PFS Communication with Teachers & Parents 2 — Questions and Answers
Question 1: A PFS practitioner is explaining a 403(b) plan to a public school teacher. Which unique feature should be emphasized that is NOT available in a 401(k)?
- Employer matching contributions
- The 15-year catch-up provision for employees with 15+ years of service (Correct answer)
- Roth contribution option
- Automatic enrollment
Correct answer: The 15-year catch-up provision for employees with 15+ years of service
403(b) plans offer a special catch-up provision allowing employees with 15+ years of service with a qualifying employer to contribute an additional $3,000 per year (up to a lifetime cap).
Question 2: When communicating with a parent about funding a child's education, a PFS should clarify that 529 plan distributions used for K-12 tuition are federally tax-free up to:
- $5,000 per year
- $10,000 per year (Correct answer)
- $15,000 per year
- There is no federal limit for K-12
Correct answer: $10,000 per year
Federal law allows up to $10,000 per year per beneficiary in tax-free 529 distributions for K-12 tuition expenses.
Question 3: A teacher client asks their PFS about the tax treatment of union dues paid for professional association membership. Under current tax law (post-TCJA), employee union dues are:
- Deductible as a miscellaneous itemized deduction
- Deductible above-the-line
- Not deductible for federal income tax purposes through 2025 (Correct answer)
- Fully deductible if the teacher works in a public school
Correct answer: Not deductible for federal income tax purposes through 2025
The Tax Cuts and Jobs Act of 2017 suspended the deduction for miscellaneous itemized deductions (including union dues) through 2025.
Question 4: In communicating financial planning advice to a parent, a PFS distinguishes between a custodial UGMA account and a 529 plan. Which statement is accurate regarding financial aid impact?
- Both are treated identically under FAFSA
- UGMA assets are assessed at up to 20% of the asset value as student assets (Correct answer)
- 529 plans owned by a grandparent have no FAFSA impact
- 529 plan distributions always count as student income on FAFSA
Correct answer: UGMA assets are assessed at up to 20% of the asset value as student assets
UGMA/UTMA custodial accounts are considered student assets and assessed at up to 20% on FAFSA, versus a maximum 5.64% for parental assets.
Question 5: A teacher nearing retirement asks a PFS about the impact of the Windfall Elimination Provision (WEP). WEP primarily affects teachers who:
- Earn income from a second job
- Receive a pension from employment not covered by Social Security (Correct answer)
- Have fewer than 35 years of Social Security earnings
- Retire before age 62
Correct answer: Receive a pension from employment not covered by Social Security
WEP reduces Social Security benefits for individuals who receive pensions from employment not covered by Social Security, such as many state and local government teachers.
Question 6: When helping a parent understand the Coverdell Education Savings Account (ESA), a PFS should communicate that annual contributions are limited to:
- $2,000 per beneficiary regardless of income
- $2,000 per beneficiary subject to contributor income phase-outs (Correct answer)
- $5,000 per beneficiary with no income limits
- $10,000 per beneficiary per year
Correct answer: $2,000 per beneficiary subject to contributor income phase-outs
Coverdell ESA contributions are capped at $2,000 per beneficiary per year and phase out for contributors with MAGI between $95,000–$110,000 (single) or $190,000–$220,000 (married).
Question 7: A PFS is communicating the Government Pension Offset (GPO) rule to a teacher client. GPO reduces spousal or survivor Social Security benefits by:
- 50% of the teacher's pension amount
- Two-thirds of the teacher's government pension amount (Correct answer)
- 100% of the teacher's pension amount
- One-third of the teacher's pension amount
Correct answer: Two-thirds of the teacher's government pension amount
GPO reduces Social Security spousal or survivor benefits by two-thirds of the individual's government pension that was not subject to Social Security taxes.
PFS Communication with Teachers & Parents 2
A PFS practitioner is explaining a 403(b) plan to a public school teacher.
Which unique feature should be emphasized that is NOT available in a 401(k)?