REVIEW QUESTIONS



     Cash or deferred arrangements (CODAs) are also called:

     a.     defined benefit plans
     b.     pension plans
     c.     403(b) plans
     d.     401k plans

(d)     Cash or deferred arrangements are called 401k plans if they qualify under that section of the tax code.



     401k plans must be incorporated into an underlying

     a.     defined benefit plan
     b.     defined contribution plan
     c.     profit-sharing plan
     d.     Simplified Employee Pension

(c)     401k plans must be part of an underlying profit-sharing plan or stock bonus plan.


     Which of the following is a required feature of a traditional 401k plan?

     a.     employee elective deferrals
     b.     employee voluntary contributions
     c.     employer matching contributions
     d.     employer non-elective contributions

(a)     Of the four types of possible contributions to a 401k plan, only employee "elective deferrals" are necessary.


     Which of the following are made with "after-tax" dollars?

     a.     employee elective deferrals
     b.     employee voluntary contributions
     c.     employer matching contributions
     d.     employer non-elective contributions


(b)     Voluntary contributions are made by employees in "after-tax" dollars.


     Contributions employees make from a bonus or salary reduction program are known as:

     a.     elective deferrals
     b.     voluntary contributions
     c.     matching contributions
     d.     non-elective contributions


(a)     Elective deferrals are monies employees choose to contribute to a 401k plan.  This money may be "set aside" through a salary reduction plan or by deferring a bonus or raise.


     Contributions made by an employer as part of a profit-sharing arrangement are known as:

     a.     elective deferrals
     b.     voluntary contributions
     c.     matching contributions
     d.     non-elective contributions


(d)     Employers may make either matching or non-elective contributions to their employees' 401k accounts.  Matching contributions are based on the amount employees elect to defer.  Non-elective contributions are usually a form of profit-sharing.  They are not tied to the employees' contributions.


     Most employers allocate non-elective contributions based on the employee's:
     a.     elective deferrals
     b.     salary or wages
     c.     voluntary contributions
     d.     years of service

(b)     Most "profit-sharing" or non-elective contributions are allocated based on employee compensation.

    For tax purposes, employee elective contributions are:

     a.     included in the employee's gross income then deducted on the employee's tax return
     b.     excluded from the employee's gross income and deducted on the employee's tax return
     c.     treated as the employer's contribution and deducted on the employer's tax return
     d.     excluded from the employee's gross income only if the employee is not "highly compensated"     

(c)     Elective deferrals are not reported by the employee as taxable income (i.e., they are "excluded" from income) and are deducted by the employer as a business expense.  Technically, elective deferrals by employees are "employer contributions".


     Which of the following are always "immediately and fully" vested?

     I.      employee elective deferrals
     II.     employee voluntary contributions
     III.    employer matching contributions
     IV.   employer non-elective contributions

     a.     I only
     b.     I and II only
     c.     III and IV only
     d.     I, III and IV only

(b)     All monies contributed by the employee are 100% vested at the time of contribution.



     Which of the following will result in a tax deduction to either the employee or employer?

     I.       employee elective deferrals
     II.      employee voluntary contributions
     III.     employer matching contributions
     IV.    employer non-elective contributions

     a.     I only
     b.     I and II only
     c.     III and IV only
     d.     I, III and IV only

(d)     Employers claim a deduction for elective deferrals, matching contributions and non-elective contributions.  Voluntary contributions are not deductible by either employer or employee, they are made with "after-tax" dollars.


     Which of the following are tax deductible for an employer?

     I.        employee elective deferrals
     II.       employee voluntary contributions
     III.      employer matching contributions
     IV.     employer non-elective contributions

     a.     I only
     b.     I and II only
     c.     III and IV only
     d.     I, III and IV only

(d)     Employers claim a deduction for elective deferrals, matching contributions and non-elective contributions.  Voluntary contributions are not deductible by either employer or employee, they are made with "after-tax" dollars.

     Earnings on which of the following grow tax-deferred?

     I.       employee elective deferrals
     II.      employee voluntary contributions
     III.     employer matching contributions
     IV.    employer non-elective contributions

     a.     I only
     b.     I and II only
     c.     III and IV only
     d.     I, II, III and IV

(d)     All earnings in a 401k plan grow tax-deferred, regardless of the source of the contribution.


     Employers may impose delayed vesting requirements on which of the following?

     I.        employee elective deferrals
     II.       employee voluntary contributions
     III.      employer matching contributions
     IV.     employer non-elective contributions

     a.     I only
     b.     I and II only
     c.     III and IV only
     d.     I, II, III and IV

(c)     Deferred vesting may be imposed on employer contributions.  All employee contributions, elective and voluntary, are fully vested at the time of contribution.

    The reason employers offer matching contributions to 401k plans is:

     a.     they are required under the tax code
     b.     they are required under ERISA
     c.     as an incentive
     d.     their tax deductability

(c)     While matching contributions are tax deductible, the reason employers offer them is as an incentive or fringe benefit to their employees.  Matching contributions are not required by the tax code or ERISA.


     The maximum matching formula for an employer's matching contributions to a 401k plan is:

     a.     25 cents per dollar of employee deferral
     b.     50 cents per dollar of employee deferral
     c.     75 cents per dollar of employee deferral
     d.     one dollar per dollar of employee deferral

(d)     The maximum matching formula is the "full matching formula"  one dollar of employer contributions for each dollar the employee elects to defer.


    The tax code requires a minimum matching contribution of:

     a.     25 cents per dollar of employee deferral
     b.     50 cents per dollar of employee deferral
     c.     75 cents per dollar of employee deferral
    d.     there is no required matching contribution


(d)     There is no minimum matching formula, and no requirement that employers match their employee's deferrals.


The rules on "premature" distributions from 401k plans are less restrictive than for other qualified plans.  Which of the following reasons for premature distributions are allowed in a 401k but generally not in other qualified plans?

     a.     disability
     b.     attaining age 55
     c.     financial hardship
     d.     termination of the plan

(c)     Distributions for financial hardship are allowed in 401k plans but not other qualified plans.


     In which type of 401k plan are contributions usually made in a lump-sum once-a-year?

     a.     SIMPLE plans
     b.     bonus-type plan
     c.     thrift-type plan
     d.     SEP plans

(b)     A bonus-type 401k plan allows for one annual contribution -- usually a deferral of an annual bonus.


