Retirement Planning/ Employee Benefits Final Exam
Both you and your employer contribute ___% of your pay into Social Security and ___% of your pay into Medicare. These are called FICA taxes a. 3.2%, 1.45% b. 3.2%, 3.45% c. 6.2%, 1.45% d. 6.2%, 3.45% e. Neither me nor my company pay into Social Security or Medicare
C
Qualified Joint & Survivor Annuities must provide a survivor annuity no less than ___ or greater than ___? a. 25%, 50% b. 25%, 100% c. 50%, 50% d. 50%, 100% e. 100%, 100%
D
Individuals can establish Traditional IRA's at any age
False- Cannot after age 70.5
If an employer has a profit, at least some contribution must be made that year to the profit sharing plan
False- Companies are not required to make profit sharing contributions in a given year
Participants in an ESOP hold company stock, but they do not have voting rights on corporate issues.
False- ESOP participants do have some voting rights
Employees must be over age 60 to make catch-up contributions
False- Employees must be over age 50 to make catch-up contributions
Plan administration is less expensive and less complex for qualified plans than for nonqualified plans
False- Plan admin is more complex and costly for qualified plans
Employees can elect a salary reduction to fund their 401(k) plan either before or within a month after compensation is earned
False- The election must be in place before the compensation is earned
The contribution limit for Roth 401k accounts in 2019 is $6,000
False- The limit is $19,000
In qualified retirement plans, employers get a tax deduction when an employee retires and draws down their company retirement funds.
False- The tax deduction comes at the time the contribution is made
Single individuals who are not covered by a qualified plan are phased out of deductible IRA contributions if they earn over $74,000.
False- Would be true if they were covered by a qualified plan
An employer can adopt a qualified retirement plan after the end of the plan year and backdate documents to obtain favorable tax treatment for the year
False- backdating is not allowed
Roth IRA conversions are best done in years when income is lower than normal, thus minimizing the additional tax burden.
True
Roth IRA's are subject to income limitations.
True
Spouses receive the greater of 100% of their own Social Security benefit or 50% of their spouses.
True
The Internal Revenue Code sets a maximum limit on the projected annual benefit that a defined benefit plan can provide.
True
The acronym EPCRS stands for Employee Plan Compliance Resolution System
True
The article on Student Loan repayment plans offered as an employee benefit by some companies stated that Fidelity will pay up to $10,000 of its employee's student loans over a 5 year period
True
The initial penalty for a Prohibited Transaction is 15%
True
The plan is allowed to pay a reasonable fee for legal, accounting, or other services performed by a party-in-interest
True
When converting from a traditional IRA to a Roth IRA, the amount converted is included in gross income for federal tax purposes
True
With a nonqualified plan, the employer's tax deduction must be deferred until the year in which income is taxable to the employee, which could be several years in the future.
True
Stock options have high out-of-pocket expenses for companies with high stock prices.
False
The annual Form 5500 series must be filed within 2.5 months after the end of the plan year.
False
The death benefit from group-term life insurance is not tax-free to the beneficiary.
False
The first step in the planning process is to identify the employer's objectives.
False
The retirement plan for CBZ Shalom synagogue must adhere to ERISA reporting and disclosure rules.
False
All of the following are acceptable vesting schedules for a defined-contribution plan, EXCEPT: a. All contributions are vested immediately b. 3-year cliff vesting c. 5-year cliff vesting d. 6-year graded vesting
C
The duties of fiduciaries include all of the following, except a. act with the care, skill, prudence, and diligence under the prevailing circumstances that a "prudent man" would act in a like capacity b. select moderate- to high-risk investments that will maximize gains in the plan c. follow the provisions of the documents governing the plan, unless inconsistent with ERISA provisions d. act for the exclusive purpose of providing benefits to participants and their beneficiaries e. all of the above are duties of fiduciaries
B
A KEOGH plan is useful when a. a self-employed person needs to shelter current earnings from federal income tax b. a corporation has a large younger workforce c. a corporation adopts a corporate plan d. a self-employed person incorporates her business and becomes an employee of the business
A
When converting/rolling over an existing IRA to a Roth IRA, all of the following are true except a. the amount rolled over is not included in the gross income of the IRA account holder for federal income tax purposes b. there is no limit on the rollover, and it can be a total or partial rollover of an existing IRA c. distributions from the Roth IRA are received tax free if they are made after a 5-year holding period and they are made after age 59 1⁄2, death, disability, or for a first-time home purchase d. no minimum distribution rules apply to the Roth IRA except at death e. all of the above are true
A
Which of the following retirement plans would be most effective in encouraging early retirement? a. defined benefit plan b. 401(k) plan c. profit sharing plan d. money purchase plan e. cash balance plan
A
