Tax Topic 54 - Retirement Plans for Small Business  

Plans such as a SEP, SIMPLE and qualified plans offer you and your employees a tax preferred way to save for retirement and under a 401(k) plan, employees can contribute limited amounts of their before-tax pay to the plan. As an employer, you can set up and maintain retirement plans for yourself and your employees. Such plans are SEP plans, SIMPLE plans, and Qualified plans, including 401(k) plans.

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You will need IRS Publication 560 to complete the questions for this topic.

1. Gary is a calendar-year eligible small employer and wishes to take advantage of the Credit for Small Employer Pension Plan Startup Costs. He incurred $2,000 in qualified startup cost in 2009 for an eligible plan that will become effective on January 1, 2010. What is Gary's Pension Startup Costs credit amount for calendar year 2009?

A. $500.
B. $0 (he gets the credit in 2010).
C. $2000.
D. $1,000.

2. In 2009, Colleen started a SIMPLE plan for all five of her employees and herself. It cost her $400 in fees to administer the plan. She never had a pension plan prior to starting this plan. Her tax credit is:

A. $200.
B. $400.
C. $0.
D. $100.

3. Generally, if you had 100 or fewer employees who received at least _________ in compensation last year, you can set up a SIMPLE plan.

A. $200.
B. $2,000.
C. $5,000.
D. $10,000.

4. In figuring the compensation of a participant, you can treat the following amounts as the employee's compensation.

A. The employee's social security wages (including elective deferrals.
B. Nontaxable reimbursements or other expense allowances.
C. Deferred compensation (other than elective deferrals).
D. Any of the above.

5. This is a person who performs services for an employer and the employer has the right to control and direct the results of the work and the way in which it is done. The employer provides the employee's tools, materials and workplace. In addition, the employer can fire the employee.

A. Self-employed person.
B. A common-law employee.
C. A leased employee.
D. An employee.

6. Under a SEP, you make the contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. A SEP-IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP-IRA is maintained. SEP-IRAs are set up for, at a minimum, each eligible employee. An eligible employee is an individual who

A. Has reached age 21.
B. Has worked for you in at least 3 of the last 5 years.
C. Has received at least $550 in compensation from you in 2009.
D. All of the above.

7. You cannot consider the part of an employee's compensation over $245,000 when figuring your contribution limit to a SEP-IRA for a common-law employee. The maximum contribution for an eligible employee is

A. $5,250.
B. $49,000.
C. $46,000.
D. $230,000.

8. Excess contributions are your contribution to an employee's SEP-IRA (or to your own SEP-IRA) for 2009 that exceed

A. 25% of the employee's compensation (or for you, 20% of your net earnings from self-employment).
B. $49,000.
C. The lesser of A or B above.
D. The greater of A or B above.

9. When you can deduct contributions made for a year depends on the tax year on which the SEP is maintained. If you file your tax return and main the SEP using a fiscal year or short tax year,

A. You deduct contributions made for a year on your tax return for that year.
B. You deduct the yearly contributions on your tax return for the year within which the calendar year ends.
C. You deduct the contribution for the year after the year ends.
D. You deduct contributions made for a year on your tax return for a prior year.

10. If you contribute to your own SEP-IRA, you must make a special compensation to figure your maximum deduction for these contributions. When figuring the deduction for contributions made to your own SEP-IRA, compensation is your net earnings from self-employment, which takes into account the deduction for one-half of your self-employment tax and

A. Your contributions.
B. 25% of the compensation paid to the participants.
C. Trade or business under common control described in section 414(c).
D. The deduction for contributions to your own SEP-IRA.

11. Deduct the contributions you make for your common-law employees on your own tax return. Sole proprietors and partners deduct contributions for themselves on

A. Schedule C (Form 1040).
B. Schedule F (Form 1040).
C. Line 28 of form 1040.
D. Form 1065.

12. The tax advantages of using SEP-IRAs for retirement savings can be offset by additional taxes that may be imposed for

A. Making excess contributions.
B. Making early withdrawals.
C. Not making required withdrawals.
D. Any of the above.

13. You can set up a SIMPLE IRA plan if you meet the employee limit and

A. You maintain another qualified plan.
B. You do not maintain another qualified plan unless the other plan is for collective bargaining employees.
C. You do not maintain a plan for collective bargaining employees.
D. Coverage under the plan has not significantly changed during the grace period.

14. You can set up a SIMPLE IRA plan only if you had

A. 200 or fewer employees who received $10,000 or more in compensation.
B. 100 or fewer employees who received $5,000 or more in compensation.
C. 50 or fewer employees who received $3,000 or more in compensation.
D. 2 or more employees who received $100 or more in compensation.

15. A SIMPLE IRA plan can permit participants who are 50 or over at the end of the calendar year to also make catch-up contributions. The catch-up contribution limit for 2009 for SIMPLE IRA plans is

A. $2,500.
B. $3,500.
C. $10,500.
D. $5,000.

16. To be a qualified plan, a defined benefit plan must benefit a least

A. 50 employees.
B. The greater of 40% of all employees or two employees.
C. At least the lesser of A or B above.
D. The greater of A or B above.

17. For qualified plans, contributions or benefits to be provided can be in favor of highly compensated employees.

True False

18. In setting up a qualified plan, you must adopt a written plan. The plan can be an IRS-approved master or prototype plan offered by a sponsoring organization. The following organization generally can provide IRS-approved master or prototype plans.

A. Banks and insurance companies.
B. Trade or professional organizations.
C. Mutual funds.
D. Any of the above.

19. The deductions limit for your contributions to a qualified plan depends on the kind of plan you have. The deduction for contributions to a defined contribution plan cannot be more than 25% of the compensation paid or accrued during the year to your eligible employees participating in the plan. When figuring the deduction limit, the following applies.

A. Elective deferrals are not subject to the limits.
B. Compensation includes elective deferrals.
C. The maximum compensation that can be taken into account for each employee in 2009 is $245,000.
D. All of the above.

20. A 401(k) plan can permit participants who are age 50 or older at the end of the calendar year to also make catch up contributions. The catch-up contribution limit for 2009 is

A. $2,500.
B. $5,500.
C. $10,500.
D. $5,000.