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CFP 4 True/False Questions

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits. CFP 4 True/False Questions. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits.

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CFP 4 True/False Questions

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  1. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits CFP 4True/False Questions

  2. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits Module 1Planning for Retirement & Social Security

  3. Module 1 True/False • The source of funds for OASDI is a special tax on employers, employees, and self-employed persons. Your answer  Play Jeopardy music

  4. Module 1 True/False • Automatic cost-of-living increases in OASDI benefits are based upon changes in the consumer price index. • There is a reduction in OASDI benefits if the benefits begin after an insured worker reaches full retirement age (FRA). • OASDI retirement benefits are exempt from income taxation for all recipients in the current year.

  5. Module 1 True/False • An individual receiving Social Security retirement benefits who has not attained full retirement age (FRA) and who has excess earnings may lose some or all of his or her OASDI retirement benefits for the current year. • Individuals are fully insured for OASDI programs if they have at least six quarters of coverage. • The Basic Hospital Insurance Plan of Medicare provides benefits to all individuals age 65 or over, subject to payment of a monthly premium.

  6. Module 1 True/False • The Supplementary Medical Benefits Plan under Medicare normally pays 80% of approved medical costs after the patient pays a deductible. • A covered worker, currently married for five years, has had two previous marriages, which lasted for eleven years and nine years, respectively. All three spouses may be able to collect OASDI retirement benefits based on the worker’s earnings.

  7. Module 1 True/False • A spouse, age 55, who has the responsibility for a 14-year-old child of the other spouse (who is disabled) will receive a Social Security benefit equal to 70% of the disabled spouse’s PIA. • A widow, age 59, who has a daughter, age 17, will receive a Social Security widow’s benefit; the daughter will be eligible to receive a child’s benefit at age 18. • A disabled worker covered by Social Security is eligible for Medicare coverage after being entitled to Social Security disability benefits for 24 months.

  8. Module 1 True/False • The cost of prescription drugs to be taken daily while traveling will be covered by Medicare Part B if the patient is a Social Security recipient. • Within the preretirement income range of $15,000 to $60,000, the lower the preretirement income level is, the higher the income replacement level will be. • Social Security is an inflation-adjusted source of retirement income that a planner should include as part of a retirement savings need analysis if the client’s wages are subject to FICA taxes.

  9. Module 1 True/False • An income replacement ratio of 60% generally is appropriate for establishing a retirement income level for a 55-year-old client. • The higher a client’s income level is, the more valuable a tax-favored retirement plan is likely to be. • Assuming an inflation rate that exceeds the investment return rate will result in a negative inflation-adjusted yield.

  10. Module 1 True/False • If the inflation rate is assumed to equal the investment return rate, the inflation-adjusted yield will equal zero. • If a client has a $50,000 annual retirement income need and expects to receive Social Security benefits of $10,000 per year and a level pension of $15,000 per year, the client’s income deficit, which will grow with inflation, will be $25,000 per year.

  11. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits Module 2Fundamentals of Defined Benefit Plans

  12. Module 2 True/False • Higher-than-expected investment earnings in a defined benefit plan could decrease the employer’s annual contribution. • A flat-benefit formula in a defined benefit plan is especially appropriate if an employer wants to base a retirement benefit in part upon length of service. • Defined benefit plans must pass the 50/40 test and either the ratio percentage test or average benefits test. • A defined benefit test should be recommended whenever an owner is over age 50.

  13. Module 2 True/False • For an employee retiring at age 60, the maximum annual retirement benefit is $210,000 in 2014, actuarially adjusted downward. • In a defined benefit plan, the highest years’ average pay formula generally is more favorable to employees than career average pay, which considers the average of earnings over the entire period of plan participation. • The standard funding account compares actual plan results with a hypothetical amount needed to provide promised benefits.

  14. Module 2 True/False • If an actuarial interest rate assumption is altered from 5% to 7%, the employer will have to increase plan contributions. • A participant’s years of participation in the plan is a factor that affects a participant’s retirement benefit in a defined benefit plan. • If an employer wants to take into account past service, they would use the “attained age level” method. • The use of salary scales by the actuary will increase the annual funding cost for the employer.