     Which of the following type of 401k plan is sometimes called a  salary reduction plan?

     a.     SIMPLE plans
     b.     bonus-type plan
     c.     thrift-type plan
     d.     SEP plans

(c)     Thrift-type 401k plans encourage regular retirement savings, usually through a salary reduction plan.


     In a bonus-type 401k, the employer:

     a.     may require an all-or-none contribution to the plan
     b.     may permit an employee to split the bonus -- contributing some to the plan and taking the rest in cash
    c.     both a and b are true
     d.     neither a nor b are true

(c)     Some employers will require the employee to either take or defer the entire bonus, while others will allow a "partial" deferral.


     In a thrift-type 401k:
     a.     the employee designates a percentage of compensation to be deferred into the plan    
     b.     the employer designates a percentage of compensation to be deferred into the plan
     c.     the employee may not alter the designated percentage being deferred
     d.     the employer may alter the designated percentage being deferred

(a)     In a thrift-type plan, the employee chooses the level of savings, usually through a salary reduction program. That level may be changed by the employee.


     SIMPLE 401k plans are available to:

     a.     all employers
     b.     sole proprietors and partnerships only
     c.     only to employers who have an existing 401k plan
     d.     those employing 100 or fewer employees

(d)     SIMPLE 401k plans may be established by employers who do not have any other qualified plans and who employ fewer than 100 employees.



     ERISA requires 401k plans to

     a.     be in writing
     b.     discriminate against highly-compensated employees
     c.     immediately vest all contributions
     d.     pay all distributions in the form of a joint annuity


(a)     All qualified plans, including 401k plans, must be in writing.  Discrimination against lower paid employees is prohibited.       Deferred vesting of employer contributions is permitted.       Distributions to married participants must be in the form of a joint annuity, unless waived by the spouse.  


     Which of the following provisions of ERISA apply to 401k plans?

     I.       two years of employee service to be eligible to participate in the plan
     II.      that the plan be for the exclusive benefit of the participants and their beneficiaries
     III.     mandatory distributions beginning at age 70½
     IV.     qualified joint survivor annuities for married participants

     a.     I and III only
     b.     II and IV only
     c.     II, III and IV only
     d.     I, II, III and IV

(c)     401k plans may require only one of year employee service to participate (other qualified plans may require two years).  All of the other provisions apply to 401ks and other qualified plans.


     An employer offers to contribute to its employees' retirement plan or increase the employees' coverage under its health insurance plan -- at the employee's option.  This type of arrangement:

     a.     does not qualify as a 401k plan
     b.     qualifies as a 401k plan
     c.     qualifies as a 401k plan only if the employer offers the employee the option of taking the contribution in the form of cash or additional health insurance
     d.     is not permitted

(c)     401k plans must offer the employee the choice of taking a deferral in cash.  Hence the name "Cash or Deferred Arrangement"  If it does not offer a cash option, the plan does not qualify as under section 401k of the tax code.

Carlos Morales' works for two employers who each maintain a 401(k) plan. Carlos is eligible to participate in both, and contributes to both plans this year.  If Carlos contributes more to the two plans than is allowed by the annual limit on elective deferrals:
a. the plans could lose their qualified tax status
b. faces a 6% penalty on the excess contribution
c. the employer must pay a 10% penalty tax on the excess contribution
d. none of the above  

(b) If an employee's elective contributions exceed the annual limit, the employee faces a 6% penalty for each year the contributions remain in the plan.  If those "overcontributions" are to plans that are under the control of one employer, and the employer does not "correct" the situation, the plans could lose their special tax status.  If the contributions are to plans of different employers -- as in this case -- the overcontribution doesn't affect the plans' qualified status.  Employers who contribute more than allowed under the 100%/$40,000 rule, face a 10% penalty.


     When computing an employee's annual elective deferrals, the employee must include all elective contributions made to:

     a.     other 401k plans
     b.     SEP plans
     c.     tax-sheltered annuities (403(b) plans)
    d.     all of the above

(d)     The annual limit on elective deferrals applies to all such deferrals to 401k plans (including SIMPLE plans), SEP-IRAs and tax sheltered annuities -- regardless of which employer is sponsoring the plan(s).


    The maximum that may be contributed to a 401k plan on behalf of an employee each year is:

     a.     $40,000 (adjusted for inflation)
     b.     100% of the employee's compensation (net of the contribution)
     c.     the lesser of $40,000 or 100% of the employee's compensation
     d.     the greater of $40,000 or 100% of the employee's compensation

(c)     The limit on "annual additions" to defined contribution plans, including 401k plans, is 100% of compensation to a maximum of $40,000 per year ($56,000 in 2019).


     The "separate accounting " rule requires:

     I.     all employers to maintain a separate accounts for each participant
     II.     a separate account for each participant only if the employer  imposes a vesting requirement
     III.     employers to allocate gains, losses, withdrawals and other changes to the plan on a reasonable and consistent manner
     IV.     that the accounts of highly compensated employees be separate from those of the rank-and-file

     a.     I and III
     b.     II and III
     c.     I and IV
     d.     III and IV

(b)     Employers must maintain a separate account for each employee, unless the plan immediately vests all contributions.  Employers must also allocate account activity among the participants in a reasonable and consistent manner.


     Under ERISA, 401k plans are permitted to impose a delayed vesting requirement on:

     a.     all contributions
     b.     matching and non-elective contributions only
     c.     non-elective contributions only     
     d.     voluntary and matching contributions only

(b)     Deferred vesting may be applied to employer provided contributions - namely matching and non-elective contributions.


     Which of the following are NOT exempt from a 401k plan's deferred vesting schedule?

     a.     elective deferrals
     b.     amounts rolled over from another qualified plan
     c.     earnings on voluntary contributions
     d.     earnings on matching contributions

(d)      Monies deposited by employees (elective deferrals,  voluntary contributions,  and rollovers) must be fully and immediately vested, as must earnings on those deposits.  Employer provided contributions and earnings on those contributions may be subject to deferred vesting.


