Chapter 20: Introduction to Qualified Plans Review Questions

A 401(k) plan: A. is when employer contributions are given in the form of employer stock. B. sets up employer stock accounts for the employee. C. allows employees to choose to receive compensation as cash or as a contribution to a qualified profit sharing plan. D. None of the above are correct. E. All of the above are correct.

C. allows employees to choose to receive compensation as cash or as a contribution to a qualified profit sharing plan.

Qualified retirement plans have the following tax advantages EXCEPT: A. the employer gets an immediate deduction. B. the employee is taxed only when plan benefits are received. C. the employee is taxed at the time the employer makes contributions for the employee. D. earnings on money put aside is not subject to federal income tax while in the plan fund.

C. the employee is taxed at the time the employer makes contributions for the employee.

All the following are reasons to recommend that an employer adopt a qualified retirement plan EXCEPT: A. certain qualified plan designs can minimize turnover in the employer's workforce by tying benefits to vesting service. B. the existence of a qualified plan allows an employer's employees to retire with dignity and without suffering a severe economic detriment. C. some qualified plans are thought to encourage employee productivity. D. small employers (employers with less than 25 employees) can cut costs by designing the plan to exclude employees who are under age 25 and who have less than three years of service.

D. small employers (employers with less than 25 employees) can cut costs by designing the plan to exclude employees who are under age 25 and who have less than three years of service.

14. Check all that apply to Defined benefit plans: One-time lump sum payment. Employee bears investment risk . Employee contributions neither permitted nor required. Usually favors younger employees with shorter service and mid-level pay brackets. Costs usually are easy to estimate with some certainty; no variation based on the plan=s investment return. An actuary is required to calculate contributions and to assist in benefit calculations; usually requires distributions only at retirement; forefeitures by non-vested participants are not tracked in individual accounts.

Employee contributions neither permitted nor required. An actuary is required to calculate contributions and to assist in benefit calculations; usually requires distributions only at retirement; forefeitures by non-vested participants are not tracked in individual accounts.

12. Employees must pay a minimal tax when the employer first makes a contribution.

False

13. Employees only pay for interest income to employer contributions but on employer contributions themselves.

False

19. In a defined-benefit plan, the employee bears the risk of bad investments of the plan.

False

3. Employer contributions to qualified retirement plans are taxed immediately but future earnings on contributions are not.

False

6. After age 70 1/2, an employee can no longer defer income through a qualified retirement plan.

False (can continue to defer but must take minimum payouts)

18. Only defined-benefit plans provide individual account balances for participants.

False, Defined-contribution plan

10. Qualified plans require funding in advance of payment.

True

11. Qualified plans must have non-forfeiture provisions.

True

15. Stock bonus plans are a form of profit-sharing plans.

True

2. Depending on how they are designed, retirement plans can be targeted to increase or decrease turnover in certain types of workers.

True

20. Only a defined-benefit plan needs an actuary on an ongoing basis.

True

21. A pension plan is designed primarily to provide adequate retirement benefits to covered employees and emphasizes definitely determinable benefits and deferral of payment to retirement.

True

7. A qualified plan can cover any of the following EXCEPT: A. an employee of the sponsoring company. B. a partner in a partnership. C. an owner-employee of an S corporation. D. a private contractor doing work for the sponsoring company.

D. a private contractor doing work for the sponsoring company

7. When a former employee begins to receive benefits, the taxes paid on the benefits may be lower because the retiree is likely to be in a lower tax bracket.

True

8. One reason that an employee might not appreciate their retirement plan is because employees believe they will not stay at the organization long enough to vest in benefits.

True

9. Retirement plans can help increase current productivity.

True

17. Defined-contribution plans tend to be more costly administratively because of more complex rules and the requirement of actuarial statements

. False, defined -benefit contribution plan

Which of the following statements are true? A. Retirement plans allow for most employees to retire at an average age of 32. B. The average cost of retirement benefits is less than 7% of payroll. C. Effective retirement plans never allow employees to play an active role in creating a personal benefit package. D. All of the above are true statements. E. None of the above are true statements. F. Elvis is still alive and works at Big Bob=s Barbeque Shack on Monroe Street.

B. The average cost of retirement benefits is less than 7% of payroll.

A major federal tax advantage of a qualified plan is: A. employees pay taxes in advance of receiving benefits. B. earnings on plan funds accumulate tax-free. C. plan benefits are exempt from federal gift and estate taxes. D. employers receive a 10 percent tax credit for plan contributions.

B. earnings on plan funds accumulate tax-free.

Retirement plans can help organizations meet their goals by: A. attracting & retaining employees with required levels of expertise and professional maturity. B. encouraging turnover among employees with appropriate levels of tenure with the firm. C. deferring the employer=s actual cash flow for compensation while satisfying the employee=s desire for immediate rewards and future security. D. All of the above are correct. E. None of the above are correct. F. Tirty-two percent of the above answers are correct.

