Qualified and nonqualified retirement plans

Correct answer: It meets the requirements of Internal Revenue Code section 401(a)

A plan is qualified when it, and the trust that holds its assets, meet the requirements of IRC section 401(a). Meeting those requirements is what unlocks the plan's tax advantages.

Correct answer: In the year the contributions are made to the plan

A key tax advantage of a qualified plan is that the employer deducts its contributions currently, when they are made, even though the employee is not taxed until distribution.

Correct answer: They are not taxed until they are distributed

In a traditional, pre-tax 401(k), contributions and investment growth accumulate tax-deferred. The participant pays no tax on the earnings until money is distributed.

Correct answer: To provide extra benefits only to selected executives or key employees

Because a nonqualified plan does not have to meet section 401(a), it may discriminate. That lets an employer reward only the executives or key employees it chooses.

Correct answer: When the executive includes the benefit in income, usually when it is paid

Under a nonqualified plan the employer's deduction is matched to the employee's income inclusion. Since the executive is taxed when paid, the company deducts at that time.

Correct answer: Highly compensated employees

Section 401(a)(4) bars contributions or benefits that discriminate in favor of highly compensated employees, a term section 401 defines by reference to section 414(q).

Correct answer: Vesting, as set out in section 411

Section 401(a)(7) says a trust is not a qualified trust unless the plan satisfies the minimum vesting standards of section 411.

Correct answer: Not use them to increase any other employee's benefits

Section 401(a)(8) provides that a defined benefit plan's trust is not qualified unless the plan provides that forfeitures will not be applied to increase the benefits any employee would otherwise receive. In practice they reduce future employer costs.

Correct answer: A qualified joint and survivor annuity

Section 401(a)(11) requires a defined benefit plan to pay a vested participant who survives to the annuity starting date in the form of a qualified joint and survivor annuity, unless waived as section 417 allows.

Correct answer: 50 percent

Section 401(a)(13)(D)(ii) defines the minimum-required qualified joint and survivor annuity as one under which the survivor annuity is 50 percent of the amount payable during the joint lives of the participant and spouse.

Correct answer: Reaching the earlier of age 65 or normal retirement age; the 10th anniversary of joining the plan; terminating service

Section 401(a)(14) requires benefits to begin, unless the participant elects otherwise, within 60 days after the close of the plan year in which the latest of these occurs: the participant attains the earlier of 65 or normal retirement age, the 10th anniversary of starting participation, or termination of service.

Correct answer: The plan may not reduce the pension because of the Social Security increase

Section 401(a)(15) provides that benefits being received by a participant or beneficiary, or owed to a separated vested participant, may not be decreased because of an increase in Social Security benefit levels or the wage base.

Correct answer: The required beginning date

Under section 401(a)(9), a trust is not qualified unless the plan provides that each employee's entire interest will be distributed, or begin to be distributed, no later than the required beginning date.

Correct answer: Begin taking required minimum distributions by her required beginning date

Under current law, required minimum distributions from a qualified plan generally must begin by the required beginning date tied to age 73 (for a retired participant, April 1 of the year after turning 73).

Correct answer: Yes; a pension plan may distribute to an employee who has reached age 59½ and is still employed

Section 401(a)(36) provides that a pension plan's trust does not fail to qualify solely because the plan permits distributions to an employee who has attained age 59½ and has not separated from employment.

Correct answer: The annual limitation in effect under section 402(g)

Section 401(a)(30) requires the plan to limit an individual's elective deferrals, across all the employer's plans, to the limitation in effect under section 402(g)(1)(A) for the year.

Correct answer: A direct trustee-to-trustee transfer to the eligible retirement plan she specifies

Section 401(a)(31)(A) requires a qualified plan to let a distributee of an eligible rollover distribution elect a direct trustee-to-trustee transfer to an eligible retirement plan she specifies.

Correct answer: Deposit it into an IRA no later than the 60th day after he received it

Section 408(d)(3)(A) excludes an IRA distribution from income if the amount is paid into an IRA or eligible retirement plan no later than the 60th day after it is received.