     Since Jim Jones enrolled his employer's 401(k) plan two years ago, he has made elective contributions of $12,000 to his employer's 401k  plan, which the employer has matched 50¢ on the dollar -- or $6,000.  The plan has grown to $25,500.  Of the $7,500 accumulated earnings, $5,000 is attributed to the elective contributions and $2,500 is  allocated to the matching contributions. This plan uses a "two-to-six year" vesting schedule. Jim decides to leave this employer and rollover his benefits into his IRA -- how much may he rollover?  

     a.     $17,000
     b.     $18,500
     c.     $18,700
     d.     $25,500


32.     (c) Jim is entitled to all of the monies he contributed, or $12,000 of elective deferrals and the $5,000 earned on those savings or $17,000.  In addition, Jim is entitled to a portion of the $6,000 contributed by his employer and the $2,500 earned on that  contribution.  Jim has two years of service, which under the two-to-six year graded vesting schedule for matching contributions, entitles him to 20% of the employer-provided contributions and earnings.  Jim may rollover 100% of $17,000, plus $1,700 (20% of $8,500), or $18,700.

An employee terminates employment before the benefits in his plan are fully vested.  What happens to the unvested portion?
a. It reverts to the employer.
b. It is allocated among the remaining plan participants.
c. It is applied as matching contributions in the future.
d. None of the above.

(b) ERISA prohibits forfeitures from reverting to the employer.  In defined contributions plans, including 401(k) plans, any forfeited funds are allocated to the accounts of any remianing plan participants.



     When determining if a plan is top-heavy for vesting purposes, which of the following employees are considered "key personnel"?

     I.       officers of the employer earning $180,000
     II.      owners holding 5% or more ownership in the employer
     III.     non-owner employees earning $150,000 or more per year
     IV.     any of the 10 largest owners in the employer

     a.     I and II only
     b.     II or IV only
     c.     I and III only
     d.     I, II and IV only


(a)     Key personnel are any employees who serve as highly-paid officers (making more than $135,000 adjusted for inflation), or are also owners of the employer having a 5+% ownership interest; or who own 1+% of the employer and earn more than $150,000.  Choice III is not an owner or officer, and therefore is not a "key" employee.  (The "largest owners" were at one time considered "key personnel", but no longer are.)


     If a plan is "top-heavy", benefits must vest no slower than:

     I.     three year cliff vesting
     II.     five year cliff vesting
     III.     two-to-six year graded vesting
     IV.     three-to-seven year graded vesting

     a.     I and III
     b.     I and IV
     c.     II and III
     d.     II and IV


(a)     Top heavy plans must use the accelerated vesting schedules: 3-year cliff vesting or 2-to-6-year graded vesting.



     According to the non-discrimination rules, a "highly-compensated employee" is one who during the year:

     I.     owns more than 5% of the employer
     II.     earns more than $80,000 per year (adjusted for inflation)
     III.     is any officer of the employer
     IV.     fits the definition of key-personnel under the "top-heavy" rules

     a.     IV only
    b.    I or II only
     c.     II or III only
     d.     I, II or III only     


36.     (b)     The list of "highly compensated employees" for non-discrimination purposes is different than the list for "key personnel" under the top-heavy rules.  Highly compensated employees are those owning 5+% of the employer, or those earning more than $80,000 per year - adjusted for inflation.


     Which of the following is a "coverage test" for participation in a 401k  plan?

     a.     ratio test
     b.     actual contribution test (ACP)
     c.     actual deferral test (ADP)
     d.     top-heavy test

(a)     There are two possible "coverage" tests:  ratio test or percentage test.


     In addition to satisfying a "coverage test", 401k plans must not discriminate in favor of highly compensated employees in terms of benefits.  The test(s) used to determine non-discrimination for this purpose is (are):

     a.     actual deferral test (ADP)
     b.     actual contribution test (ACP)
     c.     either a or b
     d.     both a and b

(d)     401k plans must satisfy both the ADP and ACP tests, in addition to one of the "coverage tests".


     Employers may require employees to make elective deferrals to a 401k plan in order to qualify for which of the following additional employer benefits:

     a.     health or life insurance coverage
     b.     stock option plans
     c.     non-elective employer contributions
     d.     none of the above

(d)     Employers may not offer other employee benefits (other than matching contributions to the 401k plan) contingent on employees' elective deferrals.


     All of the following are subject to income taxation when withdrawn from a 401k plan EXCEPT:

     a.     elective deferrals
     b.     earnings on elective deferrals
     c.     voluntary contributions
     d.     earnings on voluntary contributions


(c)     Voluntary contributions are made with "after-tax" dollars.  These are not taxed again when withdrawn.



     Early retirees in a 401k plan must begin to take distributions no later than:

     a.     age 59 1/2
     b.     upon disability
     c.     the year after attaining age 70 1/2
     d.     upon retirement

(c)     Participants in a 401k plan, as with all qualified plans, must begin to take distributions no later than age 70½ -- the first payment may be delayed to April 1 of the following year.  Those who continue to work after that age may delay withdrawal until retirement.



     Premature withdrawals from a 401k plan are subject to:

     a.     taxation as ordinary income
     b.     a 10% penalty tax
     c.     both a and b
     d.     neither a nor b

(b)     Premature withdrawals, i.e., before age 59½, or due to death, disability, etc., are subject to a 10% penalty in addition to the taxes owed on the distribution.



     ABC Corporation merges with XYZ.  As part of the corporate restructuring, ABC's 401k plan is terminated.  Of ABC's 150 eligible employees, 56 are now eligible to participate in XYZ's defined contribution pension plan.  Angela Davis, age 46, was eligible to participate in ABC's 401k but is not eligible to participate in XYZ's plan.  Angela may:

     a.     withdraw her 401k funds without penalty
     b.     rollover her 401k funds into her IRA without penalty
     c.     leave her 401k funds with ABC until she reaches age 59 1/2
     d.     rollover her 401k funds into XYZ's pension plan     
(b)     Since there is a "successor plan" to the terminated plan that covers at least 2% of the workers in the terminated plan, Angela may not simply withdraw her funds without penalty.  The plan is terminated so she may not leave the funds in the plan, and she is not eligible to rollover the funds in the successor plan.  Of the choices, rolling her funds over to an IRA is the only option she has.  She could also withdraw the account value and pay the 10% penalty on the premature distribution.


     When a plan is terminated due to sale of the business, and the purchaser does not adopt a new plan,  the assets in the plan:

     a.     must be rolled over into the participants' IRAs
     b.    must be distributed in a lump sum within 12 months
     c.     must be rolled over into a qualified "successor plan"
     d.     are subject to the 10% penalty on premature distributions

(b)     When a plan is terminated and there is no successor plan, the plan assets must be distributed as a lump-sum within one year.  There is no penalty due to a "premature" distribution.  These funds may be rolled over by the participants into an IRA.