  15. Module 2 True/False • All pension plans are guaranteed by PBGC. • Key employees are used when calculating the ratio percentage and average benefits tests. • Cash balance plans can use either three-year cliff or two-to six-year graded vesting. • PBGC does not cover all traditional defined benefit plans and cash balance plans. • The plan’s mortality assumption is a factor that affects a participant’s retirement benefit in a defined benefit plan.

  16. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits Module 3Fundamentals of Defined Contribution Plans

  17. Module 3 True/False • Money purchase plans satisfy the “definitely determinable benefits” requirement by specifying the amount of the participant’s retirement benefit. • “Annual additions” to a defined contribution plan consist of employer and employee contributions and forfeiture reallocations. • For an employer’s contribution to a qualified plan to be tax deferred, the contribution must be within statutory limits on the allowable amount, and it must be authorized by the plan document.

  18. Module 3 True/False • Higher-than-expected investment earnings in a defined contribution plan can be expected to decrease the employer’s annual contribution. • Annual contributions to a profit sharing plan may vary each year (both in amount and as a percentage of covered payroll), which accommodates fluctuating business performance. • One advantage of a profit sharing plan for a 55-year-old owner is that it probably will provide him or her with the maximum possible retirement fund at age 65.

  19. Module 3 True/False • An ESOP limits plan ownership of employer stock to 25% of total plan value. • In a money purchase plan, annual employer contributions are a fixed percentage of covered payroll. • In a company that offers a profit sharing plan, an employer contribution must be made in any year in which profits are realized. • A target benefit plan allows discretionary annual contributions.

  20. Module 3 True/False • In a target benefit plan, forfeitures may be reallocated to the accounts of remaining participants or applied to reduce the employer contribution. • In 2014, elective deferrals to defined contribution plans are limited to $17,500 annually, plus $5,500 for the age 50 catch-up if it applies. • Since employee elective deferrals are considered employer contributions, the employer’s 25% deduction limit is reduced by the amount of elective deferrals.

  21. Module 3 True/False • SEPs, profit sharing plans, stock bonus plans, and money purchase plans are permitted to offer 401(k) provisions. • Both employer contributions and elective deferrals are exempt from income tax withholding, but only employer contributions are exempt from FICA and FUTA; elective deferrals are subject to FICA and FUTA taxes. • A self-employed owner/employee may contribute a maximum of 25% of net business profits to his or her account in a profit sharing Keogh plan.

  22. Module 3 True/False • To determine net earnings, a self-employed individual must subtract his self-employment tax deduction from business profit. • A self-employed individual will have lump-sum treatment available from a Keogh plan upon death, disability, or attainment of age 59½. • The maximum vesting schedule for defined contribution plans is either two-year cliff or two- to six-year graded. • Jack works for ABC Corp. and earns $270,000 a year. If his company installs a 10% profit sharing plan, his contribution amount would be $27,000.

  23. Module 3 True/False • Net unrealized appreciation is always taxed as a long-term capital gain, and taxation can occur upon distribution or upon sale. • Jane, age 44, has left YAM Industries and taken a stock distribution from the company’s ESOP. Her basis in the stock is $23,000, and it will be subject to ordinary income taxes as well as a 10% penalty tax. • ESOPs require that employers allow participants to diversify after three years of service.

  24. Module 3 True/False • Social Security integration is allowed with ESOPs, but not with stock bonus plans. • A cross-test profit sharing plan could provide equal contributions to two owners, ages 35 and 50, who both make $180,000 a year.

  25. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits Module 4Fundamentals of 401(k) Plans

  26. Module 4 True/False • A profit sharing 401(k) plan to which highly compensated employees deferred an average of 6% of compensation and to which nonhighly compensated employees deferred an average of 4% of compensation would pass the ADP test. • If a profit sharing 401(k) plan participant meets the criteria for a hardship withdrawal, then his or her full account balance is available for withdrawal.

  27. Module 4 True/False • Employer matching provisions may be incorporated into a 401(k) plan to strengthen the plan’s ability to pass nondiscrimination tests. • A safe harbor 401(k) plan avoids the need to do either the ADP or ACP test. • Any qualified plan can establish 401(k) provisions. • Employee deferrals must be taken into account when calculating an employer’s 25% contribution limit into a profit sharing 401(k) plan.

