Qualified Plans Chapter 6 Flashcards

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Questions and Answers

What are employer contributions made to a qualified plan subject to?

Are after-tax contributions

May discriminate in favor of highly paid employees

Are taxed annually as salary

Are subject to vesting requirements (correct)

How are contributions to a tax-sheltered annuity treated with regards to taxation?

They are not included as income for the employee, but are taxable upon distribution (correct)

They are never taxed

They are taxed as income for the employee, but are tax free upon withdrawal

They are taxed as income for the employee

All of the following would be different between qualified and nonqualified retirement plans EXCEPT:

Taxation of withdrawals

IRS approval requirements

Taxation on accumulation (correct)

Taxation of contributions

An IRA purchased by a small employer to cover employees is known as a:

Simplified Employee Pension plan Signup and view all the answers

An Internal Revenue Code provision that specifically provides for an individual retirement plan for public school teachers is a(n):

403(b) Plan (TSA) Signup and view all the answers

Which of the following is TRUE of a qualified plan?

It has a tax benefit for both employer and employee Signup and view all the answers

If a retirement plan or annuity is 'qualified,' this means:

It is approved by the IRS Signup and view all the answers

Which of the following statements concerning a Simplified Employee Pension plan (SEP) is INCORRECT?

SEPs are suitable for large companies Signup and view all the answers

Which of the following scenarios will incur a 10% tax penalty on distributions?

Distributions are made on a policy before age 59½ Signup and view all the answers

An employer has sponsored a qualified retirement plan for its employees where the employer will contribute money whenever a profit is realized. What is this called?

Profit sharing plan Signup and view all the answers

Under SIMPLE plans, participating employees may defer up to a specified amount each year, and the employer then makes a matching contribution up to what percent of the employee's annual wages?

3 Signup and view all the answers

Under the 401(k) bonus or thrift plan, the employer will contribute:

An undetermined percentage for each dollar contributed by the employee Signup and view all the answers

Under a SIMPLE plan, which of the following is TRUE regarding taxation on both contributions and earnings?

They are tax deferred until withdrawn Signup and view all the answers

All of the following employees may use a 403(b) plan for their retirement EXCEPT:

The CEO of a private corporation Signup and view all the answers

For a retirement plan to be qualified, it must be designed for the benefit of:

Employees Signup and view all the answers

Which of the following is NOT true regarding a nonqualified retirement plan?

It needs IRS approval Signup and view all the answers

Study Notes

Qualified Plans Overview

Qualified plans require employer contributions to adhere to vesting requirements, ensuring that employees earn their entitlement to benefits over time.
Tax-sheltered annuity contributions are excluded from employee income but become taxable upon distribution.
Key distinctions between qualified and nonqualified retirement plans include differences in taxation on withdrawals and contributions, and IRS approval is necessary for qualified plans.

Plan Types and Specifications

A Simplified Employee Pension (SEP) is an IRA intended for small employers to provide retirement benefits for employees.
The 403(b) Plan is designed specifically for public school teachers and non-profit employees, offering tax advantages under the Internal Revenue Code.
Qualified plans provide tax benefits to both employers and employees, differentiating them from plans that can favor highly paid employees or lack vesting schedules.

IRS Approval and Plan Compliance

"Qualified" retirement plans receive IRS approval, allowing them to meet specific regulatory standards and benefit from tax advantages.
Nonqualified plans do not require IRS approval, which distinguishes their structure and eligibility criteria.

Contribution and Matching Details

Under SIMPLE plans, employees can defer contributions, with employer matching contributions capped at 3% of the employee's annual wages.
In a 401(k) bonus or thrift plan, employer contributions can vary as an undetermined percentage of employee contributions, providing flexible support for retirement savings.

Tax Implications and Distribution Rules

Employer contributions to retirement plans are generally tax-deferred until distributed, allowing growth without immediate tax impact.
A 10% tax penalty typically applies to distributions made before age 59½, unless certain conditions are met, such as qualified rollovers.

Employee Eligibility and Benefits

Only specific employees are eligible for 403(b) plans, excluding positions such as the CEO of a private corporation, which signifies the plan's targeted demographic.
To ensure a plan is classified as qualified, it must be designed for the collective benefit of employees rather than solely for the employers or key executives.

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Description

Test your knowledge on Qualified Plans with these flashcards focusing on key concepts from Chapter 6. Each card includes critical definitions and concepts to help you understand the intricacies of vesting requirements and tax treatment of contributions. Perfect for quick review and preparation for exams in finance or retirement planning.