     Which of the following is true regarding the "hardship" exemption to the 10% penalty on premature distributions?

     a.     the amount withdrawn for hardship is not subject to income taxation in the year of the withdrawal
     b.     the participant must not have any other readily available financial resources that can be used to meet the hardship
     c.     the participant may continue to make elective deferrals to the  401k plan
     d.     the participant may not withdraw funds to pay for taxes owed on the withdrawal due to hardship

(b)     Hardship withdrawals are allowed if the participant has no other resources to meet the hardship.  If taken, the participant may not defer additional amounts into the plan for the next 12 months.  Withdrawals due to hardship are not subject to the 10% penalty, but are subject to ordinary income taxation.  Participants may withdraw an amount sufficient to meet the hardship, plus any taxes owed on the withdrawal.


     All of the following are legitimate reasons for a "hardship" withdrawal from a 401k plan EXCEPT:

     a.     purchase of a primary residence
     b.     medical expenses of the participant's spouse     
     c.     the employee's monthly mortgage payment
     d.     college tuition for a dependent
(c)     Payment of a monthly mortgage is not a financial hardship.  The other choices qualify as possible "hardships".

     How much may be withdrawn from a 401k plan due to financial hardship?

     a.     any amount of financial need that cannot be met by other readily available resources
     b.     the total value of the 401k account
     c.     the total value of the employee's elective contributions, less prior distributions due to hardship
     d.     the lesser of a or c

(d)     Obviously, the participant cannot withdraw more than is in the account.  Hardship withdrawals are limited to the lesser of the actual hardship (plus any taxes owed on the withdrawal) or the      amount of elective deferrals in the account, less any previous withdrawals due to hardship.


     The maximum amount that a 401k participant may borrow from the plan is:

     a.     $50,000
     b.     the greater of 50% of his or her vested benefits or $10,000
     c.     the lesser of a or b
     d.     the greater of a or b

(c)     If allowed by the plan documents, participant's may borrow up to 50% of vested benefits to a maximum of 50%.  In accounts with small accumulated balances, the participant may borrow up to $10,000.


     Loans taken from a 401k plan:

     a.     must be secured by collateral
     b.     must be repaid within 5 years
     c.     must be repaid on at least a quarterly basis
     d.     all of the above


(d)     All of these are conditions that apply to loans from qualified plans such as 401ks.


     A participant, age 27, borrows $10,000 from her 401k plan this year, but fails to make the first scheduled repayment of $500 according to the terms of the plan.  She is in the 28% tax bracket.  Her tax liability, due to this loan, is:
     a.     nothing this year
     b.     $2,800 ordinary income tax this year
     c.     $2,800 ordinary income tax and $1,000 penalty on a premature distribution
     d.     10% penalty on the amount of the missed payment of $500


(c)     Since she failed to honor the terms of the loan, she is deemed to have taken the full amount as a distribution.  She owes taxes on the distribution plus a penalty for taking a distribution before age 59  1/2.

     SIMPLE plans may be established in the form of a:

     I.     401k plan
     II.     IRA plan
     III.     SEP plan

     a.     I only
     b.     II only
     c.     I and II only
     d.     I and III only


(c)     SIMPLE plans may be established as 401k plans or IRAs.


     The primary advantage of a SIMPLE plan is that employers are relieved of:

     a.     vesting requirement under ERISA
     b.     non-discrimination rules
     c.     matching contribution requirements
     d.     drawing up plan documents


(b)     SIMPLE plans allow employers to ignore the non-discrimination and top heavy rules that apply to other 401k plans.  SIMPLE plans must be in writing, require  employer contributions and provide for 100% immediate vesting (which is more strict than allowed under ERISA).


     Which of following are permitted to offer SIMPLE plans to their employees?

     a.     employers with 100 or fewer employees
     b.     only employers with employees covered by a collective bargaining agreement
     c.     employers who offer other qualified retirement plans
     d.     any of the above


(a)     Only employers with no other qualified plan who employ fewer than 100 employees may establish a SIMPLE plan.


     When counting employees who are "eligible" for a SIMPLE plan, the employer must count:

     a.     all employees who worked for the employer during the past two years
     b.     only those employees who may make contributions to the plan
     c.     only those employees not covered by a collective bargaining agreement
     d.     all employees who worked for businesses under the common control of the employer


(d)     When counting employees for purposes of the "100 employee rule", all employees who worked for the employer during the year must be counted -- even those not eligible to participate.  If the employer controls more than one business all employees of all businesses must be counted.


     Which are true of SIMPLE 401k plans?

     a.     new plans may be established on a fiscal or calendar year
     b.     existing plans may continue to operate on a fiscal or calendar year basis
     c.     existing plans may continue to operate on a fiscal year basis, but new plans must be established on a calendar year basis only
     d.     all SIMPLE plans must operate on a calendar year basis


(d)     All SIMPLE plans operate on a calendar year basis.  An existing "fiscal year 401k" may be converted into a SIMPLE plan only if the plan is converted into a "calendar year" plan.


     If an employer adopts the most strict "participation rules", which "eligible employees" may participate in the SIMPLE plan, i.e., contribute to the plan?

     a.     all "eligible" employees may participate
     b.     only those "eligible" employees who earned at least $5,000 from the employer this year
     c.     only those "eligible" employees who earned at least $5,000 from the employer in the past two years
     d.     only those "eligible" employees who earned at least $5,000 from the employer in any of the past two years

(d)     Employers may exclude certain employees from participating in the plan (i.e., contributing to the plan).  Employers may exclude employees who have not earned $5,000 in any of the prior two years  - these need not be consecutive years.


     An "eligible" employee works for two unrelated employers, earning $20,000 from each for the past two years.  Each employer offers a SIMPLE 401k. If the employee is eligible to contribute to Employer A's plan this year, the employee:

     a.     may not contribute to Employer B's plan this year
     b.     may contribute to either Employer A of Employer B's plan, but not both during the same year     
     c.     may contribute the annual SIMPLE maximum to Employer A's plan and the annual SIMPLE maximum to Employer B's plan this year
     d.     may contribute the annual SIMPLE maximum this year between both Employer A and Employer B's plan

57.     (d)     Employees may participate in more than one SIMPLE plan each year - but may contribute no more than the inflation-adjusted limit to all such plans during the year.
.


