Exam For CFP Credit: Enrollment and Distribution

1. When do you decide on the distributions from a nonqualified deferred compensation plan?

12 months before the date you want to receive the money
At retirement, when you elect distribution years
At the time when you decide how much compensation to defer
The decision is never yours, as NQDC plans provide for mandatory distributions

2. Which of these is NOT allowed to be a distribution trigger in a nonqualified deferred compensation plan?

Job termination
July 1 of the distribution year that you elected at enrollment
A financial hardship
A date you choose as long as your company is notified three months in advance

3. What age must you be to receive distributions from your NQDC plan?

The minimum age for receiving Social Security
There is no required minimum age
At least 59½ years old
At least 50 years old, but only after 15 years of service to the company (otherwise 59½)

4. At distribution, do you receive your deferred amounts as a lump sum or by installments?

Always a lump sum
Always installments (an annual stream of payments)
This depends on what you can elect and the mandatory distribution rules in your plan
Half as a lump sum, and the rest paid over a period of 10 years.

5. When can you change the timing or form of a distribution from your NQDC plan?

NQDC plans do not permit changes to elected distributions
At any time during the calendar year before the date you elected for receiving the distribution
At least 12 months before the date you elected for receiving the distribution
At least one month before the date you elected for receiving the distribution

6. What are in-service distributions?

Distributions for executives who perform military service
Distributions received when you are still employed by the company
Distributions that are contingent upon meeting corporate performance goals
Distributions in exchange for cash compensation received for your services

7. Which of the following is not a permissible reason for accelerating a distribution?

To satisfy a domestic relations order in a divorce
To cover employment, state, local, or foreign taxes
To pay taxes owed because the plan does not comply with IRC Section 409A
To cover moving expenses when you're reassigned to a new location

8. Can you get a distribution in company stock?

This depends on the provisions of your plan
No, NQDC can be distributed only in cash
Yes, but you must elect this at the time of deferral
Only when all distributions from the NQDC plan must be in stock

9. Are distributions allowed for job loss and for financial hardship?

Only one or the other, but not both
Only when the plan specifies these as distribution triggers
Only if the plan requires these distributions to be made 30 days after the event occurs
Only if you elected these as special circumstances for a distribution

10. How are taxes usually collected when you receive distributions?

The full amount of tax is due with your tax return
For former and current employees, taxes are withheld from the distributed amount
Taxes are withheld according to withholding elections you make at the time of deferral
Estimated tax payments only

11. How and when is distribution income reported for current or former employees?

On Form 1099-NQDC for the year of distribution
On Form 1099-MISC for the year of distribution
On Form W-8, with a special box for nonqualified plans, for the year of distribution
On Form W-2, with a special box for nonqualified plans, for the year of distribution

12. Can you roll distributions into an IRA or a new employer's NQDC plan?

This is not allowed for NQDC plans
Only if you elected this at the time of deferral
Only if the new employer has a nonqualified deferred compensation plan and allows rollovers
Only if you roll the distributions over within 60 days of starting with the new company

13. To avoid tax penalties under IRC Section 409A, must payment distributions occur at the exact date specified in your deferral election?

Yes, 409A penalties are triggered if the distribution occurs on any date other than that specified in your distribution election
Yes, unless your company uses a rabbi trust, in which case the payment can occur at any time during the calendar year of the distribution
No, but the payment must occur by (1) the end of the month of your designated payment date or (2) the 30th day of the sixth month after the end of that year
No, but the payment must occur by (1) the end of the calendar year of your designated payment date or (2) the 15th day of the third month after the end of that year

14. Can a nonqualified plan permit an early distribution for a financial or medical hardship without tax penalties under Section 409A?

Never
Only with amounts scheduled for distribution within the following five years
Only for a severe financial hardship stemming from an illness or accident involving you, a family member, or a beneficiary; from a casualty loss; or from another similar extraordinary financial circumstance
Only for "unforeseeable emergencies," but neither Section 409A nor the IRS defines these or gives guidance on the matter

15. When you receive distributions in company shares, do capital gains tax rates apply, or is the value of the deferred amount based on the company's stock price?

