All Answers from a Taxation – Qualified
Employee Benefit Plan Perspective!
1.
What is a highly compensated
employee?
2.
What effect does a highly
compensated employee have on the minimum vesting requirement?
3.
What is the maximum amount that
a self-employed individual can contribute to a Keogh plan in 2011? 2012? 2013?
4.
When can a Keogh plan include a
401 (k) plan?
5.
Minimum coverage tests – what
are the two alternative tests to comply with the minimum coverage requirements?
6.
Explain one of these minimum
coverage tests in detail.
7.
What is permitted disparity?
8.
What is a top heavy plan?
9.
Describe in detail the process
to get a plan qualified for I.R.S. purposes.
10.
Write a memorandum to Sam Tangy
explaining the benefits of a qualified plan to him and his company, Tangy
Corporation. This should be in the form of a well written fax memorandum.
11. All
individuals with earned income or taxable alimony are eligible to set up an
IRA.
12. A
lump-sum distribution of employee benefits will not
be taxed if there isarollover
of benefits to a new qualified plan within 90 days.
13. Payments
of retirement benefits to an employee’s beneficiary are taxed in the same way
as if the employee had received them.
14. A
minimum participation rule for defined benefits plans requires that they
generally benefit the lesser of 50 employees or 40 percent of all employees.
15. Payments
of retirement benefits to a self-employed individual must begin no later than
age65½.
16. An
employee stock ownership plan isatype
of defined contribution plan.
17. Excess
contributions to an IRA are subject to a 10 percent excise tax, which is
deductible for tax purposes.
18. A
distribution from an IRA to an individual is generally subject to 10 percent
penalty taxif
the individual has not yet reached age 59½.
19. An
employee’s participation is the tax-qualified
retirement plan of one employerwillpreclude
his participation in a tax-qualified plan offered by a second employer.
20. Only
individuals with self-employment income are eligible to set up and contribute
toaKeogh (H.R. 10) plan.
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21. Paul and Lois Lee,
both age 50, are married and filed a joint return in 2013. Their 2013 adjusted
gross income was $115,000, including Paul’s$105,000salary. Lois had no
income of her own.
Neither spouse was covered by an employer-sponsored
pension plan. What amount could the Lee’s contribute to IRAs for22013in order to
take advantageoftheir maximum allowableIRAdeduction on the 2013 return?
a)
$5,000
b)
$5,500
c)
$12,000
d)
$13,000
22. Ida Korb, who is
divorced, received taxable alimony of $34,000 in 2013. In addition, she
received $900 in earnings from a part-time job in 2103. What was the maximumIRAcontribution that Ida
could have made for 2013 which she could have deducted on her 2013 individual
tax return, assuming that she is age 34 and everything was done on a timely
basis?
a)
$900
b)
$5,000
c)
$5,500
d)
$6,500
23. Emil and Judy Ryan are
married and file a joint return. Emil earned a salary of$104,000 in 2013 from
his job at Konna Corp., where Emil is covered by his employer’s pension plan.
Judy, who worked part-time in 2013 and earned $2,000, is not covered by an
employer’s pension plan. The Ryan’s do not itemize their deductions. Assuming
they are both age 48 and their adjusted gross incomefor2013 is $125,000, what
is the maximum that they can deduct for contributions to their IRAs on their2013returns?
a) $0
b) $5,000
c) $5,500
d) $11,000
24. For the year 2013,
Fred and Wilma Todd reported the following items of income:
Fred
Wilma
Salary $60,000 $200
Interest income $1,000 none
Cash prize won on T.V. game show none 8,000
$61,000
$9,000
Fred is not a participant in and
qualified retirement plan and he and Wilma established individual retirement
accounts during the year. Assuming a joint return was filed for 2013 and that
they are both age 52, what is the maximum amount that they can be allowed for
contributions fortheir individual retirement
account?
a)
$6,700
b)
$8,000
c)
$12,000
d) $13,000
25.
Michael Mason is self-employed. During
the current year, he established a qualified defined-contribution retirement plan of
which he will be the only beneficiary. Mason’s records disclose thefollowing:
Earned income from self-employment $40,000
Interest income $4,000
Dividend income $2,000
Net long-term capital gain $4,000
$50,000
What is the maximum amount that Mason and
deduct as a contribution to his qualified retirement plan for 2013 if he paid a
self-employment tax of $5,652?
a)
$1,500
b)
$5,500
c)
$7,435
d) $8,000
26. Wally Wadder’s
employer has a Simplified Employee Pension (SEP) for its employees. Wally’s
compensation before his employer’s SEP contribution was $30,000. What is the
maximum amount that Wally’s employer can deduct as a contribution to a SEP-IRA
on behalf of Wally for 2013?
a)
$750
b)
$1,500
c)
$5,500
d) $7,500
27. During the current year,
Jay Jermaine received a salary of$15,000 and interest income of $1,000 and
contributed$1,500
to his
IRA. What amount of the IRA contribution can be deducted in arriving at Jay’s
adjusted gross income?
a)
$0
b)
$1,000
c)
$1,500
d) $5,000
28.
