Employee Benefits Final Exam- Tammi Metz

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Valquez Alura, an executive with Harbor Millwork, is covered under her company's incentive stock option (ISO) plan. Under the plan, Valquez is granted an option in 2012 to purchase company stock for $50 per share. In April of 2014, Valquez exercises this option and purchases 100 shares for $5,000. The fair market value of the shares when she exercised the option was $7,500. In November of 2015, she sold the 100 shares for $10,000. What is Valquez's compensation income from this transaction?

$2,500

Jim Tandy, age sixty-five, will retire next month from Algor Industries. Last month, Jim withdrew $40,000 from his qualified retirement savings plan at work. Before the withdrawal, Jim had an account balance of $500,000. While employed at Algor, Jim made $100,000 of after-tax contributions to his retirement plan. The taxable portion of his withdrawal is

$32,000

Megan Farley received $150,000 worth of incentive stock option (ISO) stock in November of last year that is exercisable for the first time during the next calendar year. Which of the following best describes the tax consequences that Megan faces as a result of the ISO?

$50,000 of Megan's ISO stock is treated as a nonstatutory stock option

Hal Overton is a middle manager of Global Corporation. One year ago, Hal received a stock option for 100 shares of stock from Global. 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. Hal resigned from Global last month to take an executive position at rival Universal Corporation. Tax consequences for Hal include

$500 in taxable compensation income.

Certain small employers may be eligible for a business tax credit for startup costs or employee education expenses incurred in connection with the adoption of a retirement plan. What is the maximum amount of the credit?

$5000

Hugh Green's employer, Jolly Foods, granted Hugh a stock option under its employee stock purchase plan to buy 200 shares of Jolly Foods stock for $10 per share when the market price was $13 per share. A year and a half later, when the stock had a value of $15 per share, Hugh exercised his option. Fourteen months later, when the stock was $17 per share, Hugh sold his stock. In the year of sale, Hugh had to report _____ as wages and _____ as capital gains.

$600, $800

Which of the following options are good questions to ask about existing benefit plans?

(I)Who is covered? (II)What benefits are provided?(III)How is the plan funded? (IV)Who administers the plan? Answer: (I), (II), (III), and (IV)

How long must stock acquired by an employee under the ISO be held to satisfy section 422 regulations?

(I)at least two years after the option grant (II)one year from the date stock is transferred to the employee Answer: (I) and (II) only

Which of the following are regulations governing ESPPs?

(I)benefits are limited to $25,000 per year (II)benefits are forbidden to more than 5% owners (III)the plan must cover all employees, with few exceptions Answer: (I) (II) and (III) only

Which of the following options are reasons why employees may need employer-sponsored benefit plans?

(I)health care costs can be expensive (II)retirement saving is difficult (III)families need financial protection in the event of an employee's death answer: (I), (II), and (III) only

Which of the following implications of federal securities laws may apply to restricted stock?

(II)if stock is issued without cost, federal securities registrations are not generally required (III)securities laws may apply to stock issued to executives (IV)the private placement securities exemption may apply

What benefit is gained by offering an ISO?

(II)the ISO provides greater tax deferral than a nonstatutory option (III)income from sale of stock received at exercise may be eligible for preferential capital gain treatment (IV)the company has little or no out-of-pocket cost with an ISO Answer: (II) (III) and (IV) only

The fiduciary responsibility net includes any person who

(i.) exercises any discretionary authority or control over plan management (ii.) exercises any control over plan asset management (iii.) renders investment advice for compensation (iv.) has discretionary authority or responsibility in plan administration Answer : (i.), (ii.), (iii.), and (iv.).

ERISA requires report and disclosure of benefits to plan participants under the

- Summary Plan Description. -Summary Annual Report. -Individual Accrued Benefit Statement. Answer: All of the above

Which of the following types of employer plans are exempt from most or all ERISA provisions?

- plans of state, federal, or local governments or governmental organizations. -plans of churches, synagogues, or related organizations. -plans maintained solely to comply with workers' compensation, unemployment compensation, or disability insurance laws. ( All of the Above)

In a rush to get a qualified retirement plan installed before the deadline for the year, the owner of Baxter Concrete failed to get a determination letter from the IRS. Five years later, Baxter is audited. If the IRS finds a disqualifying provision or if an essential provision is missing from Baxter's plan

-Baxter's tax deduction for the year being audited could be lost. -Baxter's employees could be required to pay tax on their vested benefits. -Baxter's plan fund could lose its tax-exempt status ( answer: All of the above)

Harper Engineering, Inc. offers several benefits to employees. Which of its benefits would be exempt from the ERISA reporting and disclosure requirements?