  28. Module 4 True/False • The maximum age 50 catch-up contribution amount for 401(k) plans is $5,500 in 2014. • Corporations can establish 401(k) plans; however, sole proprietors cannot. • A 401(k) plan must allow participation to anyone who is at least age 21, and has completed one year of service (over 1,000 hours). • A highly compensated employee in 2014 would include employees who had compensation of at least $115,000 in 2013.

  29. Module 4 True/False • Highly compensated employees are used in the ADP and ACP tests, and key employees are used in the ratio percentage and average benefits tests. • A plan with the employer matching 100% of the first 6% of compensation with immediate vesting would qualify as a safe harbor plan. • A qualified automatic contribution arrangement (QACA) is a type of safe harbor plan in which, if matching contributions are made, the employer must match 100% of the first 1% of compensation, and 50% of compensation above 1% and up to 6%.

  30. Module 4 True/False • Any employer contributions made in a QACA must be immediately 100% vested. • If a sole proprietor has a profit of $100,000, then the maximum contribution that he or she could make into a solo 401(k) plan would be $52,000. • Employer stock distributions from a KSOP are eligible for net unrealized appreciation (NUA) treatment. • Unlike traditional Roth IRAs, which have phaseout limit amounts, there are no income phaseout limits for Roth 401(k)s.

  31. Module 4 True/False • With a SIMPLE 401(k), the employer must either match at least the first 3% of compensation or make a nonelective contribution of at least 2%. • A SIMPLE 401(k) plan is not subject to ADP testing. • SARSEPs allow employees to defer up to $17,500 (in 2014), and also allow for an age 50 catch-up of $5,500 (in 2014). • If an employer has a SARSEP, they are not allowed to also have a qualified plan. • An employee must be a participant in a profit sharing 401(k) plan for at least two years before an in-service withdrawal could be allowed.

  32. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits Module 5Traditional, Roth & SIMPLE IRAs

  33. Module 5 True/False • An IRA contribution for a given tax year can be made until the due date for filing that year’s federal income tax return, including extensions. • An IRA distribution that is one of a series of substantially equal periodic payments over life expectancy and that is received before age 59½ is not subject to the 10% early withdrawal penalty. • Alimony received is considered compensation for the purpose of calculating the amount an individual may contribute to an IRA.

  34. Module 5 True/False • The value of collectibles is deductible as an IRA contribution. • Regardless of age, any working individual may make a deductible or nondeductible IRA contribution.   • IRA assets cannot be pledged as collateral for a loan. • A distribution from an IRA may escape current income taxation by being rolled over to another plan within 60 days. • IRA distributions must begin no later than April 15 of the year the owner turns age 70½.

  35. Module 5 True/False • A person who is eligible to deduct an IRA contribution may choose to make a nondeductible contribution instead. • The spouse may roll over an IRA when the owner dies. • When received as distributions after age 59½, nondeductible IRA contributions may be taxed according to the exclusion ratio. • Earnings on investments held by qualified plans are taxable to the employer.

  36. Module 5 True/False • Favorable forward-averaging tax treatment may be available on distributions from qualified plans, IRAs, and TSAs. • Active participation status needs to be determined for traditional IRA deductibility, but not for Roth IRA eligibility. • The five-year clock for Roth IRAs starts on January 1st of the year for which the contribution was made, which is not necessarily the same year as the contribution itself is made.

  37. Module 5 True/False • There are three ways in which a substantially equal and periodic payment can be calculated, but only one of the ways results in a payment that will vary from year to year. • Roth IRA contributions can be made at age 80. • As is the case with any IRA accounts, ERISA protection does not apply to deemed IRAs. • SIMPLE IRAs have the same employee deferral limit as 401(k) plans.

  38. Module 5 True/False • With SIMPLE IRA plans, employers must match at least 3% of compensation, or make a nonelective contribution of at least 2% of compensation. • If a 39-year-old-employee is making $45,000 a year, the maximum contribution to a SIMPLE IRA plan with an employer match would be $13,350. • If a 48-year-old employee who has been in the plan for just one year takes a distribution from his or her SIMPLE IRA, that employee will be subject to a 10% early withdrawal penalty tax.