All of the following are factors in determining "reasonableness of compensation," except a. the employee's qualifications for the position b. the number of shares of stock issued by the company c. the size and complexity of the business enterprise d. comparison of the compensation paid with the company's gross and net income e. economic conditions
B
An employee stock purchase plan is a tax-advantaged form of employee compensation that is most effectively used in a a. family corporation. b. large corporation with publicly traded stock. c. closely held corporation. d. all of the above e. only a and c
B
Michelle is 61 years old and owns 100% of her business. All of her employees are in their 20s and 30s and make roughly $52,000 per year. Michelle pays herself $245,000 annually. Which of the following retirement plans should Michelle implement if she wants to maintain flexibility, maximize retirement benefits for herself, and keep costs down? a. Target benefit plan b. A cross-tested profit sharing plan c. A defined-benefit plan d. A money purchase plan integrated with Social Security
B
Kevin Malone is a supervisor at Landon Paper Company. One year ago, Kevin received a stock option for 100 shares of stock from Landon. The option price was $5.00 a share. When he exercised his option three months ago, the stock had risen to $10.00 per share. Kevin resigned from Landon last month to take an executive position at rival Paper Corp. Tax consequences for Kevin include a. taxable income at the time the stock option was granted. b. no taxable income at the time the stock option was exercised. c. $500 in taxable compensation income. d. $1,000 in taxable compensation income payable this year. e. $1,000 in taxable compensation income payable next tax year.
C
Michelle Pendleton earns $310,000 a year at Pinnacle Plus, Inc. One of Michelle's employee benefits is a group-term life policy equal to her annual salary. Which of the following is true regarding this policy? a. Michelle must include the entire premium cost in his taxable income. b. Pinnacle does not get a tax deduction for premiums paid. c. Michelle must count premium dollars for $260,000 coverage as part of taxable income. d. If all other employees earn less than $100,000 per year, Pinnacle cannot take a tax deduction because the plan is discriminatory. e. none of the above
C
The minimum price a company can use as the purchase price of stock purchased under an employee stock purchase plan (ESPP) is ____% of the fair market value of the stock a. 50% b. 75% c. 85% d. 100%
C
Alexander & Sons, Co. has an unfunded nonqualified deferred compensation plan. Employees covered under the plan can defer taxes on plan contributions if plan funds are a. available to company creditors b. subject to substantial risk of forfeiture c. placed in a designated trust d. a and b e. b and c
D
All the following employers are eligible for a tax deferred annuity plan, EXCEPT: a. Churches b. 501(c)(3) organizations c. State universities d. Professional corporations
D
All the following reasons will induce an employer to adopt a nonqualified plan, EXCEPT: a. To circumvent the reporting and disclosure requirements b. To circumvent the nondiscrimination requirements c. To provide benefits above the maximum permitted for qualified plans d. To provide an immediate tax deduction for the employer
D
An employee can purchase no more than $_____ of stock under an ESPP in any one calendar year. a. 10,000 b. 15,000 c. 20,000 d. 25,000 e. 50,000
D
An employer can use a restricted stock plan to a. create a performance incentive for an executive b. discourage employees from setting up a rival business c. retain employees d. all of the above e. only a and c
D
BLS Printing, Inc. is a young and innovative company with 31 employees between 22 and 30 years of age. Turnover has averaged about 3.25% per year for the 5-year old company. Profit has been intermittent. The owners believe that a substantial investment will need to be made in new equipment next year or two. Which of the following retirement savings plans is best for BLS? a. money purchase plan b. target benefit plan c. defined benefit plan d. profit sharing plan
D
Disadvantages of cross-tested plans include a. hire of new employees can upset the age distribution in the plan b. discourages hire of older employees c. complex rules d. all of the above e. only a and b
D
Elective deferrals in a 401(k) plan can be distributed upon occurrence of all of the following, except a. retirement b. disability c. severance from employment with the employer d. attainment of age 55 1⁄2 by the participant e. plan termination (if the employer has no other defined contribution plan)
D
Ellie James, age 37, has $16,500 in her qualified retirement plan. The maximum amount that Ellie can borrow against her account is a. zero - qualified retirement plans do not permit loans b. $8,000 c. $ 9,500 d. $10,000 e. $50,000
D
For a defined contribution plan, annual additions include which of the following? a. employer contributions b. employee salary reductions c. plan forfeitures d. all of the above e. only a and b
D
In a rush to get a qualified retirement plan installed before the deadline for the year, the owner of Elite Electronics failed to get a determination letter from the IRS. Five years later, Elite is audited. If the IRS finds a disqualifying provision or if an essential provision is missing from Elite's plan, a. Elite's tax deduction for the year being audited could be lost. b. Elite's employees could be required to pay tax on their vested benefits. c. Elite's plan fund could lose its tax-exempt status. d. all of the above e. only a and b
D
