Enrolled Agent > EA - Part 2: Businesses > Unit 18: Retirement Plans for Businesses > Flashcards

Unit 18: Retirement Plans for Businesses Flashcards

Review business retirement plan types, limits, and credits. (93 cards)

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1
Q

What is the SECURE Act 2.0’s provision regarding student loan payments?

A

Employers can make matching contributions to an employee’s retirement plan based on the employee’s qualified student loan payments.

This allows employees paying off student loans to benefit from employer retirement contributions.

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2
Q

Are required minimum distributions (RMDs) required from Roth 401(k) accounts starting in 2025?

A

No

This change aligns Roth 401(k) accounts with Roth IRAs, which already do not have RMDs.

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3
Q

What type of savings account does the SECURE 2.0 permit employers to offer?

A

Pension-linked emergency savings accounts

(PLESAs)

Employees can contribute up to $2,500 annually, treated as after-tax Roth contributions.

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4
Q

What are the common types of retirement plans available for small businesses?

A
  • Simplified Employee Pension (SEP) plans
  • Savings Incentive Match Plan for Employees (SIMPLE) plans
  • Qualified plans (including 401(k) plans and traditional pensions)

SEP-IRAs and SIMPLE plans have less complex requirements compared to other retirement plans.

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5
Q

Can a business deduct retirement plan contributions if it has a net operating loss?

A

Yes

A business can deduct retirement plan contributions made on behalf of employees even if it has a net operating loss for the year.

This applies to all business types, including sole proprietorships and partnerships.

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6
Q

What must a sole proprietor or partner have to deduct retirement plan contributions for themselves?

A

Self-employment income

This means net profits from Schedule C or Schedule F, or self-employment income from a partnership, less ½ deductible self-employment tax.

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7
Q

For S corporation shareholder-employees, what constitutes “earned income” for retirement plan contributions?

A

Only W-2 wages paid to the shareholder-employee count as earned income. Pass-through income reported on Schedule K-1 is not treated as earned income for retirement plan purposes.

Distributions received as a shareholder of an S corporation do not qualify as earned income for retirement plan purposes.

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8
Q

Can a C corporation deduct retirement plan contributions during a net operating loss?

A

Yes

A C corporation can deduct retirement plan contributions on Form 1120, even if it has a net operating loss.

This applies to contributions made for employee-shareholders, officers, or other employees.

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9
Q

What are the nondiscrimination requirements for retirement plans?

A

Plans must not improperly favor owners or highly-paid executives over other employees.

If a plan fails nondiscrimination testing, the company must take corrective action to avoid penalties or disqualification.

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10
Q

What is a SEP-IRA?

A

A Simplified Employee Pension (SEP) is a cost-effective way for employers to contribute to their own and employees’ retirement plans, offering higher contribution limits than traditional IRAs.

SEPs require a written agreement and contributions must be made by the tax return deadline.

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11
Q

What flexibility do SEP-IRAs offer to small employers?

A

Contributions can vary from year to year, and there is no requirement for an official “plan document.”

Employers must execute a written agreement to provide benefits to all eligible employees.

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12
Q

Who can contribute to a SEP-IRA?

A

Only the employer

Contributions are pre-tax and not subject to income tax until withdrawn. All eligible employees must participate, and contributions are immediately 100% vested.

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13
Q

What are the employer contribution rules for a SEP-IRA?

A
  • Employers must contribute the same percentage of compensation for each eligible employee.
  • Contributions must be made in cash and cannot exceed the lesser of 25% of compensation or $70,000 for 2025.
  • Employers are not required to contribute every year, but if they do, it must be uniform for all employees.

Vesting is immediate, and contributions are not reported on an employee’s Form W-2.

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14
Q

Can employees contribute to their SEP-IRA?

A

No

Only employers and self-employed individuals can contribute to a SEP-IRA.

SEP-IRA contributions do not affect the amount an individual can contribute to a traditional or Roth IRA.

