IRM Exam 2 TB - Questions and Answers (Complete Solutions) A defined benefit plan can help an older controlling employee in a small business maximize
... [Show More] tax-deferred savings. True The Internal Revenue Code sets a maximum limit on the projected annual benefit that a defined benefit plan can provide. True An employee cannot be covered under both a defined benefit and a defined contribution plan. False Defined benefit plans that use the flat amount formula provide a retirement benefit that is a percentage of the employee's average earnings. False A unit credit formula is based on the employee's age. False Which plan has benefit levels that are guaranteed by both the employer and the Pension Benefit Guaranty Corporation (PBGC)? a. money purchase plan. b. target benefit plan. c. cross tested plan. d. defined benefit plan. e. tax-deferred annuity. An employer who wants to reward an employee's years of service and contribution to the company (measured as salary) would use a defined benefit plan formula based on a a. flat amount. b. flat percentage based on years of service. c. flat percentage based on final average pay. d. flat percentage based on career average pay. e. unit credit formula. Disadvantages of defined benefit plans include a. employee bears investment risk. b. higher installation and administrative costs as compared with a defined contribution plan. c. older employees will receive a lower retirement benefit than younger employees. d. a and b. e. a and c. Advantages of defined benefit plans include all of the following, except a. defined benefit plans are easy to design and easy to explain to employees. b. employees obtain a tax-deferred retirement savings medium. c. retirement benefits at adequate levels can be provided for all employees regardless of age. d. benefit levels are guaranteed both by the employer and, for some plans, by the PBGC. e. for an older highly compensated employee A flat amount formula provides a distribution based on a. an average of each employee's earnings over a number of years. b. a percentage of each employee's average earnings. c. a stated dollar amount for each employee. d. an average of each employee's earnings over the employee's career with the employer. Shannon McDougal will retire December 31 of this year. Shannon has worked for Shamrock Construction for thirty years. During his last five years, he earned $40,000, $47,000, $44,000, $46,000, and $48,000. Shamrock's retirement plan uses a unit credit formula that awards employees 1.5 percent for each year of service using a financial average of the last three years. Shannon's annual benefit will be a. $19,500. b. $20,250. c. $20,700. d. $21,150. e. $21,600. April Showers, age thirty, opened the Unique Boutique five years ago. April has five employees ranging in age from twenty-five to forty-two. Earnings have fluctuated. Profits have been made only in the last two years. April should a. not have a defined benefit plan because it is designed for older business owners. b. have a defined benefit plan because it will maximize April's tax deduction. c. not have a defined benefit plan because there are a large number of years until the owner or employees retire. d. have a defined benefit plan because the owner can get $1,500 tax credit for establishing a new retirement plan. e. not establish a defined benefit plan because it is not likely April can meet the annual funding requirements. Sherin Blake, owner of Blake Architectural Design, Inc., has hired an actuary to calculate the funding requirement for the company's defined benefit plan. To make an accurate calculation, the actuary will have to consider a. the estimated retirement age of all employees covered by the plan. b. the formula that Sherin chose to use to calculate employee retirement benefits. c. interest earnings on the fund. d. all of the above. e. only a and b. Mandy Thomas, age forty-seven, is the owner of The Golf Pro Shop. Mandy wants to retire at age fifty-five. The company adopted a defined benefit plan two years ago, three years after the business opened. Mandy wants to increase the amount that she contributes to her own retirement. Mandy can'= a. increase the amount without limit. b. increase the amount within limits set by the Internal Revenue Code. c. increase the amount, but must also contribute to all other company employee accounts by the same proportion. d. increase the amount, but maximum benefit will be cut in half because the plan is less than ten years old. e. she cannot increase her contribution. A cash balance plan favors older workers. False A cash balance plan is not guaranteed by the Pension Benefit Guaranty Corporation. False A cash balance plan establishes a separate fund for each plan participant. False Investment designation by participants (earmarking) is not available in a cash balance plan True The investment risk is borne by the employer. True Which of the following is a disadvantage of a cash balance plan? a. provides relatively larger benefits for older workers, creating large disparity among younger and older workers. b. is difficult to fund with a large number of middle-income employees. c. plan shifts investment risk to employees. d. retirement benefits may be inadequate for