Objectives that employers have for benefit plans include a. maximizing benefits for shareholder-employees. b. matching benefit levels of local competitors. c. increasing tax burden on employees. d. only a and b e. only b and c
D
Packaging Inc. has experienced significant highs and lows in its business. Due to its fluctuating fortunes, it also has high turnover among its employees. Most employees are young and do not stay very long with the company. The company would like to keep costs down for its retirement plan. Which qualified plan would be most appropriate for Packaging Inc.? a. A defined benefit plan with immediate eligibility for employees b. A defined benefit plan with eligibility restricted to employees with 1 year of service and age 21 c. A profit-sharing plan with immediate eligibility d. A profit-sharing plan with eligibility restricted to 1 year of service and age 21
D
The law firm of Todds, Harlo, and Jones is structured as a professional corporation that has three key employees between ages 38 and 41, two law clerks in their late 20s, and two secretaries, both age 33. The three key employees earn $625,000 per year. The law clerks are paid $32,000 and the secretaries are paid $16,500 annually. Turnover for both the law clerks and secretaries has been rather high, with at least one law clerk and one secretary leaving about every 6 months for the past year. Characteristics of the firm that would make a cross-tested plan a less than optimal solution for the firm include a. the plan would have to be reconsidered at each new hire b. the plan would provide potentially less advantages given the age of the highly compensated group c. having more than one highly compensated employee makes coverage tests related to the plan more difficult to apply d. all of the above e. none of the above
D
Which of the following is a distribution option that may be available in a defined benefit plan? a. Period Certain Annuity b. Joint annuity with someone other than spouse c. Lump Sum d. All the above
D
Which of the following is true regarding restricted stock plans? a. restricted stock plans can be designed as incentive plans, similar to bonus plans b. restricted stock plans should be used only when the employer is willing to create new shareholders of the company c. restricted stock plans may include a provision that the employee cannot re-sell the stock without first offering it back to the company d. all of the above e. only a and b
D
Which of the following types of employer plans are exempt from most or all ERISA provisions? a. plans of state, federal, or local governments or governmental organizations b. plans of churches, synagogues, or related organizations c. plans maintained solely to comply with workers' compensation, unemployment compensation, or disability insurance laws d. all of the above e. none of the above because no employer plans are exempt from ERISA provisions
D
Wireless LLC. sponsors a profit sharing plan. The payroll of Wireless LLC. is $600,000. Bankroll's maximum deduction is: a. $50,000 b. $75,000 c. $125,000 d. $150,000 e. $600,000
D
A disadvantage of profit sharing plans is that a. employee bears the investment risk. b. actuarial costs make the plan expensive to administer. c. there is no predictable level of employer funding under the plan. d. a and b e. a and c
E
A tax deferred annuity plan can invest in all of the following, except a. level premium annuities b. a growth mutual fund c. variable annuities d. a bond mutual fund e. shares of stock
E
Mac Printing, Inc. is a young and innovative company with 22 employees between 21 and 32 years of age. Turnover has averaged about 2% per year for the 6-year old company. Profit has been intermittent. The owners believe that a substantial investment will need to be made in new equipment next year. Which of the following retirement savings plans is best for Mac? a. money purchase plan b. target benefit plan c. nonqualified deferred compensation plan d. defined benefit plan e. profit sharing plan
E
Mary Jo Verse, owner of Dixie Distributors, installed a qualified retirement plan in her business three years ago. Mary Jo's strength is in public relations and sales. She says "numbers make me nervous," so she has delegated the handling and investment of the retirement plan to a trustee. a. Mary Jo has freed herself from any fiduciary responsibility, having transferred all of that responsibility to the plan trustee b. Mary Jo should be sure that her liability insurance covers any liabilities that arise out of breach of fiduciary responsibility c. Mary Jo can reimburse the plan trustee for any costs the trustee might incur as a result of performing fiduciary duties d. a and b e. b and c
E
Steve Davis, owner of Davis Enterprises, wants to implement one retirement plan that will reduce turnover to about 3% a year, favor key employees, help forestall unionizing among his rank-and-file workers, and hold costs down to between 1% and 2% of company net profit. When you meet with Tod, which step of the employee benefit planning process is most important to cover with him? a. meet the client and gather data b. formulate a new overall employee compensation plan c. analyze existing plans to identify weaknesses and needs for revision d. develop a program for periodic review of the plan's effectiveness e. identify the employer's objectives; quantify and prioritize them
E
Steve Thomas, founder of Thomas Tires, Inc, wants to implement a retirement plan that would allow him to maximize contributions to his three managers. He does not want to fund a retirement plan for any of his 60 line workers. Mr. Thomas should consider a a. defined contribution plan. b. defined benefit plan. c. money purchase plan. d. profit sharing plan. e. nonqualified plan.
