Unit 9: FINA 4397

For defined benefit pension plans, the life insurance death benefit cannot exceed ______ times the expected monthly benefit for an employee

100

Life insurance can be provided in a qualified plan if the plan meets the incidental death benefit requirements. Which of the following statements about these requirements are CORRECT? In a defined benefit pension plan, the aggregate premiums for a term or universal life insurance policy cannot exceed 50% of the employer's contributions to the plan. In a defined contribution plan, the aggregate premiums for a whole life insurance policy cannot exceed 50% of the employer's contributions to the plan. In a defined benefit pension plan, the death benefit provided by the life insurance cannot exceed 50 times the expected monthly benefit to be paid to the employee. In a defined contribution plan, the aggregate premiums paid for a term or universal life cannot exceed 25% of the employer's contributions to the plan.

2 and 4

Parrish Products would like to implement a retirement plan for its employees. The company has over 2,000 employees and would like to help them in saving for their retirement. The company chairman, Roger Parrish, is concerned about the administrative costs of the plan. He was recently informed by one of his colleagues that certain types of retirement plans are required to provide annuities to the participants and their beneficiaries. Which of the following qualified plans must provide qualified joint and survivor annuities (QJSAs) and qualified preretirement survivor annuities (QPSAs)? 1. SEPs. 2. Target benefit pension plan. 3. Profit-sharing plan. 4. Defined benefit pension plan.

2 and 4

Which of the following factors should be considered when a businessowner is selecting the type of retirement plan for her company? The age of the owner's children. The owner's retirement savings need. The business's current financial status and ability to make ongoing contributions. The owner's attitude toward investment risk.

2, 3, 4

Which of the following retirement plans can a professional corporation implement? Section 403(b) plan. SIMPLE 401(k). Money purchase pension plan. Employee stock ownership plan (ESOP).

2, 3, 4

Which of the following statements regarding the taxation of an insurance death benefit received by a beneficiary of the plan participant are CORRECT? 1. The pure insurance element of the plan death benefit is taxable as ordinary income to the beneficiary. 2. The pure insurance element of the plan death benefit is income tax free to the participant's beneficiary. 3. The amount of the distribution in excess of the pure insurance element is taxable as a qualified plan distribution. 4. The lower of the total Table 2001 costs or the actual insurance cost may be recovered tax free from the plan death benefit.

2, 3, 4

Kat is covered by her employer's money purchase pension plan. If the plan provides life insurance on Kat's life, which of the following statements regarding Kat's income tax ramifications are CORRECT? 1. Kat will not be taxed on the pure protection cost of the life insurance. 2. A money purchase pension plan is not allowed to provide life insurance coverage. 3. Kat must include the pure protection cost of the life insurance in her taxable income. 4. The pure protection cost of the life insurance will be treated as nontaxable basis once Kat begins receiving distributions from the plan.

3 and 4

Safe harbor Section 401(k) plans are appropriate for employers who: Want to encourage plan participation among highly compensated employees. Want a plan that must be tested annually for coverage requirements. Want to provide for a high level of employee elective deferrals without annual discrimination testing. Have highly compensated employees whose elective deferrals would be limited in a traditional Section 401(k) plan because of ADP testing.

3 and 4

Assume a company's goal is to maximize retirement benefits to the highly compensated employees, who also happen to be the oldest employees. Which of the following best accomplishes this goal if the company is installing a new plan?

A defined benefit pension plan.

XYZ Corporation wants to maximize retirement benefits to the company's highly compensated employees whose ages range from 53 to 65. The rank and file employees range in age from 20 to 40. Which one of the following plans would best accomplish XYZ's retirement plan goal?

A traditional defined benefit pension plan.

Which of the following types of plans can be designed to provide for the deferral of taxable income for the participant's retirement? Roth IRA account. SIMPLE 401(k). Nondeductible traditional IRA account. Nonqualified deferred compensation plan.

All of the above

Which of the following factors may affect the types of asset classes and risk levels of qualified plan investments? Liquidity. Marketability. Capital preservation. Diversification.

All of the above.

In which of the following types of plans does the employer assume the investment risk?

Cash balance pension plan.

Janice has owned her own company for 25 years. She is now 54 and wishes to retire at 64. She currently employs 5 people, all between the ages of 24 and 33. If Janice wanted to establish a retirement plan with the highest benefit for her, assuming the company has adequate cash flow, what is the most appropriate plan?

Defined benefit pension plan.

Which of the following may be taxable to a profit-sharing plan participant even when there is no distribution from the plan?

Life insurance premiums for a policy held by the plan.

Which of the following is an advantage of money market funds in a qualified retirement plan investment portfolio?

Maximum Liquidity Money market funds provide a high degree of liquidity, low risk, and steady value in exchange for a low interest rate.

A prospective client's objectives are to adopt a plan that has predictable costs, is administratively convenient, and is easily communicated to employees. Which plan represents the best choice?

Money purchase pension plan.

Which of the following investments would be the least suitable for a qualified retirement plan?

Municipal bond fund.