D. All of the above are correct

A taxpayer wishing to contest a tax assessment has three choices. Which of the following is not one of those three choices? A. Federal District Court in the taxpayer=s district B. United States Tax Court C. United States Claims Court D. Small Claims Court

D. Small Claims Court

24. Revenue rulings only apply to the individual taxpayer in question.

False, are interpretations of tax law in specific fact situations that are published by the IRS and are binding on other taxpayers where the same set of relevant facts exists.

4. Employees never pay tax on retirement plan income.

False, employers

16. Stock bonus plans fund primarily in the form of mutual funds.

False, stock of the employer

1. Retirement plans can help attract and retain the type of work force needed to help businesses achieve their objectives.

True

Which one of the following is NOT an example of a defined-contribution plan? A. Cash-balance pension plan B. Profit-sharing plan C. Stock bonus plan D. Section 401(k) E. ESOP F. Target-benefit plan

A. Cash-balance pension plan

A qualified profit-sharing plan is similar to a qualified money-purchase pension plan in which of the following respects? A. Employer contributions are tax deductible. B. There is no limit on the amount of a participant's compensation that can be taken into account in the contribution formula. C. Retirement benefits provided to employees are projected actuarially. D. The employer is normally allowed to make contributions up to 30 percent of payroll.

A. Employer contributions are tax deductible.

Management objectives in pension plan design include which of the following? A. Help employees with retirement savings. B. Discourage recruitment. C. Discourage productivity. D. Encourage college bargaining.

A. Help employees with retirement savings.

Sources of tax law binding all taxpayers include: I. Treasury regulations II. IRS private-letter rulings A. I only B. II only C. Both I and II D. Neither I nor II

A. I only

All of the following are characteristics of a qualified plan EXCEPT? A. funding after employee retirement. B. nondiscrimination rules. C. limitations on benefits or employer contributions D. may require termination of employment before funds can be withdrawn.

A. funding after employee retirement.

The federal government encourages the adoption of qualified retirement programs for all the following reasons EXCEPT to: A. provide a tax-sheltered savings program for owners of small businesses. B. prevent retirees from becoming a burden on society. C. reduce pressures from society to increase benefits under Social Security. D. increase the nation's level of savings and capital investment.

A. provide a tax-sheltered savings program for owners of small businesses.

Defined-contribution pension plans include which of the following? I. Target-benefit plans II. Money-purchase plans A. I only B. II only C. Both I and II D. Neither I nor II

C. Both I and II

Employer contributions to Qualified Retirement plans are: I. immediately deductible to employer. II. tax deferred to employee. A. I only B. II only C. Both I and II D. Neither I nor II

C. Both I and II

Which one of the following is a respective regulatory role of Treasury Regulations, IRS Revenue Rulings, and IRS Private Letter Rulings? A. Private rulings technically apply to all taxpayers in that area. B. All regulations and rulings only deal with issues faced by people in the upper tax brackets. C. Treasury regulations are informal written rules. D. Private letter rulings are applied for, to the IRS by private taxpayers.

D. Private letter rulings are applied for, to the IRS by private taxpayers.

All of the following are basic objectives of pension plan design EXCEPT: A. help employees with retirement saving. B. tax deferral for owners and highly compensated employees. C. help recruit, retain and retire employees. D. encourage formation of a collective bargaining unit. E. encourage productivity directly.

D. encourage formation of a collective bargaining unit.

The tax benefits of a qualified plan are: A. the employer gets a tax deferral. B. the employee gets a tax deduction. C. the employer gets a tax deferral; employee=s contribution is a tax deduction. D. the employer gets a tax deduction; employee=s contribution is tax deferred.

D. the employer gets a tax deduction; employee=s contribution is tax deferred

Which of the following are sources of statutory law in regards to qualified plans? A. Internal revenue code B. ERISA C. Civil Rights laws D. Age discrimination E. All of the above

E. All of the above

An actuary is used for which type of plan? A. Profit sharing plan B. 401(k) plan C. Money-purchase plan D. ESOPs E. Defined benefit plans

E. Defined benefit plans

Which of the following is a characteristic of defined contribution plans? A. Employer bears risk B. Employee contributions are neither permitted nor required C. Usually favors older employees with higher pay brackets and longer service D. An actuary is required E. Individual accounts

E. Individual accounts

22. A profit-sharing plan provides benefits that are less certain and may even be completely discretionary on the employer=s part (although they must be allocated in a nondiscriminatory way).

True

23. Treasury regulations are binding on all taxpayers.

True

5. Employer contributions to the plan and plan earnings are not subject to payroll taxes such as Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax (FUTA).

True