E
The ratio percentage test states that a qualified plan must cover what percentage of nonhighly compensated employees in relation to the percentage of highly compensated employees covered? a. 25% b. 40% c. 50% d. 60% e. 70%
E
While driving to work last week, Steven Smith's car broke down. He called a tow truck and got a ride with a friend to and from work that day. When the auto repair shop called, Steven learned repairs would cost $2,000. That was $2,000 more than he had. Steven is considering taking money out of his 401(k) plan to cover cost of the repair. If he does a. there will be no tax or penalty since it is a hardship withdrawal b. Steven must pay income tax, but will avoid a 10% penalty tax since it is a hardship withdrawal c. Steven can withdraw $2,000, but he must pay income tax on the amount withdrawn. If he replaces the withdrawn amount within two years, he can avoid paying a penalty on the amount withdrawn. d. Steven cannot withdraw money from a 401(k) unless he is 59 1/2, disabled, or has unusually high medical or housing expenses e. Steven will pay income tax and a 10% penalty for an early withdrawal and must satisfy requirements to show it qualifies as a hardship
E
An employee cannot be covered under both a defined benefit and a defined contribution plan.
False
An employer must make SEP (Simplified Employee Pension) contributions every year, regardless of company performance.
False
An employer receives a tax deduction for a restricted stock plan in the year that the stock plan is adopted.
False
Bonus plans are formal agreements that must be in writing and negotiated with an attorney.
False
Contribution limits for a SIMPLE IRA are the same as other qualified plans, but with less administrative cost.
False
ERISA divides plans into two types: Section 401(k) Plans and Healthcare Plans
False
Employees can direct their own investments in a Cash Balance Plan
False
IRAs can be invested in a variety of investment vehicles, including mutual funds, stocks, bonds, and life insurance contracts
False
It is required for all qualified plans to receive a favorable determination letter from the IRS
False
Medicare Part B coverage is free. You pay into it during your working years.
False
Social Security benefits are based on your highest 10 years of earnings.
False
A business tax credit for retirement plan startup costs must be taken within the first 3 years.
True
A top-heavy plan is one in which key employees hold more than 60% of plan assets
True
An early distribution penalty can be assessed on earnings from Roth IRA withdrawals
True
An employee stock purchase plan generates little to no out-of-pocket cost to the company.
True
An employer can use a nonqualified plan as a form of "golden handcuffs" that bind an executive to remain with a company and meet certain conditions
True
An individual's benefit increases roughly 8% for every year past normal retirement age they delay collecting Social Security up to age 70.
True
As a general rule, the IRC does not allow a tax deduction for a publicly held corporation for compensation in excess of $1,000,000 for the company CEO
True
Bonuses are taxable to the employee as ordinary income
True
Charles Day is an executive at Philly Farms. Philly Farms has given Charles a restricted stock plan that states if he fails to achieve $500,000 in sales each quarter for the next 10 years, he forfeits his claim on the stock in the plan. The IRS would view this provision as a substantial risk of forfeiture.
True
Church and governmental qualified plans must meet special rules
True
Cross Tested plans must test on an annual basis to confirm compliance
True
Currently, a SEP (Simplified Employee Pension) provides for company contributions only
True
Defined benefit plans provide more benefit security than do Profit Sharing plans.
True
Distributions are not required from Roth IRAs until after the death of the IRA owner
True
Employees can make in-service withdrawals from their 401(k) plans
True
Employers can use a restricted stock plan to retain key employees
True
Employers who are worried about nondiscrimination requirements can opt for a "safe harbor" plan that ensures compliance.
True
In a profit sharing plan, the employer can decide not to contribute to the plan.
True
Individuals can roll one Roth IRA into another, but cannot roll it into a 401k plan.
True
Medicare Part D covers prescription drugs.
True
Medicare is available for individuals age 65 and over
True
Nonqualified plans are often used to maximize benefits for select key employees
True
One method that a corporation can use to justify reasonableness of compensation is to cite local and national economic conditions that were favorable to increased sales of the company's profit
True
Qualified plans and IRAs may be subject to both estate tax and income tax upon distribution
True
Required minimum distributions from a qualified retirement plan must begin no later than April 1st of the calendar year following the later of age 70.5 or retirement.
True