     Which of the following are mandatory in a SIMPLE 401k plan?

     I.       employee elective deferrals
     II.      employee voluntary contributions
     III.     employer matching contributions
     IV.    employer non-elective contributions

     a.     I only
     b.     I or II only
     c.     III or IV only
    d.     I, III or IV only

(c)     Employees need not defer compensation under a SIMPLE plan.  However, the SIMPLE rules require employers to either match employee contributions or make non-elective contributions.


     Which of the following are NOT permitted in a SIMPLE 401k plan?

     a.     employee elective deferrals
     b.     employee voluntary contributions
     c.     employer matching contributions
     d.     employer non-elective contributions

(b)     Voluntary, after tax contributions are not permitted under the SIMPLE rules.



     The maximum allowable employee elective contribution to a SIMPLE 401k plan is:

     a.     less than that allowed in a SIMPLE 401k
     b.     more than that allowed in a SIMPLE 401k
     c.     the same as that allowed in a SIMPLE 401k
     d.     offset by contributions to the employer's SIMPLE 401k

(a)     The annual limit to SIMPLE plans is considerably less than is allowed for regular 401(k) plans.


     An employer offering a SIMPLE 401k plan must either:

     I.     match employee elective deferrals dollar-for dollar
     II.     match employee elective deferrals dollar-for dollar up to 3% of compensation
     III.     contribute no more than 2% of the employee's compensation as a non-elective contribution
     IV.     contribute 2%  of the employee's compensation as a non-elective contribution

     a.     I or III
     b.     I or IV
     c.     II or III
     d.     II or IV

(d)     Employers must either match employee contributions up to 3% of compensation, to contribute 2% as a non-elective contribution.


     An employer's contribution to an employee's SIMPLE 401 (k) account, is based on the employee's:

     a.     compensation
     b.     compensation up to a maximum of $150,000 adjusted from inflation
     c.     years of service
     d.     earnings history


62.     (b)     Employers base contributions to SIMPLE 401k plans on the employee's compensation up to a maximum amount of $150,000 adjusted for inflation ($280,000 in 2019).


     Employers must notify participants in a SIMPLE plan of the employer's contribution method for the year no later than:

     a.     the start of the election period
     b.     30 days before the election period
     c.     60 days before the election period
     d.     90 days before the election period


(a)     Employers must notify employees of their right to make deferrals, and the amount of the employer's contribution, before the election period.  The election period must extend over at least 60 days.


     Employees may terminate participation, i.e. elective deferrals, in a SIMPLE plan:
     a.     only on the election date
     b.     by giving notice within 30 days of the election date
     c.     by giving notice within 60 days of the election date
     d.     at any time


(d)     Employees may terminate participation in the plan at any time.


     Employers must "segregate" participating employees' elective deferrals into the 401k plan:

     a.     as quickly as possible
     b.     by the 15th day after the end of the month in which the employee would have otherwise received the deferral in cash
     c.     by the end of the employer's tax year
     d.     by the filing date of the employer's tax return

(a)     The rules require segregation of employee deferrals "as quickly as possible" - but under no circumstance later than the 15th of the following month.


     Employers may deposit their matching or non-elective contributions into the 401k plan:

     a.     as soon as is reasonably possible
     b.     by the 15th day after the end of the month in which the employee would have otherwise received the deferral in cash
     c.     by the end of the employer's tax year
     d.     by the filing date of the employer's tax return

(d)     Employer contributions must be deposited into the plan by the employer's tax filing date, including extensions.


     All contributions to a SIMPLE 401k plan must fully vest no slower than:
     a.     three year cliff vesting
     b.     five year cliff vesting
     c.     three-to-seven year graded vesting
     d.     immediately


(d)     All contributions to a SIMPLE plan are 100%, immediately vested.


     Which of the following are "immediately and fully" vested in a  SIMPLE 401k plan?

     I.      employee elective deferrals
     II.     employee voluntary contributions
     III.     employer matching contributions
     IV.     employer non-elective contributions

     a.     I only
     b.     I and II only
     c.     III and IV only
     d.     I, III and IV only


 (d)     All contributions to a SIMPLE plan are 100%, immediately vested.  Since voluntary contributions are not permitted in a SIMPLE plan, they cannot vest.


     Which of the following non-discrimination tests must be met in a SIMPLE 401k plan?

     a.     actual deferral test (ADP)
     b.     actual contribution test (ACP)
    c.     neither a or b
     b.     either a or b


(c)     SIMPLE plans are not subject to the regular 401k plan discrimination rules.  As long as the contributions do not exceed the limits imposed by the SIMPLE rules, neither ADP or ACP test applies.


     Which of following are treated the same in a "regular 401k" and a  SIMPLE 401k plan?

     a.     vesting
     b.     non-discrimination
     c.     premature distributions
     d.     reporting requirements


(c)     Rules governing distributions from SIMPLE plans are the same as for "regular" 401ks.  SIMPLE plans are exempt from the non-discrimination rules, top-heavy rules, reporting requirements that apply to regular plans.  The vesting schedule is faster in a SIMPLE plan.


     The maximum amount that may be borrowed from a SIMPLE 401k plan is:     
     a.     less than that allowed in a SIMPLE 401k
     b.     more than that allowed in a SIMPLE 401k
     c.     the same as that allowed in a SIMPLE 401k
     d.     offset by loans taken from SIMPLE 401ks


 (c)     Rules governing loans from SIMPLE plans are the same as for "regular" 401ks.



Use the following information to answer the following two questions

ABCO Corporation established a 401k plan for its 100 eligible employees, ten of whom are "highly compensated".  Under the plan, eight highly compensated employees are covered and have benefits equal to 20% of their compensation.

Under the "percentage test" how many of the non-highly compensated employees must be covered by the plan?

a.     51
     b.     63
     c.     70     
     d.     90

(b)     The percentage test requires coverage of at least 70% of the non-highly compensated employees.  Of the 100 eligible employees, 10 are highly compensated.  Of the 90 non-highly compensated employees, at least 63 (70% of 90) must be covered.


