IRC Sec. 132 defines the following nontaxable fringe benefits: no-additional-cost services, qualified employee discounts, de minimis benefits, working condition fringe benefits, qualified transportation fringe benefits, and qualified retirement planning services. The IRC requires all compensation for services be included in an employee’s income except when specifically excluded by law. There are no exclusions for group legal services, GTL in excess of $50,000, and third-party sick pay relative to the employer’s contribution.
For more information, refer to Module 4, Lesson 1
All of the following items are taxable compensation EXCEPT:
qualified employee discounts.- Correct Answer
group legal services.
company-provided group-term life insurance in excess of $50,000.00.
third-party sick pay relative to an employer’s contribution.
RATIONALE
Under IRS rules, qualified transportation fringe benefits provided by an employer are not taxable if less than $300.00 per month. However, amounts in excess of $300.00 per month are subject to income, social security and Medicare tax withholding.
For more information, refer to Module 4, Lesson 2
Qualified transportation fringe benefits are subject to which taxes?
- No federal taxes.- Correct Answer
- Federal income tax only
- Social security and Medicare taxes only
- Federal income, social security, and Medicare taxes
Under IRS rules, the value of the personal use of a company vehicle is subject to social security and Medicare tax withholding. It is the employer’s option whether to withhold income tax. When using the cents-per-mile valuation method, the value of the vehicle cannot exceed the luxury vehicle value, ($60,800.00 in 2023). It does not matter if the employee drives more personal than business miles in the company vehicle when determining the taxation of the personal use of the vehicle. The IRS requires employers to include the value of the personal use of a company vehicle at least annually.
For more information, refer to Module 4, Lesson 3
An employee drove a company car 6,000 miles for business, 5,000 miles for commuting, and 4,000 miles for other personal use. The car is valued at $62,300.00. What are the tax implications of the employee’s use of the car?
The employer is required to report the value of the personal use of the vehicle quarterly.
The employer must withhold federal income tax on the personal use of the vehicle.
To qualify for the cents-per-mile method, the employee must drive the vehicle at least 12,000 miles annually.
The employer cannot use the commuting value method to calculate the value of the personal use of the vehicle. – Correct Answer
Under IRS rules, employee contributions to a 401(k) plan are not subject to income tax but are subject to social security (6.2%) and Medicare (1.45%) taxes. 403(b) plans are designed for employees of tax-exempt organizations, 457(b) plans are designed for employees of state and local government employees. Employers are not required to match employee contributions to a 401(k) plan.
For more information, refer to Module 5, Lesson 1
Which of the following statements is true about 401(k) plans?
Employer contributions to a 401(k) plan are not subject to federal income tax when deferred. – Correct Answer
Employers must match employee contributions to a 401(k) plan.
A 401(k) plan is designed primarily for employees of tax-exempt organizations.
A 401(k) plan is a deferred compensation plan primarily for employees of state and local governments.
Under IRS rules, employee contributions to a Roth 401(k) plan are subject to income tax at the time of contribution and are subject to social security (6.2%) and Medicare (1.45%) taxes. 403(b) plans are designed for employees of tax-exempt organizations, 457(b) plans are designed for employees of state and local government employees. Employers are not required to match employee contributions to a 401(k) plan.
For more information, refer to Module 5, Lesson 1
Which of the following statements is true about 401(k) plans?
Employers must match employee contributions to a 401(k) plan.
A 401(k) plan is designed primarily for employees of tax-exempt organizations.
Contributions to a Roth 401(k) plan are subject to federal income tax when deferred.- Correct Answer
Employee contributions to a 401(k) plan are not subject to social security and Medicare tax withholding.
Under IRS rules, an employee must make a deferral election for a nonqualified deferred compensation plan by the end of the preceding tax year.
For more information, refer to Module 5, Lesson 4
When must an employee make a deferral election for a nonqualified deferred compensation plan?
By the end of the preceding tax year.- Correct Answer
Before the end of the prior month
Before the beginning of the prior pay period
Before the beginning of the prior quarter
RATIONALE
You answered: 0
The correct answer is: $50.49
Under IRS rules, employee contributions to a 401(k) plan are not subject to income tax but are subject to social security (6.2%) and Medicare (1.45%) taxes.
For more information, refer to Module 5, Lesson 2
An employee earns $66,000.00 annually and contributes 1% to a 401(k) plan. Calculate the annual amount of federal taxes that must be withheld from the employee’s 401(k) contribution.