Henry
earned a salary of$62,000,while his wife, Wilma, was not employed. What is the
maximum that can be contributed to individual retirement accountsifthey are both age 46
and file a joint return for 2013?
a) $5,500
b) $7,000
c) $10,000
d)
$11,000
29.
Jackie Johnson, a self employed attorney,
has a self-employment retirement plan with an established, defined contribution
plan that covers her and three common-law employees. In the current year,
Jackie has earned income 0[$120,000 and the three employees have total salaries
of $60,000. Jackie contributes $9,000 to the plan for herself. What is the
minimum account that Jackie must contribute to the accounts of the employees
under the plan for 2013?
a)
$1,800
b)
$4,500
c)
$6,000
d)
$7,500
30.
Jackson Jingles, a sole proprietor, had
net earnings of’$4,000 from self-employment and paid a self-employment tax
of$565. What is Jackson’s maximum self-employment retirement plan deduction for
20l3?
a)
$400
b)
$600
c)
$743
d) $1,000
31. Betsy Ross wants to take funds from her IRA. She is 37 years old.
You advise her she will have to pay a 10% penalty when she files her tax
return. She tells you not to include the penalty. Betsy’s father is president
at Ross Toggs Inc. your largest client. What are your options?
32. On January 3, 2014 Sandy Dodger realizes he would benefit from
setting up a qualified profit sharing plan. Can
he do so? What are his options? What would you suggest he absolutely not do?
32.
33. Income is always taxable. True or false. Explain with examples and
citation.
34. Based on your answer in # 1, compensation is always taxable as
income. True or false. Explain with examples and citations.
35. Payments by privately held companies are always deductible as
compensation. True or false. Explain with examples and citations.
36. Payments to an individual from a publicly held company in excess of
$1,000,000 are not taxable to the employee. True or false. Explain.
37. Give ten examples of fringe benefits and discuss the rules regarding
the deductibility to the company and taxability to the employee.
38. Are attorney’s fees included in the gross income of the injured
party? Explain.
39. What recent development may impact the tax treatment of damages
received for certain non-physical personal injuries?
40. With respect to stock options, define these terms:
a)
Grant date
b) Strike price
c) Exercise date
d) Spread
e) Vesting
f) Vested options
g) In the money
41. What methods are used to funk NQSO’s?
42. What are the requirements for an option to qualify as an ISO?
43. What is a section 83(b) election? When is it used? What are the
advantages and disadvantages making the election?
44. There are several types of deferred compensation discussed in the
text.
Choose
any three.
·
Using the internet, find a
sample agreement that is used for businesses to document a plan.
·
Find a provision that shows
that the agreement satisfies the provisions of Section 409(a) underline or
highlight it.
·
Discuss the taxability of the
agreements to the employee and employer.
·
Discuss the non-tax benefit of
one of the plans to both the employee and the employer.
·
What ethical concerns do you
see with these plans? (Any one or all three)
Part I
Tangy Corporation is
a young high-growth company engaged in the manufacture and distribution of
automotive parts. Its common stock had doubled in value since the company was
listed on the NASDAQ exchange about two years ago. Tangy currently has a high
debt/equity ratio due to the issuance of debt to finance its capital expansion
needs. Despite rapid growth in assets and profitability, Tangy has severe cash
flow problems and a poor working capital ratio. The company urgently needs to
attract new executives to the organization and to provide financial incentives
to existing top management because of the recent turnover and high growth.
Approximately 55% of the common stock is owned by Sam Tangy who is CEO, and his
immediate family. None of the other officers own stock in the company.
Your group has been
asked to prepare suggestions after reviewing the compensation system.
Your discussions
with several top management individuals reveal the following aspects of the
corporate strategy philosophy:
·
The company needs to expand the
equity capital base because of its concern for the high risk caused by large
amounts of debt.
·
Improvement in cash flow and
liquidity would enhance its stock price and enable the company to continue its
high growth rate.
·
Top management feels that
employees should own some stock in the company. The company currently offers a
qualified pension plan to its employees and executives that provides only
minimal pension benefits. No other deferred compensation or bonus arrangements
are currently being offered.
·
Sam Tangy feels that the top
management group should own a substantial amount of Tangy stock to ensure that
the interest of management correspond with the shareholder interests (i.e., the
maximization of shareholder wealth).
The following four types of executive
compensation arrangements have been discussed:
Sec. 401 (k) and ESOP plans for
employees.
Encourage all employees and
executives to independently fund their retirement needs beyond any Social
Security benefits by establishing IRA plans.
Provide restricted property
arrangements (using Tangy stock) to attract new top level executives and
to retain existing executive.
Offer nonqualified or incentive
stock options to existing and new executive.
Required:Prepare a client memo that recommends revisions to Tangy
Corporation’s existing compensation system for both its employees and executive
groups. Your recommendations should discuss the pros and cons of different
deferred compensation arrangements and should consider both tax and nontax
factors.
Part II
Sam Tangy is 43 and
plans to retire at the age of 64.
Required:Create an appropriate retirement plan for Sam Tangy given all of the
information in Part I and any additional information you wish to add.