     Under the "ratio test", how many of the non-highly compensated  employees must be covered by the plan?

     a.     51
     b.     63
     c.     70     
     d.     90


(a)     Under the ratio test, the coverage percentage for non-highly compensated employees must be at least 70% the coverage percentage for highly compensated employees.  The coverage percentage for highly compensated employees is 80% (8 covered of 10 eligible).  Therefore the coverage percentage for non-highly compensated  employees must be 56% (70% of 80%).  Of the 90 non-highly compensated employees, at least 51 must be covered (56% of 90 = 50.4 employees).



     Under the "actual deferral percentage" (ADP) test, if the ADP of the non-highly compensated employees is 5%, the ADP of the highly paid group must not exceed:

     a.     5.0%
     b.     6.5%     
     c.     7.0%
     d.     11.0%

(c)     When the ADP of the non-highly compensated group is between 2% and 8%, the ADP of the highly compensated group may exceed the non-highly paid group by 2% -- in this case up to 7%.



     If the ADP of the highly-compensated employees exceeds the allowable amount under the ADP test, the employer may:

     a.     reclassify the plan's matching or voluntary contributions as  "elective"
     b.     recharacterize the elective contributions as "voluntary"
     c.     distribute the excess to the highly paid employees
     d.     all of the above


 (d)     All of these are ways to correct "excess contributions".


     If a 401k plan fails the non-discrimination tests (ADP or ACP), and  the employer does not "correct" the excess within 12 months from the end of the plan year, the plan:

     a.     will lose its qualified status
     b.     is subject to a 50% penalty
     c.     must distribute all plan assets to participants
     d.     roll over its assets into a "successor plan"


(a)     Failure to correct contributions to comply with the non-discrimination rules will ultimately cause the plan's disqualification.  Administrators have 12 months after the end of the plan's year to correct any excess contributions.


     Distributions to participants made by the administrator to correct an  "excess contribution or deferral" are subject to:

     a.     ordinary income taxation in the year of distribution
     b.     the 10% penalty on premature distributions in the year of distribution
     c.     both a and b
     d.     neither a nor b


(a)     Distributions of "excess contributions" must be included in the participant's income for tax purposes, but are not subject to the 10% penalty for premature withdrawals.


     In order to avoid a 10% excise tax on "excess contributions", the plan administrator must distribute the "excess" no later than:

     a.     the end of the plan year
     b.     2½ months after the plan year
     c.     the employer's tax filing date
     d.     12 months after the plan year



(b)     If excess contributions are corrected within 75 days of the end of the plan year, the plan avoids the penalty.  If not corrected within 75 days, the excess contributions are subject to the 10% penalty; if not corrected within 12 months the plan loses its qualified status.


     Which of the following are possible tax treatments for a lump-sum distribution from a 401k plan?

     I.      taxation of the entire distribution as ordinary income
     II.     five-year income averaging
     III.     ten-year income averaging
     IV.     tax-free rollover to another qualified plan

     a.     I and IV only
     b.     II and III only
    c.     I, III and IV only
     d.     I, II, III and IV

(d)     Lump sum distributions may be rolled over -- or taken as a taxable distribution.  Taxable distributions can be fully taxed as ordinary income in the year of distribution, or -- if the participant was born in 1936 or earlier -- ten-year forward averaging is allowed.  Five-year averaging is no longer allowed under the tax code (it was possible prior to 2001).


    To avoid the 20% withholding provision, participants who wish to  move assets from their 401k plan to another custodian should:

     a.     rollover the distribution
     b.     transfer the distribution
     c.     either a or b
     b.     neither a or b


 (b)     Rollovers are subject to 20% withholding, direct transfers are not.  



Employers wishing to establish a 401(k) plan may avoid the nondiscrimination tests by setting up a:
a. Safe Harbor 401(k)
b. SIMPLE 401(k)
c. qualified automatic enrollment plan
d. all of the above are not subject to the nondiscrimination tests

(d)  Employers can avoid the ADP and ACP tests by setting up a Safe Harbor 401(k), SIMPLE 401(k), or  qualified automatic enrollment plan.  All of these require a minimum matching or non-elective contribution on the part of the employer.  


  To take a tax-free distribution from a Roth 401k, the contributions must first remain in the account for:

     a.     one tax year
     b.     two tax years
     c.     three tax years
     d.     five tax years

(d) Contributions must be held in a Roth account for at least five tax years (and taken after age 59 1/2, or in the case of death, disability or the first-time purchase of residence)  to qualify for tax-free withdrawals.

 If a taxpayer takes a "non-qualified" distribution from a Roth 401k, the distribution is taxable as ordinary income.  The distribution is treated, for tax purposes:

    a.     as contributions first, then earnings
     b.     as earnings first, then contributions
     c.     the same as for distributions from non-deductible traditional IRAs
     d.     the same as for distributions from deductible traditional IRAs

(a) Non-qualified withdrawals from a Roth 401(k) are treated as contributions the same as non-deductible traditional IRAs -- each withdrawal is part tax-free return of principal and part taxable income.  Withdrawals from a Roth IRA ,on the other hand, are contributions first (tax-free return of principal) and then earnings (which are taxable as ordinary income).

 The penalty on "premature withdrawals", i.e. prior to age 59½, from a Roth 401k is:

     a.     0%
     b.     6%
     c.     10%
     d.     50%

(a) There are no penalties for making a "non-qualified" withdrawal from a Roth account.


   A 74 year old man has a Roth 401(k) valued at $66,000 as of January 1 this year.  According to IRS tables, his life expectancy is 13.2 years.  He withdrew $3,000 from the 401(k) this year.  He is subject to a penalty of:

     a.     0
     b.     $1,000
     c.     $1,500
     d.     $2,000  

(b) Unlike a Roth IRA -- which does not require withdrawals at age 70 1/2 -- Roth 401(k) plans must begin making distributions at that age.  To find the minimum required distribution, divide the account balance by the life expectancy ($66,000 divided by 13.2 equals a mandatory withdrawal of $5,000)  He only withdrew $3,000 -- or $2,000 less than required.  A 50% penalty applies to the undistributed portion..


Beginning in 2006, employers offering a 401k program to their employees:

a.  must offer Roth-type plans
b.  may offer Roth-type plans
c.  may offer both Roth-type and SIMPLE 401k plans in a unified accounting system
d.  must terminate regular 401k plans if offering Roth-type plans

(b) The law permits, but does not mandate, Roth 401(k)s beginning in 2006.