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Xyz
IRC Section 409A allows distributions when there is an unforeseen emergency. Distributions when a natural disaster occurs, when the employee’s spouse dies, and at the employee’s election before termination violate IRC Section 409A and require immediate inclusion of the plan’s value in the employee’s income.
For more information, refer to Module 5, Lesson 4
For a nonqualified deferred compensation plan to exclude deferrals from income, distributions can be allowed:
when the employee’s spouse dies.
at the employee’s election before termination of employment.
when a natural disaster occurs.
when there is an occurrence of an unforeseen emergency .- Correct Answer
Under IRS rules, nonqualified deferred compensation plans, including 457(b) plans, are not required to meet the discrimination rules that qualified plans such as 401(k), 403(b), defined benefit, and defined contribution plans must meet.
For more information, refer to Module 5, Lesson 2
Which of the following plans can discriminate in favor of highly compensated employees?
- 401(k) plans
- 403(b) plans
- 457(b) plans – Correct Answer
- Qualified defined benefit plans
RATIONALE
Under IRS rules, a 401(k) plan may allow an employee age 50 or older to make an additional $7,500.00 contribution beyond the $22,500.00 deferral limit.
For more information, refer to Module 5, Lesson 3
Which of the following employees are eligible to make a catch-up contribution to a 401(k) deferred compensation plan?
All employees within 10 years of normal retirement age
All full-time employees only
All employees making deferrals
All employees who will be age 50 or older during the year– Correct Answer
Catch-up contributions are additional contributions that eligible employees can make to their 401(k) plans. The contribution limits for catch-up contributions are higher than the regular contribution limits.
In 2023, the catch-up contribution limit for 401(k) plans is $6,500. This means that an employee who is age 50 or older can contribute a total of $22,500 to their 401(k) plan in 2023 ($19,500 regular contribution limit + $6,500 catch-up contribution limit).
To be eligible to make catch-up contributions, an employee must:
- Be age 50 or older during the year.
- Be an active participant in the 401(k) plan.
- Have earned income during the year.
All full-time employees are not eligible to make catch-up contributions. Only employees who meet the requirements listed above are eligible.
The primary differences between a nonqualified deferred compensation plan and a qualified plan are that nonqualified plans can discriminate in favor of officers and highly compensated employees, and that nonqualified plans have no limits to the contributions made by employees or employers.
For more information, refer to Module 5, Lesson 2
What is a primary difference between a nonqualified deferred compensation plan and a qualified plan?
- Nonqualified plans are established for the benefit of all employees.
- Nonqualified plans must meet the IRS rules for eligibility and vesting.
- Nonqualified plans can discriminate in favor of highly compensated employees – Correct Answer
- Nonqualified plans must be in writing and be communicated to employees.
Under IRS rules, the time and form of distributions must be specified at the time of the employee’s election to defer into a nonqualified plan.
For more information, refer to Module 5, Lesson 4
What must be specified at the time of the employee’s election to defer into a nonqualified plan?
The ability to make changes to the election
The time and form of distributions – Correct Answer
The amount of catch-up deferrals allowed
The maximum amount of the deferral
IRC Section 409A allows distributions when there is a change in control of the corporation. Distributions when the employee receives a golden parachute payment, when the employee reaches age 65, and when the employee reaches normal retirement age require immediate inclusion of the plan’s value in the employee’s income.
For more information, refer to Module 5, Lesson 4
For a nonqualified deferred compensation plan to exclude deferrals from income, distributions can be allowed:
when the employee reaches normal retirement age.
when there is a change in control of the corporation. – Correct Answer
when the employee receives a golden parachute payment.
when the employee reaches age 65.
For a nonqualified deferred compensation plan to exclude deferrals from income, distributions can be allowed only under the following exceptions:
- Death of the employee.
- Disability of the employee.
- Separation from service (with certain exceptions).
- Involuntary separation from service (with certain exceptions).
- Unforeseeable emergency.
- Change in control of the corporation.
Other events, such as the employee reaching normal retirement age or receiving a golden parachute payment, are not considered exceptions to the distribution restrictions.
When performing the ADP nondiscrimination test, a highly compensated employee is defined as an employee with compensation in excess of $150,000.00 in the prior year, the top-paid 20% of employees during the prior year (if the employer elects this option), or 5% owners of the employer’s stock.
For more information, refer to Module 5, Lesson 3
When performing discrimination testing for a 401(k) plan, which of the following employees is a highly compensated employee?
An employee with compensation of $145,000.00 in the prior year
An employee owning 1% of the company’s stock
An employee with compensation of $155,000.00 in the prior year – Correct Answer
An employee owning 3% of the company’s stock