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15
Q

What are the eligibility requirements for a SEP-IRA?

A
  • At least 21 years old
  • Worked for the employer in 3 of the last 5 years
  • Received compensation of at least $750 for 2025

Employers can use less restrictive requirements, but not more restrictive ones.

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16
Q

What is the penalty for early withdrawal from a SEP-IRA before age 59½?

A

A 10% additional tax may apply unless the taxpayer qualifies for an exception.

Withdrawals can be rolled over tax-free to another SEP-IRA, traditional IRA, or qualified retirement plan.

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17
Q

What are the two types of contributions an employer can make to a SIMPLE IRA?

A
  • Matching contributions: Dollar-for-dollar match up to 3% of compensation.
  • Nonelective contributions: Flat 2% of each eligible employee’s compensation.

Matching contributions can be reduced to as low as 1% in any 2 out of 5 years.

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18
Q

What is the employee contribution limit for a SIMPLE IRA in 2025?

A

100% of compensation, up to $16,500, with an additional $3,500 catch-up contribution for those age 50 and older.

Employees can change their contribution levels during the plan’s election period, which must be at least 60 days long.

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19
Q

Can a business with over 100 employees maintain a SIMPLE plan?

A

No

A business must have 100 or fewer employees to establish a SIMPLE plan, but it has a two-year grace period to establish another plan if it exceeds this limit.

The business can maintain the SIMPLE plan during the two-year grace period.

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20
Q

Are employee and employer contributions in a SIMPLE IRA vested?

A

Yes

They are 100% vested, meaning the funds cannot be forfeited.

Employees can withdraw their own IRA funds at any time, but withdrawals may be subject to income tax and an early withdrawal penalty if under age 59½.

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21
Q

What employees can an employer exclude from a SIMPLE plan?

A
  • Employees covered by a union agreement
  • Nonresident alien employees with no U.S. source income

Employers cannot impose eligibility requirements more restrictive than stated, but can impose less restrictive ones.

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22
Q

What are the eligibility requirements for employees to participate in a SIMPLE IRA plan?

A

Any employee who has earned at least $5,000 in any 2 prior years and who is expected to earn at least $5,000 in the current year.

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23
Q

What are the contribution options for employers in a SIMPLE IRA plan?

A
  • Match on payroll contributions up to 3% of compensation
  • Nonelective contribution equal to 2% of compensation
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24
Q

What are the maximum contribution limits for employees under a SIMPLE IRA plan in 2025?

A

Up to $16,500, with an additional $3,500 catch-up contribution if age 50 or older.

