Question

All of the following are TRUE of the federal tax advantages of a qualified plan EXCEPT

A. Employee and employer contributions are not counted as income to the employee for income tax purposes.
B. At distribution, all amounts received by the employee are tax free.
C. Employer contributions are tax deductible as ordinary business expense.
D. Funds accumulate on a tax-deferred basis.

Answer 1

The federal tax advantages of a qualified plan include tax deferral, tax deductible employer contributions, and exclusion from employee's taxable income. However, distributions received by the employee are subject to income tax.

Step-by-step explanation:

The federal tax advantages of a qualified plan include several benefits. However, not all options provided in the question are true. Let's review each option:

1. A. Employee and employer contributions are not counted as income to the employee for income tax purposes. This is true. Contributions made to a qualified plan are generally not included in the employee's taxable income until they withdraw the funds.
2. B. At distribution, all amounts received by the employee are tax free. This option is false. When employees eventually withdraw funds from their qualified plan, they are subject to income tax on the distributions received.
3. C. Employer contributions are tax deductible as ordinary business expense. This is true. Employers can generally claim tax deductions for contributions made to a qualified plan as a part of their ordinary business expenses.
4. D. Funds accumulate on a tax-deferred basis. This option is true. One of the main benefits of a qualified plan is that funds accumulate on a tax-deferred basis, meaning the investments grow without immediate taxation.

Based on the above explanations, the correct answer is B. At distribution, all amounts received by the employee are not tax free.