The Acme Corporation has six owners, ranging in age from 30 to 60 years old, and 25 rank-and-file employees. The owners want to adopt a qualified retirement plan that will allow them to maximize the contributions to the owners' accounts and minimize the contributions to the accounts of the rank-and-file employees. Which of the following plans would best meet the owners' needs?

New comparability plan

Which one of the following types of plans typically favors older employees?

Only defined benefit pension target benefit pension age-weighted profit-sharing plans favor older employees.

Garces Product Wholesalers Inc., a regular C corporation, is considering the adoption of a qualified retirement plan. The company has had fluctuating cash flows in the recent past and such fluctuations are expected to continue. The average age of non-owner employees at Garces Products is 24, and the average number of years of service is 3, with the high being 4 and the low 1. Approximately 25% of the 12-person labor force turns over each year. The salaries of the two owners account for approximately two-thirds of covered compensation. Which is the most appropriate plan for Garces Product Wholesalers?

Profit-sharing plan Irregular cash flows suggest a profit-sharing plan. All of the other plans listed have some mandatory contribution component.

Which of the following types of qualified plans provide employers with the greatest contribution flexibility?

Profit-sharing plan Profit-sharing plans offer employers the greatest flexibility regarding overall contributions. The contributions are only required to be "substantial and recurring" according to the IRS. This is commonly interpreted to mean contributions in at least 3 out of 5 years.

Which of the following qualified plans can a regular C corporation implement?

Profit-sharing plan. Stock bonus plan. Money purchase pension plan Employee stock ownership plans (ESOPs) SIMPLE Target benefit pension Section 401(k) Defined benefit pension plans

Which of the following qualified plans can an S corporation implement?

Profit-sharing plan. Stock bonus plan. Money purchase pension plan. Employee stock ownership plan (ESOP) Section 401(k) SIMPLEs Target benefit pension Defined benefit pension plans

Which of the following retirement plans allow unrestricted investment into employer-sponsor company stock? 1. Traditional defined benefit pension plans. 2. Money purchase pension plans. 3. Cash balance pension plans. 4. Profit-sharing plans.

Profit-sharing plans

Dorothy is a 36 year-old jewelry designer who owns her own small gallery. For most of the year, she works alone handling the designing and sales herself. However, during the busy holiday season, she hires Yvonne and Mirabelle, two part-time sales clerks to help her. Each of these employees works approximately 300 hours, earning an average salary of $4,000. Dorothy would like to establish a retirement plan that would allow her to save for her own retirement, but not require her to cover the part-time employees. She also doesn't want to pay expensive administrative costs. Which one of the following plans would be most appropriate for Dorothy?

SIMPLE IRA

Margaret Duet is a 29-year-old attorney with her own law practice. She has hired four part-time employees over the past five years to assist her. Each of these employees works approximately 200 hours per year, earning an average annual salary of $4,000. Margaret would like to establish a retirement plan that would allow her to begin saving for her own retirement, with little administrative costs. Which one of the following plans would be most appropriate for Margaret?

SIMPLE IRA A SIMPLE IRA would be the most appropriate plan because it involves little administrative costs and would meet Margaret's retirement plan goals. Notice the workers are making more than $600 and less than $5,000. If a SEP would be chosen, she would have to contribute for employees who made more than $600; are at least 21; and who have worked for her for 3 of the preceding 5 years.

For tax-exempt employers who do not want to implement a Section 457 plan and desire a plan funded strictly by employee elective deferrals, a good alternative would be a:

Section 403(b) plan

Which of the following types of plans is typically used by religious, charitable, educational, and other Section 501(c)(3) entities or public school systems?

Section 403(b) plan/TSA.

Higher Corporation would like to establish a retirement plan for its employees. The company would like to attract and retain employees, make all initial contributions to the plan using company stock, and integrate the plan with Social Security. Which type of plan would be most appropriate for Higher Corporation to meet its retirement plan objectives?

Stock Bonus Plan

XYZ Corporation wants to establish a qualified plan that is easy for employees to understand, allows for funding flexibility, can be integrated with Social Security, permits unrestricted investment in company stock, provides in-service withdrawals, allows employees to vote their plan stock, and provides an immediate tax deduction for employer contributions. Which of the following types of qualified plans would best meet XYZ's objectives?

Stock bonus plan.

Which of the following qualified retirement plans allow unrestricted investment in employer securities?

Stock bonus plans. ESOPs. Traditional profit-sharing plans.

The incidental benefit rule provides that term life insurance in a defined contribution plan is limited to:

aggregate annual premiums of 25% or less of the employer's aggregate contributions to the participant's account.

The incidental benefit rule for whole life insurance in a defined contribution plan is limited to:

aggregate annual premiums of less than 50% of the employer's contributions to the participant's account.

All of the following statements describe situations in which a target benefit pension plan would best suit the company EXCEPT:

an employee census showing young owners and young rank-and-file employees.

When is a traditional profit-sharing plan?

an employer's profits, or cash flow, fluctuate from year to year an employer wishes to implement a qualified plan with an incentive feature by which an employee's account balance increases with employer profits the majority of employees are young (under age 50) and have substantial time to accumulate retirement savings and the employees are, most likely, willing to accept a degree of investment risk in their individual accounts.