-Harper gives each employee a small gift worth less than $5 on St. Patrick's Day. -Harper has a scholarship program that pays for employee tuition for industry-relevant continuing education, based on the employee passing the course, out of the employer's general assets. Answer ( B and C)

Which of the following is (are) true?

-a bonus can become very large if based on company profit or earnings -bonus arrangements are simple, flexible, and easy to design Answer: A and C

In absence of a written severance pay plan, which of the following might the IRS deem is a severance pay payment?

-a large gift -a dividend -a "buy out" payment for the employee's interest in the business Answer: (all of the above)

In lieu of a bonus, an employer can provide a tax-deferred benefit to employees by using

-a medical benefit plan. -an incentive stock option plan -a nonqualified deferred compensation plan. Answer: All of the above

As an actuary, you are helping Roadster Custom Auto Shop determine the annual cost of its defined benefit plan. In making your calculations, you must make reasonable assumptions about:

-employee turnover rate -employee salary scale. -future investment and inflation rates Answer ( all of the above)

Any distribution from a qualified retirement plan is eligible for a rollover except which of the following?

-hardship withdrawal -a distribution from a series of substantially equal payments. Answer ( only A and C)

To reduce costs of installing a qualified retirement plan, a small business owner could purchase a prototype plan from which of the following?

-insurance company. -bank -mutual fund provider ( All of the above)

Which of the following actions are ways a person can get a tax deduction for health care?

-itemize deductions -have medical expenses that exceed the floor for medical expense deductions answer: (I) and (II) only

The IRS caught the plan trustee for Hopper Manufacturing violating the prohibited transaction rules. Hopper Manufacturing

-must pay an initial penalty equal to 5 percent of the amount involved. -must pay a 100 percent penalty if the transaction is not corrected within time limits set by the IRS. -may face penalties for breach of fiduciary responsibility. Answer (all of the above)

Harvest Cannery, Inc. has several employee benefits. Which of the following types of compensation would be exempt from the reporting and disclosure requirements of ERISA?

-paying ten cents more per hour for those employees working on the 7-11 p.m. shift. -an onsite first aid center at Harvest. -an onsite dining facility at Harvest. Answer: ( all of the above)

A severance pay plan is not treated as a pension plan under ERISA if

-payments do not depend directly or indirectly on retirement of employee. -total plan payments are less than twice the employee's annual compensation the year immediately before separation from service. -all payments to any employee are generally completed within two years of separation from service. Answer (All of the Above)

A qualified plan must satisfy which of the following tests?

-ratio percentage test. -average benefit test. Answer:either a or b.

Jack Breem works for Metro Corp. Metro uses a calendar year accrual method of tracking financial transactions. Jack earned a bonus in December of this year. Which of the following is true?

-the corporation can deduct the bonus this year if payment is made within 2 1/2 months after it is earned -Jack can move taxable income from the bonus into the next taxable year answer: A and B`

What is the maximum allowable deduction an employer can take for compensation for services that are NOT rendered before the end of the taxable year for which the deduction is claimed?

0%

What percentage of each annuity payment normally will be considered taxable income to a plan participant who has no cost basis in the plan?

100 percent.

A parachute payment can be made by a corporation to which of the following classes of workers?

All of the Above

A severance pay plan will not be considered a pension plan, for ERISA purposes, if payments are contingent, directly or indirectly, upon retirement.

False

An advantage of an employee stock purchase plan is that its value is directly related to employee performance.

False

An employee cannot contribute to a profit sharing plan.

False

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

An employer using the accrual method can take a deduction for compensation for services not rendered before the end of the taxable year for which the deduction is claimed.

False

Bonuses generally offer an opportunity for the employee to defer taxation of compensation for more than one year.

False

Employer contributions to purchase life insurance within a qualified plan are not tax-deductible.

False

Generally, parachute rules also apply to payments from qualified retirement plans.