older workers. e. plan complexity makes it difficult to explain to employees. Which of the following is (are) true regarding a cash balance plan? a. employee bears investment risk. b. each participant has a hypothetical account that the employer credits at least annually. c. plan benefits older workers more than younger workers. d. a and c. e. b and c. A cash balance plan and a traditional defined benefit plan share which of the following characteristics? a. Pension Benefit Guaranty Corporation coverage. b. employer bears investment risk. c. able to use Social Security integration. d. all of the above. e. only a and b. All of the following are true regarding tax implications of cash balance plans, except a. employer contributions to the plan are deductible when made. b. taxation of the employee on employer contributions is deferred. c. the plan is not subject to minimum funding rules of the Internal Revenue Code. d. certain employers who adopt a cash balance plan may be eligible for a business tax credit up to $5,000. e. employees may make voluntary contributions to a "deemed IRA" established under the plan. The amount of employer-guaranteed investment earnings that is credited annually to each employee's account is the a. defined benefit limit. b. earmarked amount. c. interest debit. d. interest credit. Bane Industries, Inc. has 1,000 employees. The average age of the workforce at Bane is forty-five, and 80 percent of the workers earn a mid-range income. Ten percent of workers are highly compensated, and 10 percent of workers are low-wage workers. Advantages of using a cash balance plan at Bane Industries include a. employer can spread administrative cost over a large number of employees. b. younger workers have time to accumulate retirement savings. c. employee bears investment risk. d. only a and b. e. only a and c. Directors of Xenon Corporation are considering changing from a traditional defined benefit plan to another type of plan. They have asked you to explain the advantages and disadvantages of such a change. You explain that if Xenon Corp. converts to a. a defined contribution plan, most or all plan assets would be credited immediately to vested employees. b. a cash balance plan, Xenon Corp. must increase the level of contribution to older employees. c. a cash balance plan, Xenon Corp. would no longer need actuarial services. d. only a and b. e. only a and c. Eileen Tate, an employee of Great Corp., is fifty-two, and her company has just converted its defined benefit plan to a cash balance plan. The present value of her accrued benefit is $375,000. Under the cash benefit plan, Great Corp. will make an annual contribution of 11 percent to the employees' hypothetical accounts and guarantee a 6 percent interest rate. If a cash balance plan had been in effect since Eileen's date of hire, she would have $300,000. Eileen's annual salary is $105,000. Under the cash balance plan, the value of the annual contribution to Eileen's retirement account will be a. $195,000. b. $11,500. c. $6,300. d. the same contribution amount that she received under the defined benefit plan. e. $0 until the excess $75,000 is credited to her hypothetical account. IRS, ERISA, and other governmental regulatory requirements do not apply to nonqualified plans. False An employer can use a nonqualified plan as a form of "golden handcuffs" that bind an executive to remain with a company and meet certain conditions. True Amounts deferred under nonqualified deferred compensation are never subject to Social Security taxes or Medicare taxes. False With a nonqualified plan, the employer's tax deduction must be deferred until the year in which income is taxable to the employee, which could be several years in the future. True The plan is required to provide immediate vesting of benefits. False Under a nonqualified plan, a promise by an employer to pay an employee does not create an economic benefit if the promise is a. unfunded. b. secured by a trust not in the employee's name. c. currently taxed. d. only a or b. e. only b or c. All of the following approaches are commonly used to increase the security of benefits for an employee under a nonqualified deferred compensation plan, except a. employer's general assets. b. reserve account maintained by employer. c. third-party guarantees. d. corporate-owned life insurance. e. employer reserve account with employee investment direction. Under a nonqualified deferred compensation plan, constructive receipt occurs in which of the following? a. funds are available to employee without restriction. b. employee does not actually receive payment. c. employee has right to draw on the funds. d. employee has right to receive future payments and can elect at any time to accelerate the payments. e. employer set-asides. Which of the following is not a common benefit formula approach used in designing a nonqualified deferred compensation plan? a. salary continuation formula. b. salary reduction formula. c. accelerated distribution formula. d. stock appreciation rights. e. phantom stock formula. Most nonqualified deferred compensation plans are unfunded because of a. withdrawals made during employment. b. fiduciary rules. c. vesting rules. d. tax and ERISA considerations. Bob