CRPC - Chartered Retirement Planning Counselor Employer-Sponsored Retirement Plans Questions and Answers — Questions and Answers
Question 1: A 54-year-old client participates in their company's 401(k) plan and wants to maximize their personal contributions for 2024. Based on IRS limits for 2024, what is the maximum total elective deferral this client can contribute to their plan?
- $23,000
- $30,000
- $30,500 (Correct answer)
- $69,000
Correct answer: $30,500
For 2024, the maximum employee elective deferral for a 401(k) plan is $23,000. Because the client is over age 50, they are also eligible to make a 'catch-up' contribution of $7,500. The sum of the standard deferral limit and the catch-up contribution is $23,000 + $7,500 = $30,500.
Question 2: A small business owner wants to establish a retirement plan. They desire a plan that only allows for employer contributions, providing them with the flexibility to skip contributions in years when profits are low. Which of the following plans best meets these specific requirements?
- SIMPLE IRA
- SEP IRA (Correct answer)
- Safe Harbor 401(k)
- Solo 401(k)
Correct answer: SEP IRA
A SEP (Simplified Employee Pension) IRA is funded exclusively by employer contributions; employees cannot make elective deferrals. Employer contributions to a SEP IRA are discretionary, meaning the employer can choose how much to contribute each year, or to contribute nothing at all, which provides flexibility. In contrast, a SIMPLE IRA requires mandatory employer contributions and allows employee deferrals, and both 401(k) types are primarily designed for employee deferrals.
Question 3: Under the Pension Protection Act of 2006 (PPA), which of the following is a permissible vesting schedule for employer *nonelective* (profit-sharing) contributions made to a defined contribution plan?
- 5-year cliff vesting
- 2 to 7-year graded vesting
- 100% immediate vesting only
- 2 to 6-year graded vesting (Correct answer)
Correct answer: 2 to 6-year graded vesting
The Pension Protection Act of 2006 (PPA) required that employer nonelective contributions (like profit sharing) follow the same faster vesting schedules previously established for matching contributions. The permissible maximum schedules are a 3-year cliff (100% vested after 3 years) or a 2 to 6-year graded schedule (20% vested after 2 years, increasing by 20% each year until 100% vested after 6 years). The 5-year cliff and 2 to 7-year graded schedules were the pre-PPA rules for nonelective contributions.
Question 4: A 45-year-old employee takes a $20,000 hardship withdrawal from their traditional 401(k) to prevent foreclosure on their principal residence. Assuming their marginal federal tax rate is 22%, what are the total tax consequences of this distribution?
- $2,000 penalty only
- $4,400 in ordinary income tax only
- $6,400, consisting of a 10% penalty and ordinary income tax (Correct answer)
- $0, as foreclosure prevention is a penalty-free and tax-free withdrawal reason
Correct answer: $6,400, consisting of a 10% penalty and ordinary income tax
A hardship withdrawal from a traditional 401(k) is included in the participant's gross income for the year and is subject to ordinary income tax. In this case, that would be $20,000 * 22% = $4,400. Because the employee is under age 59½, the distribution is also subject to a 10% early withdrawal penalty, which is $20,000 * 10% = $2,000. The total tax impact is the sum of the income tax and the penalty: $4,400 + $2,000 = $6,400.
Question 5: A qualified retirement plan is considered 'top-heavy' for a plan year if, as of the determination date, the account balances of key employees exceed what percentage of the total plan assets?
- 50%
- 75%
- 60% (Correct answer)
- 25%
Correct answer: 60%
A retirement plan is defined as top-heavy when the aggregate value of the plan accounts for 'key employees' is more than 60% of the total value of the plan's assets for all employees. This test is performed annually to ensure that plans do not disproportionately benefit owners and highly paid employees over non-key employees.
Question 6: A public school district wants to offer a retirement plan that allows its teachers to make salary deferral contributions. Which type of plan is specifically designed for public schools and other 501(c)(3) organizations?
- SEP IRA
- 401(k) Plan
- 457(b) Plan
- 403(b) Plan (Correct answer)
Correct answer: 403(b) Plan
A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan specifically available to employees of public schools and certain 501(c)(3) tax-exempt organizations. While a 457(b) plan is often available to government employees, the 403(b) is the primary salary deferral plan for public school systems. 401(k) plans are for for-profit entities, and SEP IRAs do not allow for employee salary deferrals.
CRPC - Chartered Retirement Planning Counselor Employer-Sponsored Retirement Plans Questions and Answers
A 54-year-old client participates in their company's 401(k) plan and wants to maximize their personal contributions for 2024.
Based on IRS limits for 2024, what is the maximum total elective deferral this client can contribute to their plan?