Unit 4 Nonqualified Corporate Retirement Plans
Which of the following statements regarding nonqualified deferred compensation arrangements is NOT correct? A) Most deferred compensation arrangements are unfunded. B) These arrangements usually are unsecured promises made by an employer to an employee to pay the employee part of his compensation in the future. C) Under such arrangements, the employee can rely on guaranteed future benefits. D) The employer cannot take a tax deduction for the compensation deferred until it is paid out or otherwise taxable to the employee.
Answer: C A basic feature of a nonqualified plan is that the benefits are not guaranteed. If they were, the tax characteristics of the plan would change.
Among the reasons why a corporation might choose to utilize a deferred compensation plan for retirement planning would be A) the plans are nondiscriminatory B) current tax savings on money contributed to fund the plan C) compliance with ERISA D) employees who leave the company prior to retirement would not receive benefits
Answer: D Deferred compensation plans are usually structured so that if the employee leaves prior to retirement or is terminated with cause, benefits are forfeited. These plans are discriminatory and there is no current tax saving, hence the term "deferred". As nonqualified plans, they do not have to comply with ERISA.
An employer wishing to offer a retirement plan with a goal of retaining key employees would probably start with a A) SEP-IRA B) deferred compensation plan C) defined benefit plan D) payroll deduction plan
Answer: B Because the deferred compensation plan allows the employer to discriminate, it is a popular choice for offering special benefits to retain key employees. Defined benefit plan will be the answer to a question dealing with offering maximum benefits to older employees.
Under ERISA, all of the following retirement plans must set standards for vesting, eligibility, and funding EXCEPT: A) corporate pension plans. B) deferred compensation plans. C) Keogh plans. D) profit-sharing plans.
Answer: B Deferred compensation plans are not qualified plans and may be discriminatory. Keogh, profit-sharing, and corporate pension plans must meet set standards for vesting, eligibility, and funding under ERISA.
Which of the following statements regarding deferred compensation plans are TRUE? They may be offered to some employees and not others. They must be nondiscriminatory. They cannot include corporate officers. They cannot include members of the board of directors. A) I and III. B) II and III. C) III and IV. D) I and IV.
Answer: D Deferred compensation plans can be offered to select employees, including corporate officers; directors are not considered employees.
Which of the following statements, with respect to nonqualified retirement plans, is TRUE? A) The employer must abide by all ERISA requirements. B) Employee contributions grow tax deferred if they are invested in an annuity. C) Employee contributions are tax deductible. D) Employer contributions are tax deductible.
Answer: B Money invested in a nonqualified retirement plan will grow tax deferred if invested in a deferred annuity. Both employee and employer contributions to a nonqualified plan are not deductible; nonqualified plans are not subject to ERISA.
Nonqualified corporate retirement plans differ from qualified retirement plans because: nonqualified plan contributions are not exempt from current income tax. nonqualified plan earnings accumulate on a tax-deferred basis. the corporation need not comply with nondiscrimination rules that apply to qualified plans. the corporation must comply with ERISA requirements dealing with communications to plan participants. A) II and IV. B) I and III. C) I and II. D) II and III.
Answer: B Two of the primary ways in which nonqualified corporate retirement plans differ from qualified retirement plans in that contributions are not exempt from current income tax and they need not comply with nondiscrimination rules that apply to qualified plans. Under most circumstances, the accounts do not provide for tax deferral on earnings because these plans are rarely funded. The ERISA communication requirements apply to qualified plans only.
One reason why employers like using deferred compensation plans is that A) with all employees receiving the same benefit, plan administration is simplified B) IRS approval is easily obtained C) they can be structured so that the employee's benefits are forfeited upon termination with cause D) they provide larger tax deductions than any other plan
Answer: C Deferred compensation plans frequently provide that employees leaving before a certain period of time, going to the competition, or being terminated for cause forfeit plan benefits. There are no current tax deductions, the plans discriminate and, because they are nonqualified, there is no IRS approval.
Which of the following retirement plans is NOT legally required to establish vesting, funding, and eligibility requirements? A) Profit-sharing plan. B) Defined benefit pension plan. C) Keogh plan. D) Payroll deduction plan.
Answer: D A payroll deduction plan is a retirement plan not subject to eligibility, vesting, or funding standards as required by ERISA plans. A payroll deduction plan is a nonqualified retirement plan. Profit-sharing, pension, and Keogh plans must have established standards.