Correct answer: The second rollover is not tax-free, because only one such rollover is allowed in a 1-year period

Section 408(d)(3)(B) denies rollover treatment to an IRA distribution if, during the 1-year period ending on the day of receipt, the individual already received an IRA distribution excluded from income as a rollover.

Correct answer: Only Maria, the surviving spouse

Under section 408(d)(3)(C), an IRA is treated as inherited, and denied rollover treatment, if the owner acquired it by reason of another individual's death and was not that individual's surviving spouse. Sam's is inherited; Maria's is not.

Correct answer: The portion that is a required minimum distribution

Section 408(d)(3)(E) provides that the rollover rule does not apply to any amount to the extent it is required to be distributed. A required minimum distribution must be taken, not rolled over.

Correct answer: The $6,000 redeposited is a tax-free rollover; the $4,000 kept is a distribution

Section 408(d)(3)(D) permits partial rollovers: an amount that would qualify but for the fact that the entire amount was not redeposited is treated as a rollover to the extent it is paid into an eligible plan within 60 days.

Correct answer: Deposit the $40,000 she received plus $10,000 from other funds

A qualified plan must withhold 20 percent from an eligible rollover distribution paid to the participant. To roll over the full amount, she must replace the withheld 20 percent from other funds within 60 days; any shortfall is taxed, and the withholding is credited on her return.

Correct answer: Taxed as ordinary income, plus a 10 percent additional tax

Distributions of pre-tax contributions and earnings from a qualified plan are taxed as ordinary income, and a distribution taken before age 59½ generally incurs a 10 percent additional tax unless an exception applies.

Correct answer: As ordinary income

Because pre-tax contributions and earnings in a qualified plan have never been taxed, they are taxed as ordinary income when distributed.

Correct answer: It is exempt from tax

Section 401 cross-references section 501(a), which exempts from tax a trust qualified under section 401. That exemption is what lets earnings accumulate tax-deferred.

Correct answer: A defined benefit pension plan

A defined benefit plan promises a stated benefit, so if investments underperform, the employer must contribute more. In a defined contribution plan, including 401(k), profit-sharing and money purchase plans, the benefit is only what the account grows to, so the employee bears the risk.

Correct answer: A defined contribution plan

A 401(k) is a qualified cash or deferred arrangement under which the employee's benefit is the value of an individual account, which makes it a defined contribution plan.

Correct answer: An executive bonus plan under section 162

An executive bonus (section 162) plan, under which the employer pays a selected executive a bonus, often to fund life insurance, is a common nonqualified arrangement. The other three are standard qualified plans.

Correct answer: A nonqualified deferred compensation plan

Only a nonqualified plan may lawfully be limited to a few selected executives. A private employer's qualified plan, of any type, must satisfy nondiscrimination and coverage rules that bar favoring highly compensated employees.

Correct answer: It is a return of his cost basis and is not taxed again

Money contributed after tax forms the participant's cost basis. When benefits are paid, the basis is recovered tax-free; only the earnings above basis are taxable.

Correct answer: Qualified plans may request an IRS determination letter; nonqualified plans need no IRS approval

A qualified plan's tax advantages depend on meeting section 401(a), and its sponsor may ask the IRS for a determination letter confirming qualified status; many sponsors of pre-approved plans rely on the provider's opinion letter instead. Nonqualified plans are not tested under section 401(a) and need no IRS approval.

Correct answer: A Keogh (HR-10) plan

Keogh, or HR-10, plans are qualified plans for self-employed individuals and their employees, following tax-favored rules similar to other qualified plans.

Correct answer: She is generally not taxed on the benefit until she receives it

For the employee, both an unfunded nonqualified deferred compensation plan and a qualified plan generally defer income tax until benefits are received. They differ on the employer's deduction, nondiscrimination and asset protection.

Correct answer: Another SIMPLE retirement account

Section 408(d)(3)(G) provides that a SIMPLE account distribution to which section 72(t)(6) applies may be treated as a rollover only if paid into another SIMPLE retirement account.

Correct answer: A qualified plan, such as a 401(k) or profit-sharing plan

A current deduction for retirement contributions comes with qualified plans, which in return must cover employees on nondiscriminatory terms. Since this employer accepts broad coverage, a qualified plan fits.