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25
What is the **penalty** for early withdrawal from a SIMPLE IRA within two years of participation?
A penalty tax of 25% may apply.
26
Can a SIMPLE IRA plan be **converted** to a SIMPLE 401(k) plan **mid-year**?
Yes, effective for plan years starting on or after January 1, 2024.
27
What are the **key differences** between a SIMPLE IRA and a SIMPLE 401(k) plan?
* **SIMPLE IRA**: Employer match can be reduced to 1% (for up to 2 years out of 5); no participant loans; no Form 5500 filing required. * **SIMPLE 401(k)**: Employer match cannot be reduced; participant loans are allowed; must file Form 5500 annually.
28
What is a **qualified retirement plan**?
An employer-sponsored benefit plan that adheres to specific requirements outlined in the Internal Revenue Code (IRC) to receive tax-favored status. These plans are commonly offered by large employers, and when properly structured and administered, both contributions and earnings within these plans are generally not taxed until distribution
29
What are the **two basic kinds** of qualified retirement plans?
* Defined contribution plans (examples include a tranditional 401(k)) * Defined benefit plans (often referred to as a pension plan or traditional pension)
30
The **Employee Retirement Income Security Act** (ERISA) and what does it do?
It is a federal law that sets minimum standards for private-industry retirement and health plans. It protects participants by requiring plan disclosures, setting fiduciary responsibilities, establishing funding rules, and providing a process to appeal denied benefits.
31
What are **examples** of retirement plans covered under ERISA?
* Private employer-sponsored retirement plans, such as 401(k)s and most 403(b) plans * Traditional pensions, deferred compensation plans, and profit-sharing plans * Employee Stock Ownership Plan (ESOP)
32
What are **examples** of non-ERISA plans?
* Traditional IRAs and Roth IRAs * 403(b) plans sponsored by churches and 501(c)(3) tax-exempt organizations * Governmental plans
33
When must **Form 5500**, Annual Return/Report of Employee Benefit Plan, be filed?
By the last day of the seventh month after the plan year ends.
34
**When** can distributions from qualified retirement plans generally be made?
* The employee retires, dies, becomes disabled, or otherwise terminates employment * The plan terminates * The employee reaches age 59½ or suffers financial hardship
35
What is the **additional tax** on early distributions from qualified retirement plans?
A 10% additional tax may apply unless the taxpayer qualifies for an exception.
36
What are **some exceptions** to the 10% additional tax on early distributions?
* Distributions for medical expenses up to the allowed deduction amount * Disability or death * Distributions in the form of an annuity * Distributions due to an IRS levy on the plan * Distributions to a qualified reservist called to active duty * Qualified birth and adoption distributions * Qualified disaster recovery distributions * Distributions after separating from service after age 55 * Terminal illness distributions
37
What is the **required minimum distribution** (RMD) **age** for qualified plans under SECURE 2.0?
73
38
What is a **defined contribution plan**?
A plan that provides an individual account for each participant, with contributions made by the participant, the employer, or both, and benefits depending on the contributions made. ## Footnote Examples include 401(k) plans, 403(b) plans, and 457 plans.
39
What is the **employee contribution limit** for 401(k), 403(b), or 457 plans in 2025?
$23,500, with an additional catch-up contribution of $7,500 for participants age 50 and over.
40
What is a **defined benefit plan**?
A plan that promises a specified benefit amount or annuity after retirement, often funded entirely by the employer. ## Footnote Referred to as a "traditional pension plan", most federal and state governments offer defined benefit plans to their employees.
41
What is a **prohibited transaction**?
A transaction between a plan and a disqualified person that is prohibited by law, such as the improper use of retirement account assets for personal gain.
42
Who is considered a **disqualified person** in the context of prohibited transactions?
* A fiduciary of the plan * An employer whose employees are covered by the plan * An indirect or direct owner of 50% or more of the applicable employer * A family member of the above * A corporation, partnership, trust, or estate with a 50% or more interest held by a disqualified person * An officer, director, or highly compensated employee of the entity administering the plan
43
What constitutes a **prohibited transaction** in an IRA?
* Receiving a commission or fee for purchasing or exchanging plan assets * Taking loans from the plan * Keeping plan earnings for personal use ## Footnote Prohibited transactions can disqualify the plan if not corrected within the specified period.
44
Who are considered **disqualified persons** in relation to an IRA?
