannot make a matching contribution to Bob’s SIMPLE IRA because he is over 70½

C. Appleton can make a salary reduction contribution to Bob’s SIMPLE IRA

D. a and b

E. a and c

10. Which of the following is true about required employer contributions to a SEP?

A. contributions must be recurring and substantial

B. no contribution needs to be made in any given year

C. a minimum of 2% must be contributed into all eligible employee accounts

D. plan contributions can discriminate in favor of highly compensated employees

11. Each of the following is true regarding a SEP, except

A. direct employer contributions to a SEP are not subject to Social Security (FICA) or Federal unemployment (FUTA) taxes

B. in a SEP, employer contributions are made directly to an employee’s IRA

C. SEP contributions must be “recurring and substantial” to maintain tax-favored status

D. employer contributions to a SEP reduce the amount the employer can deduct for qualified plan contributions for an employer who maintains a SEP and a qualified plan

E. distributions from the plan follow the IRA distribution rules

12. Jack Mattingly, owner and employee of the Crab Shack, a local seafood restaurant, has a SEP for his business. Currently, he employs Star, his head cook who has been with him for 4 years; Dot and Skip, his head waitress and waiter, who have been with him for 5 years; and Andy, another waiter who has been there 3 years. He has five part-time employees who started between 1 and 2 years ago. His 16-year-old son busses tables on the weekends, but he never makes more than $400. All of his other employees, except one part-timer, are over age 21. How many employees must Jack cover under the SEP?

A. 1

B. 4

C. 5

D. 10

E. 11

[Jack must cover himself, Star, Dot, Skip, and Andy. All have been with the business at least 3 out of the last 5 years. The part-timers are not covered because they were all employed less than 3 years. His 16-year-old son is not old enough to be required to be covered under the plan.]

13. In addition to public schools and colleges, which of the following types of organizations may be allowed to establish a tax deferred annuity plan?

(1) private colleges

(2) hospitals

(3) churches

(4) political lobbying organizations

A. (1) only

B. (1) and (2) only

C. (1), (2), and (3) only

D. (2), (3), and (4) only

14. Bill Brown, age 51, is planning to retire in 5 years and withdraw funds from his tax deferred annuity. Bill can make this withdrawal, but he must pay a 10% penalty for early withdrawal.

A. true

B. false

15. Avent Charities is a Section 501(c)(3) organization that has three highly paid administrators and a small clerical staff. The administrators have asked you to help them evaluate the merits of installing a tax deferred annuity plan (Section 403(b)) instead of a Section 401(k) plan. You tell them

A. a tax deferred annuity plan is not limited to annuity contracts or mutual funds, but it can invest in a broad array of investment options

B. top-heavy rules generally do not apply to a tax deferred annuity plan

C. the entire plan will not be disqualified if the salary reduction limit is exceeded for one employee

D. A and C

E. B and C

16. Which of the following plan types relates best to this plan description: “At retirement, disability, or death, the XYZ Corporation will pay you or your designated beneficiary $50,000 a year for 10 years starting at age 65”?

A. salary continuation formula

B. salary reduction formula

C. excess benefit plan

D. phantom stock formula

17. Amounts deferred under nonqualified deferred compensation are never subject to Social Security taxes or Medicare taxes.

A. True

B. False

18. Bob Everett is covered under a funded nonqualified deferred compensation plan that has an irrevocable trust set up for his benefit. Bob must pay income tax as soon as he is vested in contributions made to the fund, even though he does not have a right to withdraw cash from the fund until he retires.

A. True

B. False

19. Which of the following would be considered an unforeseeable emergency that would permit distributions from a Section 457 plan?

A. loss of property due to casualty

B. purchase of a residence

C. college education of children

D. significant investment losses due to stock market fluctuations

20. Arthur works as a janitor for the Municipal School district weekday evenings and part-time for the Municipal Power Plant on weekends. He earns $25,000 from the school district and $10,000 from the power plant each year. Both employers have a Section 457 plan. Which of the following is true?

A. Arthur can contribute the maximum allowed by law to both plans

B. Arthur’s total contribution to both plans must be at or below plan limits set by Congress for the year that the contribution was made

C. Arthur can only contribute to one of the plans up to the maximum allowed by law

D. according to federal law, Arthur cannot contribute to the Section 457 plan at the Municipal Power Plant because he is a part-time employee

E. none of the above