You receive ordinary income based on the value of the stock at the time of deferral
You receive ordinary income based on the value of the stock at the time of distribution
You receive capital gains based on the appreciation of the stock between deferral and distribution
If the distribution meets the Section 409A rules, you have capital gains based on the appreciation of the stock between deferral and distribution, but ordinary income if the distribution violates the 409A rules

16. Who cannot participate in nonqualified deferred compensation plans?

Outside directors
Executives below the level of senior management
Consultants and contractors
Lower-paid employees

17. When must salary-deferral elections be made?

During the year before the compensation will be earned
During the year when the compensation will be earned
During the year after the compensation has been earned
During the first quarter of the year when the compensation will be earned

18. If you have just been hired or have just become eligible for the NQDC plan, how soon do you need to enroll and make deferral elections?

Within 10 days
Within 30 days
Within 90 days
There is no time limit

19. For established NQDC participants (i.e. not newly eligible), which are the most common months of the year for making deferral elections?

January and February
March and April
September and October
November and December

20. For performance-based compensation, how long before the end of the performance period must a deferral election occur?

At least 3 months
At least 6 months
At least 12 months
By the end of the prior calendar year

21. Which of the following is usually not decided when you enroll?

The percentage of compensation you want to defer, and the distribution dates
Whether to receive distributions in a lump sum or by installments
Any beneficiaries of your deferred compensation
All of the above are usually decided at enrollment

22. What types of compensation can you elect to defer?

Salary
Bonus
Sales commissions
All of the above, if your plan permits them

23. When do you elect a tax-withholding rate to apply to your distributions?

At the time of enrollment
The rate is not subject to election
During the year before distributions
Your Form W-4 always determines the rate

24. If permitted by your NQDC plan, what type of stock compensation can you elect to defer?

Nonqualified stock options
Restricted stock
Restricted stock units
Stock compensation is not eligible for deferral

25. For which of the following may your NQDC plan offer you an election on the timing or form of payment for a distribution?

Separation from service (i.e. job loss)
Disability
A future date when you expect to be still working for the company
All of the above

26. What factors go into deciding how much income someone should defer in a nonqualified plan?

These depend on the person's circumstances, but typical factors include whether the person's 401(k) plan has been fully funded, any cash-flow needs, and the level of risk that the NQDC plan carries
Generally, the participant should defer as much as possible, especially before tax-rate increases
There are no typical considerations, as you can make penalty-free changes in your deferrals at any time
The amount of each deferral is decided by the company, not the participant

27. If you change a distribution election, for how long must you redefer?

At least 12 months after the previously scheduled distribution date
At least 2 years after the previously scheduled distribution date
At least 5 years after the previously scheduled distribution date
At least 7 years after the previously scheduled distribution date

28. Which of the following is a risk you must understand before you enroll in a nonqualified deferred compensation plan?

You could lose your deferred compensation in a corporate bankruptcy
Your company may fail to comply with IRC Section 409A, exposing you (not the company) to tax penalties
Your company may be acquired and its buyer may end the NQDC plan before your elected distribution dates
All of the above

29. After you defer compensation, can you borrow money from your NQDC account without violating the rules of Section 409A?

Never, as this would show too much control over the deferred money
In certain circumstances, but only if you get formal written approval from the IRS
Yes, borrowing against the NQDC account is a routine practice for plan participants
This depends on company policy

30. Can you change the deferral elections if you involuntarily lose your job?

Yes, you can flexibly change the election, as involuntary job loss exempts you from the requirements of IRC Section 409A
Only if (1) your NQDC plan permits this and (2) all of the redeferral rules under IRC Section 409A are met
Only if (1) you gain formal written approval from the IRS and (2) your company uses a secular trust
Only if the job loss occurs in a change of control (e.g. a merger or acquisition)