 If a 45-year old participant in a Roth IRA leaves her employer and wishes to "move" those assets, she may:

     a.     transfer those assets into a traditional IRA tax free
     b.     rollover those assets into her new employers regular 401k tax free
     c.     be subject to a 10% penalty on premature withdrawals
     d.     transfer those assets into a Roth IRA tax free

(d) Assets held in a Roth account must be transferred or rolled over to another Roth-type account (Roth IRA or Roth 401(k)), or it is subject to possible taxation. There are no penalties for premature withdrawals from a Roth account.



An employer's matching contributions to an employee's Roth 401(k) are:

     a.     after tax contributions
     b.     deposited into the employee's Roth account
     c.     deposited into the employee's non-Roth account
     d.     included in the employee's taxable income

(c) Roth accounts hold employee's after-tax elective contributions.  Contributions made by the employer (matching or non-elective) are before-tax (i.e., tax-deductible by the employer) and are deposited into the employee's traditional 401(k) account.  An employer's contributions are not included in the employee's taxable income.


  Contributions to a Roth 401k are:

     a.     always tax deductible
     b.     sometimes tax deductible
     c.     never tax deductible
     d.     subject to the same rules as traditional 401ks

(c) Contributions to Roth accounts are never tax deductible.



  Limits on contributions to a Roth 401k are:

   a.    the same as for regular 401k plans
   b.    less than for regular 401k plans
   c.    more than for regular 401k plans
   d.   separate from limits on contributions to regular 401k plans

(a) The contribution limits apply to all 401(k) plans, "regular" and Roth.


Under Solo 401k plans, which of the following may be covered?

a.   only self-employed individuals
b.   any owners of the business
c.   any owners of the business and immediate family members
d.   owners of Chapter S corporations only

(c) Only business owners and their immediate family members can take advantage of Solo 401(k)s


All of ABC Manufacturing's twenty full-time employees are unionized and covered by a collective bargaining agreement.  The company also employs three part-time workers in the company's office.  Which of the following are true regarding Solo 401k plans?

a.  ABC's owner may not establish and contribute to a Solo 401k plan
b.  ABC's owner may establish and contribute to a Solo 401k plan for himself only
c.  ABC's owner may establish and contribute to a Solo 401k plan for himself and any other family members who work for the company
d.  ABC's owner may estabish a Solo 401k plan for himself if he also establishes a regular plan for the full time workers

(c) Solo 401(k)s are available to those businesses that are operated solely by owners (and their family members) or employ only those who can be excluded from coverage under Federal law, i.e., those covered by collective bargaining agreement, part-time employees, etc.


A primary advantage of a SOLO plan is that employers are relieved of:

     a.     vesting requirement under ERISA
     b.     non-discrimination rules
     c.     matching contribution requirements
     d.     drawing up plan documents

(b) Non-discrimination and top-heavy rules do not apply to Solo plans, since they cover only owner-employees.


A primary reason for establishing a Solo 401k plan as opposed to other types of plans for the self-employed, such as SEP-IRAs and SIMPLE plans, is:

a.  lower cost of adminstration
b.  higher contribution limits
c.  less restrictive vesting schedules
d.  more flexible investment options

(b) While both SIMPLE and Solo plans offer similar benefits (e.g., no non-discrimination rules, etc.) to the business owner, Solo plans permit larger annual contribution than SIMPLE plans.



  The maximum allowable employee elective contribution to a Solo 401k plan is:

     a.     less than that allowed in a "regular" 401k
     b.     more than that allowed in a "regulary" 401k
     c.     the same as that allowed in a "regular" 401k
     d.     offset by contributions to the employer's regular 401k

(c) Solo plans are subject to the same contribution limits as "regular" 401(k)s



  The maximum allowable employee elective contribution to a Solo 401k plan is:

     a.     less than that allowed in a  SIMPLE 401k
     b.     more than that allowed in a SIMPLE 401k
     c.     the same as that allowed in a SIMPLE 401k
     d.     offset by contributions to the employer's SIMPLE 401k

(b) SIMPLE plans have lower contribution limits than regular and Solo plans.



Owner-employees who participate in a Solo 401k plan:

a.  may borrow funds from their plans under the same rules as non-owner employees
b.  may borrow funds from their plans under different rules than non-owner employees
c.  may borrow funds only in cases of "financial hardship" as defined by the tax code  
d.  may not borrow funds from their plans  


(a) Owner-employees may borrow funds under the same rules as any other employee (this was not the case prior to 2002).


  The maximum that may be contributed to a Solo 401k plan on behalf of an employee each year is:

     a.     $40,000
     b.     100% of the employee's compensation (net of the contribution)
     c.     the lesser of $40,000 or 100% of the employee's compensation
     d.     the greater of $40,000 or 100% of the employee's compensation

(c) Solo plans are subject to the same contribution limits as "regular" 401(k)s: $40,000 (adjusted for inflation) or 100% of compensation, whichever is less.


The maximum amount that may be deducted by an employer for contributions to a Solo 401k plan is:

a.  10% of the payroll of all eligible participants
b.  15% of the payroll of all eligible participants
c.  25% of the payroll of all eligible participants
d.  100% of the payroll of all eligible participants

(c) Deductions for contributions are subject to the same limits as "regular" 401(k)s (and all profit sharing plans in general): 25% of the eligible employee's payroll.


Solo 401k plans may be established for owners of:

a.  sole proprietorships
b.  partnerships
c.  corporations
d.  any of the above

(d) Any type of business organization can establish solo 401(k) -- as long as only owner-employees (and their immediate family) are covered by the plan.


The maximum  Solo 401k contributions for sole proprietorships and partnerships is based on:

a.  net business profits only
b.  net business profits less any payroll (FICA) taxes
c.  net business profits less one-half of self-employment taxes
d.  wages, salary and other compensation paid to the owners

(c) For sole proprietors and partners, contribution limits are based on the business' profits, after subtracting contributions to the Solo 401(k) and less one-half of self-employment taxes


The maximum  Solo 401k contribution for owners of corporations is based on:

a.  net business profits only
b.  net business profits less any payroll (FICA) taxes
c.  net business profits less one-half of self-employment taxes
d.  wages, salary and other compensation paid to the owners

(d) In the case of corporations, contribution limits for shareholder-employees is based on the compensation the corporation pays the shareholder-employee (not business profits).



