Retirement Planning & Employee Benefits Exam 1

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: a cross-tested profit sharing plan

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

The retirement plan for CBZ Shalom synagogue must adhere to ERISA reporting and disclosure rules. a. true b. false

false

the annual form 5500 series must be filed within 2.5 months after the end of the plan year

false

the first step in the planning process is to identify the employer's objectives

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 - backdating is not allowed

Employees must be over the 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

ERISA divides plans into two types: Section 401(k) plans and healthcare plans

false

It is required for all qualified plans to receive a favorable determination letter from the IRS.

false

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: defined benefit plan

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: select moderate- to high risk investments that will maximize gains in the plan

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: the number of shares of stock issued by the company

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: 5-year cliff vesting

Bonus plans are formal agreements that must be in writing and negotiated with an attorney.

false

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 is the answer. Professional corporations are not eligible to have a 403(b) plan. A,B, AND C are eligible

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: $10,000

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: $150,000

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: 50% , 100%

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: a profit-sharing plan with eligibility restricted to 1 year of service and age 21

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: all of the above

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: all of the above

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: all of the above

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: 70%

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 and c

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: all of the above

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: all of the above

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: all of the above

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 ½ by the participant e. plan termination (if the employer has no other defined contribution plan)

D: attainment of age 55 1/2 by the participant

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: only a and b

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: profit sharing plan

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: b and c

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: identify the employer's objectives; quantify and prioritize them

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: nonqualified plan

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: profit sharing plan

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: shares of stock

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: steven will pay income tax and a 10% penalty for an early withdrawal and must satisfy requirements to show it qualifies as a hardship

A business tax credit for retirement plan startup costs must be taken within the first 3 years

true

Bonuses are taxable to the employee as ordinary income

true

Employees can make in-service withdrawals from their 401(k) plans

true

Employers who are worried about nondiscrimination requirements can opt for a "safe harbor" plan that ensures compliance.

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

The plan is allowed to pay a reasonable fee for legal, accounting, or other services performed by a party-in-interest.

true

a top-heavy plan is one in which key employees hold more than 60% of plan assets

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

church and governmental qualified plans must meet special rules

true

cross tested plans must test on an annual basis to confirm compliance

true

defined benefit plans provide more benefit security than do profit sharing plans

true

in a profit sharing plan, the employer can decide not to contribute to the plan

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

the acronym EPCRS stands for Employee Plan Compliance Resolution System

true

the initial penalty for prohibited transaction is 15%

true