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 is a rollover 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 age 65½.

16. An employee stock ownership plan is a type 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 tax if the individual has not yet reached age 59½.

19. An employee's participation is the tax-qualified retirement plan of one employer will preclude 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 to a Keogh (H.R. 10) plan.

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 $105,000 salary. 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 for 22013 in order to take advantage of their maximum allowable IRA deduction 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 maximum IRA contribution 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 income for 2013 is $125,000, what is the maximum that they can deduct for contributions to their IRAs on their 2013 returns?
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 for their 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 the following:
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 accounts if they 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?________________________________________

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.