Question

1. When referring to retirement plans the term "qualified" means that the plan                                      ____
   1. Is provided by an employer that is granted a "good employer" award by the Department of

Health & Human Services.

2. Satisfies the requirements of one or more provision(s) of the Internal Revenue Code.
3. Provides benefits only for highly compensated employees.
4. Provides benefits only for employees who are not highly compensated.

2. Under the law governing qualified pension plans, which of the following are the most restrictive age     ____

and service eligibility requirements that  a plan can impose on employees

1. age 25 and 4 years of service                      B.    age 21 and 1 year of service
2. age 18 and 6 months of service                   D.    age 21 and 3 years of service

3. Which of the following statements concerning vesting of pension benefits is correct:                         ____
   1. Vesting refers to the employee's right (or ownership of) the employer's contribution, or benefits

attributable to contributions, if employment terminates prior to retirement

2. Benefits vest more quickly under a defined benefit plan than under a defined contribution plan
3. Cliff vesting takes place earlier than graded vesting
4. Vesting takes place immediately when the employee qualifies for coverage under the plan

4. Which of the following statements about the taxation of qualified retirement plans is true?                  ____
   1. Investment income on plan assets is taxable in the year the investment income is earned.
   2. Employer contributions are considered taxable income to employees but are taxed at capital gains rates.
   3. Employer contributions are income tax deductible up to certain limits as an ordinary business expense.
   4. Distributions from qualified pension plans are received tax-free by the retiree.
   5. None of the above.

Answer 1

1) When referring to retirement plans the term "qualified" means that the plan -

  Satisfies the requirements of one or more provision(s) of the Internal Revenue Code .

Explanation :-

A qualified plan is an employer-sponsored retirement plan that qualifies for special tax treatment under Section 401(a) of the Internal Revenue Code and is therefore eligible to receive certain tax benefits, unlike a non-qualified plan.

There are many different types of qualified plans, but they all fall into 2 categories. A defined benefit plan (e.g., a traditional pension plan) is generally funded solely by employer contributions and provides the employee with a specified level of retirement benefits. A defined contribution plan (e.g., a profit-sharing or 401(k) plan) is funded by employer and/or employee contributions. The benefits the employee receives from the plan depend on investment performance. Stocks, mutual funds, real estate, and money market funds are the types of investments sometimes held in qualified retirement plans.
Examples of qualified retirement plans include 401(k), 403(b), and profit-share plans.

Qualified retirement plans give employers a tax break for the contributions they make for their employees. Those plans that allow employees to contribute a portion of their salaries into the plan can also reduce the employees’ present income-tax liability by reducing taxable income.

2) Under the law governing qualified pension plans, the most restrictive age and service eligibility requirements that a plan can impose on employees are as follows :-

B.    age 21 and 1 year of service

Explanation :-

A qualified plan must satisfy the Internal Revenue Code in both form and execution of the plan. Qualified plans are funded with pre-tax dollars, i.e. the money put into the plan are not taxed, and are subject to an early withdrawal penalty, with certain exceptions (i.e. total disability).
When benefits are withdrawn they are included in income and are subject to income taxes.
Qualified plans are subject to a variety of stringent rules under federal law. Some laws come under the jurisdiction of the Treasury Department and the Internal Revenue Service, while others fall under the Department of Labor.
In general, an employee must be allowed to participate in the qualified retirement plan if he or she meets both the following requirements:

• Has reached age 21.
• Has at least one year of service (two years if the plan is not a 401(k) plan).

3) Which of the following statements concerning vesting of pension benefits is correct:  

B) Cliff vesting takes place earlier than graded vesting

Explanation :-

“Vesting” in a retirement plan means ownership. This means that each employee will vest, or own, a certain percentage of their account in the plan each year. An employee who is 100% vested in his or her account balance owns 100% of it and the employer cannot forfeit, or take it back, for any reason. Amounts that are not vested may be taken back by the employer from the employees when they are paid their account balance (for example, when the employee terminates employment) or when they don’t work more than 500 hours in a year for five years.

An employee's own contributions to the plan are always 100% vested, or owned, by the employee.
Different vesting requirements apply to employer contributions depending on the type of plan the employer sponsors.
With a cliff vesting schedule, employees become fully vested in their pensions after a certain number of years. ERISA states that the maximum is five years for private-sector plans, but employers can allow full vesting sooner than that.
With graduated vesting, there is partial vesting for each year of service once the employee has served three years. For private-sector plans, at a minimum, after year three the employee becomes 20% vested in his/her pension; after year four he/she is 40% vested; after year five he/she is 60% vested; after year six the employee is 80% vested, and after year seven the employee becomes 100% vested.

4) Regarding the taxation of qualified retirement plans, the following statement is true :-

C) Employer contributions are income tax deductible up to certain limits as an ordinary business expense.

Explanation :-

In most cases, employer contributions for a qualified retirement plan are tax-deductible business expenses, and the money is allowed to grow tax-deferred until employees reach retirement age.
Most employers can deduct, subject to limits, contributions they make to a retirement plan, including those made for their own retirement. The contributions (and earnings and gains on them) are generally tax-free until distributed by the plan. This makes employer contributions not only aattractive recruiting tool but also a way to reduce the company’s own tax bill.

As per Internal Revenue Service, business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business operates to make a profit.
Under IRS retirement plans are also considered as ordinary business expense. It says that Retirement Plans are savings plans that offer the employer tax advantages to set aside money for his/her own, and for his/her employees' retirement.