Solo 401k plan documents must be filed no later than:

a.  the end of the business tax year
b.  the business' tax filing date.
c.  the business' tax filing date plus any extensions
d.  April 15th of the following fiscal year

(a) As with all qualified retirement plans, the plan must be established by the end of the business' tax year -- although employer contributions can be delayed up to the business' tax filing date.



A written salary deferral election into a Solo 401k plan for proprietors and partners must be signed by:

a.  no later than the end of the business year
b.  at the beginning of the year the deferrals are to be made
c.  by the business' tax filing date
d. the business' tax filing date plus extensions

(a) Salary deferrals for sole proprietors and partners must be signed no later than the end of the business' tax year.



A written salary deferral election into a Solo 401k plan for owner-employees of a corporation must be signed by:

a.  no later than the end of the business year
b.  before any deferrals are to be made
c.  by the business' tax filing date
d. the business' tax filing date plus extensions

(b) For corporate shareholder-employees, the deferral election must be signed prior to any deferrals (contributions).



When compared to other 401(k)s, what is the primary disadvantage of a SIMPLE 401k:

a.  more strict "top heavy" rules
b.   lower contribution limits
c.   longer vesting periods
d.   less flexible plan adminstration

(b) The primary disadvantage of SIMPLE plans (for those employers who are eligible for SIMPLE plans) is the lower annual contribution limits.



XYZ Corporation employs 35 full-time non-unionized employees. XYZ's parent company ABC Corporation
employs 110 full-time workers.  Which of the following is true of SIMPLE 401k plans:

a.  both ABC and XYZ may each establish SIMPLE 401k plans
b.  ABC may establish a SIMPLE 401k plan, XYZ may not
c.  XYZ may establish a SIMPLE 401k plan, ABC may not
d.  neither ABC nor XYZ may establish SIMPLE 401k plans

(d) Neither company may establish a SIMPLE plan because the combined companies employ more than 100 employees. The employment rolls must be combined since the two companies share common control.


Digitex Corporation employs 25 full-time non-unionized employees and 80 full-time unionized employees.  Which of the following is true of SIMPLE plans?

a.  Digitex may establish a SIMPLE plan for all of its employees
b.  Digitex may establish a SIMPLE plan for its non-union employees
c.  Digitex may establish a SIMPLE plan for its unionized employees
d.  Digitex may not establish a SIMPLE plan

(d) When counting employees, the companies must include all employees, including those they may not be eligible to participate, such as unionized workers covered by collective bargaining agreement.



Which of the following is true of employer size when establishing a SIMPLE plan?

a.  Employers must count any unionized employees when determining if the employer qualifies to set up a SIMPLE plan
b.  Employers must count any part-time employees when determining if the employer qualifies to set up a SIMPLE plan
c.  Employers must count any employees under "common control" when determining if the employer qualifies to set up a SIMPLE plan
d.  all of the above are true

(d) The SIMPLE rules apply to all companies under the "common control" of an employer. When counting employees, the companies must include all employees, including those they may not be eligible to participate, such as part-time and unionized workers covered by collective bargaining agreement.



SIMPLE 401k plans must conform with:

a.  actual deferral percentage (ADP) test
b.  actual contribution percentage (ACP) test
c.  both a and b
d.  neither a nor b

(d) The primary advantage of a SIMPLE plan is that it is exempt from the non-discrimination rules.



Joe, a plumbing  contractor, established a "regular"  401k plan several years ago to cover his 32 employees.  The plan operates on a fiscal year calendar.  Joe decides to convert his 401k into a SIMPLE plan.  Which of the following is true?

a.  Joe may simply convert the existing plan into a SIMPLE plan
b.  Joe must change the existing plan to a calendar-year accounting before converting the plan to a SIMPLE plan
c.  Joe must terminate the existing plan and establish a new plan as a SIMPLE plan
d.  Joe may not establish a SIMPLE plan

(b) Regular 401(k) plans may be "converted" to a SIMPLE plan -- Joe need not terminate the existing plan. All SIMPLE plans must operate on a calendar year basis. Fiscal year plans may be (and must be) converted into a calendar year before becoming a SIMPLE plan.

The catch-up contributions to a SIMPLE 401k plan for those aged 50 or older are:

     a.     less than that allowed in a "regular" 401k
     b.     more than that allowed in a "regular" 401k
     c.     the same as that allowed in a "regular" 401k
     d.     offset by contributions to the employer's "regular" 401k

(a) The catch-up provision for older plan participants is less in a SIMPLE plan than a regular 401(k).


The loan provision for SIMPLE 401k plans:

    a.     are less than that allowed in a "regular" 401k
     b.     are more than that allowed in a "regular" 401k
     c.     are the same as that allowed in a "regular" 401k
     d.     prohibit loans in SIMPLE plans

(c) The loan provisions are the same for SIMPLE, Solo and "regular" 401(k) plans


Jane and Sally's Floral Designs offers a SIMPLE 401k plan that covers the partners,  Jane and Sally, and nine other eligible employees.  The partners and three other employees decide to make elective contributions to the plan this year.  If the company chooses to make a 2% non-elective contribution to the SIMPLE plan this year:

a.  only the partners and three employees who contributed to the to the plan will have employer contributions credited to their retirement savings
b.  only the three employees, but not the partners,  who contributed to the plan will have employer contributions credited to their retirement savings
c.  all nine employees and the partners will have employer contributions credited to their retirement savings
d.  all nine employees, but not the partners, will have employer contributions credited to their reitrement savings


(c) When an employer chooses to make non-elective contributions to a SIMPLE 401(k), the employer must contribute on behalf of all eligible employees (including owner-employees) -- regardless of whether the employee chooses to contribute.


Jane and Sally's Floral Designs offers a SIMPLE 401k plan that covers the partners,  Jane and Sally, and nine other eligible employees.  The partners and three other employees decide to make elective contributions to the plan this year.  If the company chooses to make matching contributions of 3% to the SIMPLE plan this year:

a.  only the partners and three employees who contributed to the to the plan will have employer contributions credited to their retirement savings
b.  only the three employees, but not the partners,  who contributed to the plan will have employer contributions credited to their retirement savings
c.  all nine employees and the partners will have employer contributions credited to their retirement savings
d.  all nine employees, but not the partners, will have employer contributions credited to their reitrement savings

(a) When an employer chooses to make matching contributions to a SIMPLE 401(k) must contribute only on behalf of those eligible employees (including owner-employees) who choose to contribute.