* The IRA owner * Family members such as children ## Footnote Nieces and nephews are not considered related parties for the purposes of prohibited transaction rules.
45
What happens if a **prohibited transaction** occurs in an IRA?
The IRA loses its tax-exempt status as of the first day of the year in which the transaction occurred. The entire value of the account is treated as distributed and included in the owner’s income, plus penalties may apply.
46
In a Defined Benefit Plan, who is **responsible** for ensuring sufficient funds for promised benefits?
The employer ## Footnote The employer must ensure that contributions plus investment earnings will be enough to pay the promised benefits.
47
How is the future benefit calculated in a **Defined Contribution Plan**?
The future benefit depends on contributions made by the employee and/or the employer and investment earnings on the contributions.
48
What is the **vesting rule** for employee salary reduction contributions in a Defined Contribution Plan?
Employee salary reduction contributions are immediately 100% vested.
49
Is there a **federal guarantee** for benefits in Defined Contribution Plans?
No
50
When will the higher **catch-up contribution limits** for individuals aged 60 to 63 take effect?
Beginning in 2025.
51
What is the **automatic enrollment mandate** for 401(k) and 403(b) plans under SECURE 2.0?
Plans established on or after December 29, 2022, must generally include an eligible **automatic contribution arrangement** starting in 2025.
52
What are the exceptions to the **automatic enrollment mandate** under SECURE 2.0?
* Employers with 10 or fewer employees * Employers in business for less than 3 years * Church plans * Governmental plans * SIMPLE plans
53
How are contributions to a **SEP-IRA** treated for tax purposes?
Contributions are generally **100% tax-deductible**, and investment earnings grow **tax-deferred**.
54
What is the deadline for establishing a **SEP plan** to qualify for the tax year?
The deadline for filing income tax returns (including extensions).
55
What is the requirement for **SEP-IRA contributions** regarding employee participation?
All **eligible employees** must participate in the plan, including part-time and seasonal employees.
56
What are the tax implications of **employer Roth contributions** to SEP-IRAs and SIMPLE IRAs under SECURE 2.0?
Employer Roth contributions are reported to the employee on **Form 1099-R** and are taxable to the employee.
57
What are **designated Roth contributions**?
Contributions that cannot be excluded from **gross income** but distributions are normally **tax-free**. ## Footnote Employer Roth contributions are reported to the employee on Form 1099-R and are taxable to the employee.
58
Which employees can be excluded from a **SEP-IRA**?
* Employees covered by a union agreement. * Nonresident alien employees who have received no U.S. source income.
59
What is the **compensation limit** for calculating SEP-IRA contributions in 2025?
$350,000
60
What is the maximum **SEP-IRA contribution limit** for 2025?
The lesser of: * 25% of the employee’s compensation, or * $70,000
61
At what age must **SEP-IRA participants** begin taking required minimum distributions?
Age 73 ## Footnote SEP-IRAs do not offer catch-up provisions, but required minimum distributions must begin at age 73.
62
What is the **two-year grace period rule** for SIMPLE plans?
If a business exceeds the **100-employee limit**, it has a **two-year grace period** to establish another retirement plan while maintaining the SIMPLE plan.
63
True or False: Employers must make contributions every year to a **SEP-IRA**.
False ## Footnote Employers do not have to contribute each year, but if they do, it must be an identical percentage for each eligible employee.
64
What must employers do before the **election period** for a SIMPLE IRA?
Provide **formal notice** to employees of their rights to participate and make salary reduction contributions, and information regarding the employer’s planned contributions.
65
What are the eligibility requirements for employers to establish a **SIMPLE IRA**?
Any employer with **100 or fewer employees** who received at least **$5,000** in the preceding year.
66
What is the deadline for depositing **salary reduction contributions** into a SIMPLE IRA?
Within 30 days after the end of the month in which they would otherwise have been paid to the employee.
67
What is the penalty for early withdrawal from a **SIMPLE IRA** before age 59½?
10% penalty tax.
68
Can employer **matching contributions** be reduced in a SIMPLE IRA plan?
Yes, they can be reduced down to as low as **1%** in certain situations, such as when a business has a **drop in revenues**.
69
What are the requirements for establishing a **SIMPLE 401(k)** plan?
* Must have 100 or fewer employees. * Cannot have any other retirement plans. * Needs to file a Form 5500 annually.
70
What is required for **terminating a SIMPLE plan**?