False

Generally, parachute rules also apply to payments from qualified retirement plans?

False

Hedgepeth Insdustries granted an incentive stock option (ISO) to executive Jason Meric. Hedgepeth can take a tax deduction when the ISO is granted

False

In qualified retirement plans, employers get a tax deduction when an employee retires and draws down their company retirement funds.

False

Quality Lawncare's tax year runs from January to December. In December of last year, Quality Lawncare legally adopted a qualified retirement plan. Quality Lawncare must wait until the following January before a tax deduction for contributions to the plan can be taken.

False

Stock option plans are most often used by closely held corporations.

False

The "top-paid group" of employees for a year is the group of employees in the top 25 percent, ranked on the basis of compensation paid for the year.

False

When applying coverage tests to evaluate the presence of discrimination in qualified plan offerings, an employer must include all employees, even those who have a collective bargaining agreement on retirement benefits.

False

When helping a client plan for retirement, it is far more important to use an estimation process that is accurate as opposed to one that the client understands.

False

Executive Topdollar was given an option in 2011 to purchase 1,000 shares of Good Company stock at $200 per share, the 2014 market price. Topdollar can exercise the option anytime over the next 3 years. In 2015, Topdollar purchases 300 shares for a total of $60,000. The fair market value of the shares in 2015 is $100,000. Which of the following options best describes the tax consequences of Topdollar's stock option?

Good Company had a tax deduction of $40,000 in 2014 Topdollar must pay ordinary income tax on $40,000 Answer: A and B

Bob died in 2021 at age sixty. Bob named his spouse, Jessica (age fifty-eight), as beneficiary of his qualified plan.

Jessica can roll over the qualified plan assets to a traditional IRA. If she does so, minimum distributions from the IRA must begin when Jessica attains age 70½.

Which of the following pieces of information about a client's employee benefits is needed

Summary Plan Description

An employee stock purchase plan generates little to no out-of-pocket cost to the company.

True

An incentive stock option plan is an alternative to a bonus plan.

True

As part of the employee benefit planning process, a schedule should be established for reviewing and monitoring plan effectiveness.

True

Benefit plans, including health insurance, life insurance, and fringe benefits such as membership in company athletic or health clubs after retirement, should be considered in the retirement planning process.

True

Bonuses based on profit can be very large.

True

Defined benefit plans must have a joint and survivor annuity as the default form of benefit.

True

Defined contribution plans can be integrated with Social Security only under the excess method.

True

If the plan covers only a single person and was individually negotiated, some courts have found that ERISA is not applicable.

True

Life insurance is advantageous in defined benefit plans because it adds to the limit on deductible contributions.

True

Michelle Fenner is the qualified plan trustee for the defined benefit plan held by Flatt Tire Company. Flatt Tire uses life insurance as part of its qualified defined contribution plan. Currently, the cash value of the life insurance policies in the plan amounts to $50,000. Ms. Fenner can borrow against the cash value of the life insurance policies held in the plan.

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

Severance agreements can be negotiated individually with executives

True

The corporation gets a deduction for the compensation income element that an executive must recognize if stock is sold before the two year/one year holding period.

True

To enjoy favorable tax treatment with an incentive stock option (ISO), the exercise price of the option must be at least equal to the fair market value of the stock on the date the option is granted.

True

Within limits, golden parachute arrangements are considered an acceptable compensation practice, especially in industries subject to mergers and acquisitions.

True

Wheels, a small bike sales and repair shop, has ten employees, five full-time and five part-time. Walt Morgan, the owner, can't afford to provide many employee benefits, but he does provide all employees with three full-pay sick days a year. He funds the sick pay out of his general assets. He also provides his full-time employees with basic health insurance that has a high deductible to keep costs down. Walt pays an annual premium for this insurance out of his general assets. Under ERISA,

Walt qualifies for the small welfare plan exemption.

For purposes of required minimum distributions from an IRA or qualified plan, which of the following cannot be a designated beneficiary?

a charity

Acorn Booksellers is a small business interested in adopting a qualified retirement plan. The owner of Acorn wants to be able to choose from more than one financial institution when implementing the plan. Acorn's owner also wants to determine such things as the vesting schedule and the contribution or benefit formula. As a small business, Acorn wants to keep costs down. You recommend that Acorn use

a prototype plan because it would give Acorn choice in funding institution or medium while keeping installation and implementation costs low.