  39. Module 5 True/False • SEPs are normally employer funded, but employee deferrals can be allowed at the discretion of the employer. • The special eligibility requirements for SEPs generally makes them unsuitable for employers with seasonal employees. • The Keogh plan rules apply for self employed individuals who establish a SEP. • SIMPLE IRAs must be established by October 1st for the current year, whereas SEPs can be established up until April 15th for the previous year.

  40. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits Module 6403(b) Plans & Other Plan Issues

  41. Module 6 True/False • Only public school teachers and administrators may maintain TSAs. • The TSA past service credit, which is incorporated into the formula for calculating the maximum TSA deduction, in effect permits employees to use previously unused portions of their exclusion allowances for earlier years. • TSA contributions made pursuant to a salary reduction agreement are subject to FICA (Social Security) withholding. • TSA funds may be invested only in annuities.

  42. Module 6 True/False • The TSA salary reduction limit per year is $17,500 in 2014. • In the event of a hardship withdrawal from a TSA, there is a 10% penalty only if the owner is under age 59½. • The age 50 catch-up and the long service catch-up (15 years of service) may not be used at the same time. • Section 457 plan distributions must be available when an employee separates from service. • A TSA may be entirely employer funded.

  43. Module 6 True/False • If a Section 457 plan participant has previously underutilized the maximum annual salary deferrals, he or she may be allowed to defer a total of twice the regular deferral per year in the three years prior to retirement. • Roth 403(b) plans have the same contribution limits as traditional 403(b) plans, however Roth 403(b) plans have an eligibility income phaseout limit. • If a TSA only has elective deferrals, then the nondiscrimination test is met if all employees who are willing to have a salary reduction of at least $200 per year are allowed to participate.

  44. Module 6 True/False • Loans are permitted from a 403(b) plan, but not hardship withdrawals. • If a participant has both a 403(b) plan, and a Section 457 plan, they may contribute up to $17,500 into each plan (in 2014). • If a company has a defined benefit plan that is subject to PBGC coverage and a profit sharing plan, and at least one employee is covered by both plans, the overall deduction limit on employer contributions to both plans is the greater of (1) 25% of compensation or (2) the amount necessary to meet the minimum funding requirement of the defined benefit plan for the plan year.

  45. Module 6 True/False • Two or more businesses will be treated as one for purposes of qualified plan coverage requirements if there is a brother-sister relationship. • A premium for term life insurance protection is considered an incidental benefit in a pension plan if it amounts to less than 25% of the cost of all plan benefits. • If a company has a profit sharing plan and a defined benefit plan that is exempt from PBGC coverage, and no employee is covered by both plans, the overall deduction limit on employer contributions does not apply.

  46. Module 6 True/False • A qualified plan could be disqualified by the IRS if loans of equal proportion are not available to all participants on a nondiscriminatory basis. • Organization A directly controls Organization B (85% ownership), and Organization B directly controls Organization C (70% ownership); a parent-subsidiary relationship exists only between Organization A and Organization B. • Oil and gas exploratory drilling funds generally are good investment vehicles for qualified retirement plans.

  47. Module 6 True/False • A qualified plan trust could have taxable income if it purchased common stock on margin, but not if it purchased real estate with debt. • The family members of a fiduciary are disqualified persons for purposes of the prohibited transaction rules, but they are not personally liable for the tax resulting from a prohibited transaction. • Both governmental and non-governmental 457 plans are considered to be unfunded plans.

  48. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits Module 7Retirement Plan Distributions & Plan Selection

  49. Module 7 True/False • The minimum distribution rules require that distributions commence by April 15 of the calendar year following the later of (1) the calendar year in which the employee attains age 70½, or (2) the calendar year in which the employee retires. • A beneficiary under age 59½ who receives a distribution due to the owner’s death will be exempt from the 10% premature distribution penalty. • John Jikes, age 64, plans to retire this year. He will be eligible for 10-year forward averaging.

  50. Module 7 True/False • If a beneficiary is not a participant’s spouse, the entire amount of the participant’s plan funds must be distributed within five years of his or her death if distributions had not yet begun; unless the beneficiary elects to receive payments over his or her life expectancy or qualifies to roll the distribution into his or her IRA. • The full amount of a qualified plan credited to a participant’s account, when paid in several payments in one taxable year, qualifies as a lump-sum distribution.

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