Employers must notify employees prior to **November 2nd** of that year, and the plan can only be terminated at **year-end** unless replacing it with a safe harbor 401(k).
71
Are **SIMPLE IRA contributions** included in the 'Wages, tips, other compensation' box of Form W-2?
No, they are not included in the 'Wages, tips, other compensation' box.
72
What is required for an employer to **terminate a SIMPLE IRA plan**?
* Employers must notify employees prior to **November 2nd** of the year before termination. * No need to notify the IRS.
73
When must a participant in a **qualified retirement plan** begin receiving Required Minimum Distributions (RMDs)?
* By **April 1** of the first year after reaching age 73 * The calendar year they retire from the employer maintaining the plan ## Footnote Participants who are 5% owners cannot delay RMDs until retirement.
74
What is the eligibility requirement for **long-term part-time employees** to participate in 401(k) and 403(b) plans starting in 2025?
Completion of **two consecutive 12-month periods** with at least **500 hours of service**.
75
What is the main advantage of a **defined benefit plan**?
The pension is not dependent on **investment returns** and provides a **predictable income stream** for retirees.
76
Are contributions to a **defined benefit plan** optional for employers?
No, contributions are required and based on **actuarial assumptions**.
77
Why are **defined benefit plans** for self-employed taxpayers uncommon?
Due to **high administration costs** and **complexity**.
78
What is the limitation on the annual benefit under a **defined benefit plan** in 2025?
The lesser of $280,000 or 100% of the employee's average compensation for the highest 3 consecutive years.
79
What is the "super" catch-up contribution limit for **SIMPLE IRA participants** who are age 60 through 63 in 2025?
$5,250
80
What is the "super" catch-up contribution limit for **401(k) and 403(b) participants** age 60 through 63 in 2025 if permitted by the plan?
$11,250
81
What happens if a **trust or estate** incurs a loss in its final year?
The loss can be **passed through** to the beneficiaries, allowing them potential deductions on their individual returns. ## Footnote Losses cannot be passed through to beneficiaries in a non-termination year.
82
# True or False: The **NIIT** applies directly to foreign estates or foreign trusts.
False ## Footnote The NIIT does not apply directly to foreign estates or foreign trusts, although it can apply to the individual beneficiaries of those entities.
83
What are some examples of **IRD**?
* Unpaid salary or wages earned before death. * Distributions from traditional IRAs and retirement plans. * Deferred compensation benefits. * Accrued but unpaid interest, dividends, and rent. * Accounts receivable of a deceased sole proprietor.
84
Can a beneficiary claim a deduction for **estate tax** paid on IRD?
Yes, the deduction is claimed as an **Other Itemized Deduction** on Schedule A (Form 1040).
85
What must an executor do to transfer the **DSUE** to a decedent's surviving spouse?
File **Form 706** timely, regardless of the amount of the gross estate.
86
What is included in the **gross estate**?
* Fair market value of all real and personal property owned at death. * One-half of the full value of property held as joint tenants with the right of survivorship with a spouse. * Life insurance proceeds for policies owned by the deceased, payable to the estate or heirs. * Decedent’s share of property held as joint tenants with non-spouses. * Value of certain annuities or survivor benefits payable to heirs. * Value of certain property transferred within three years before death.
87
What is the **marital deduction**?
An **unlimited amount** of property can be transferred between spouses tax-free if the spouse is a U.S. citizen.
88
How can **medical expenses** be treated for a decedent's estate?
They can be **deducted** from the gross estate or treated as paid by the decedent on their final tax return if paid within one year after death.
89
How is property held as **tenants in common** included in a decedent's estate?
Only the decedent’s **percentage ownership** of the property is included.
90
What happens to the **basis of property** in a community property state upon death?
The entire value of the community property receives a **step-up in basis**.
91
What are the two basic types of **trusts**?
* Revocable trust * Irrevocable trust ## Footnote A revocable trust allows the grantor to retain control and change the terms, while an irrevocable trust does not allow changes once established.
92
What distinguishes a **simple trust** from a **complex trust**?
* Simple trust must **distribute all its income annually** and cannot distribute principal or to charities. * Complex trust can **retain income**, **distribute principal**, and make **charitable distributions.**
93
What is **Form 3520-A** used for?
Annual Information Return of Foreign Trust With a U.S. Owner ## Footnote This form must be filed by the foreign trust.
EA - Part 2: Businesses
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