Which of the following describes the report filed on Form 5500?

annual report.

For the planning process, it is helpful to have employee census information for

at least the last five years and projections for the future

Which of the following is the last step when using the seven-step planner to determine the required current monthly savings that will meet a future retirement income objective?

calculate required savings to fund shortfall

Adequate liquidity is one of several specific investment objectives in a qualified plan. Which of the following types of assets offers the most liquidity?

common stock traded on the stock market.

Which of the following retirement plans would be most effective in encouraging early retirement?

defined benefit plan

The owner of Windom Enterprises has asked you to identify a tax-free compensation option that could be used to avoid the "reasonableness of compensation" issue for their executives and upper-level managers. As the owner's financial advisor, you suggest

educational assistance plans for the dependents of the CEO and upper-level managers

What is the minimum allowable exercise price of the option?

fair market value of the stock on the date the option is granted

Which of the following options is not an advantage of defined benefit plans?

flexibility to offer more in profitable years

Capital needs at death can have a significant impact in any planning scenario. Which of the following is a reason to include this area when doing retirement planning?

funding these needs is more economical when a client begins at a younger age

Executive Michael Waldron has company stock obtained through an incentive stock option plan. Waldron has held the stock 3 years after the option was granted and 2 years after exercise of the option. Michael sold the stock last month. Tax consequences for Michael include

gain on sale is taxed at long-term capital gain rates

Advantages of rolling a qualified plan over to an IRA include

here may be more investment flexibility with an IRA.

Employees who value retirement benefits most highly include

highly compensated employees. byoung employees.c.employees who do not expect to stay long with an employer.d.low-paid employees.e.none of the above ( Only 1 option)

If a bonus is based on "profits," which of the following issues should the employer consider?

if profits are determined before or after the bonus is paid the legal definition of profit based in tax code the impact of tax code changes on the agreement (answer: A,B, and C)

Which of the following non-retirement needs may have a significant impact on retirement assets?

long-term care for a parent

In general, the tax consequences of a severance pay plan are similar to a(n)

nonqualified deferred compensation plan

Severance benefits are generally

not treated as deferred compensation for FICA purposes

Jill is considering naming a bypass trust as beneficiary of her IRA after her death. Jill's spouse is a discretionary income beneficiary of the bypass trust. Which of the following is a reason for not designating the bypass trust as beneficiary of her IRA?

part of the unified credit will be wasted on income tax.

In general terms, a number of transactions are prohibited between the plan and certain people, including: a fiduciary, a person providing service to the plan, an employer, an owner, or an employee organization. Which one of the following correctly identifies the term used to describe these people?

party-in-interest.

Marshall Gant, an executive terminated from Acme Corp. after a recent buy-out, received an excess parachute payment. The tax consequences for Marshall include

payment of a penalty tax of 20% of the excess parachute payment.

Most of the ERISA investment rules are intended to

prevent the investment from too much risk.

What is one of the primary considerations specifically related to constructive receipt of severance benefits in a funded plan?

substantial risk of forfeiture

Disadvantages of restricted stock plans from the view of the employer include all of the following, except

substantial risk of forfeiture must be established for the employee to obtain favorable tax treatment

What is the usual tax treatment of unfunded severance plan payments?

taxable to the recipient as compensation income in the year it was received

The reasonableness of compensation is evaluated when

the bonus agreement is made

A pension plan is considered fully insured for the plan year if it meets all of the following requirements, except

the plan permits only highly compensated employees the right to purchase life insurance

At what point does an employer normally receive a tax deduction for a restricted stock plan?

the year in which the property becomes substantially vested

Looking beyond pure capital accumulation needs, which of the following is a primary capital needs planning objective?

translating capital into living expense needs

For a severance pay plan to not be treated as an ERISA pension plan, how many months does the employer generally have to complete employee payments?

twenty-four.

Which of the following is the term used to identify income of a tax-exempt organization that may be subject to taxation?

unrelated business taxable income

A volume submitter plan differs from a prototype because it

uses a single financial institution for funding.

Corporate stockholders must approve the ISO plan _____ it is adopted by the company's board of directors.

within one year of the time


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