Everett is covered under a funded nonqualified deferred compensation plan that has an irrevocable trust set up for his benefit. Bob must pay income tax as soon as he is vested in contributions made to the fund, even though he does not have a right to withdraw cash from the fund until he retires. a. True. b. False. Bill U. Later has elected to defer earnings under an unfunded deferred compensation agreement AFTER he performed services for his company. To defer taxation on the deferred income a. he must avoid constructive receipt of the income. b. plan provisions must clearly stipulate "substantial risk of forfeiture" conditions. c. he also can elect to receive the deferred income as ten equal payments rather than a lump sum. d. a and b. e. a and c. Makework Corp. has an unfunded nonqualified deferred compensation plan. Employees covered under the plan can defer taxes on plan contributions if plan funds are a. available to company creditors. b. subject to substantial risk of forfeiture. c. placed in a designated trust. d. a and b. e. b and c. Reed Collier works for Database Administration, Inc. He has an informally funded nonqualified deferred compensation plan. Database Administration, Inc. can use life insurance to fund this plan. a. True. b. False. A Section 457 plan that includes limits on the amount deferred is generally referred to as an eligible Section 457 plan. True Any participant in a Section 457 plan who is over age fifty can take advantage of the fifty-or-over catch-up contributions. False Qualified plan minimum distribution rules apply to Section 457 plans. True For a governmental organization, a Section 457 plan can be offered to a group of employees, but not to only a single employee. False The no-funding requirement of Section 457 may conflict directly with ERISA requirements. True Which of the following employers can offer a Section 457 plan? a. a public school. b. a tax-exempt organization. c. a church or synagogue. d. a and b. e. b and c. Plan distributions from a Section 457 plan cannot be made before a. the calendar year in which the participant reaches age 70½. b. severance from employment. c. occurrence of an "unforeseen emergency". d. any of the above. e. only b and c. All of the following statutory provisions would allow deferred compensation beyond the annual dollar limit, except a. grandfathered plans. b. nonemployee plans. c. forfeitable plans. d. severance pay plans. e. eligible plans. Employee elections to defer compensation monthly under Section 457 can be made under an agreement entered into at any time during that month. a. True. b. False. Which of the following is an unforeseeable emergency that would permit distributions from a Section 457 plan? a. stock market decline. b. child's education expenses. c. disability of a child after an illness. d. credit card debt. Arthur works as a janitor for the Municipal School district weekday evenings and part-time for the Municipal Power Plant on weekends. He earns $25,000 from the school district and $10,000 from the power plant each year. Both employers have a Section 457 plan. Which of the following is true? a. Arthur can contribute the maximum allowed by law to both plans. b. Arthur's total contribution to both plans must be at or below plan limits set by Congress for the year that the contribution was made. c. Arthur can only contribute to one of the plans up to the maximum allowed by law. d. according to federal law, Arthur cannot contribute to the Section 457 plan at the Municipal Power Plant because he is a part-time employee. e. none of the above. Last month, Miss Happ, age fifty-four, fell off a ladder while changing a light. She broke the light and her hip. She had surgery and a week long stay at the hospital. Toward the end of the week, she realized that she had forgotten to mail in her health insurance premium and her policy had lapsed. When she was discharged, shock from the size of her hospital bill nearly put her back into the hospital. She has a Section 457 plan with her employer with a balance that slightly exceeds her hospital and doctor bills. Miss Happ a. can borrow an amount equivalent to her bill from her Section 457 plan balance. b. cannot withdraw funds from her Section 457 plan because she is under age 70½. c. cannot withdraw funds from her Section 457 plan because she did not stop working for her employer. d. can withdraw funds from her Section 457 plan because the health-related expenditures would qualify as an "unforeseeable emergency." e. can withdraw funds only if her employer is a government agency and not a private non-profit. I. M. Gone and his wife Wobie are getting a divorce. I. M. thinks that he can keep Wobie from getting any of his Section 457 plan assets because a Qualified Domestic Relations Order [QDRO] does not apply to nonqualified plans. I. M. is a. Correct. b. Incorrect. The local government in Central City is considering using an alternative to a tax deferred annuity as a retirement plan. Which of the following could Central City Government use? a. 401(k) plan. b. SIMPLE IRA. c. SIMPLE 401(k). d. Section 403(b). e. city governments can only use a tax deferred annuity A Keogh plan is a qualified retirement plan that covers self-employed business owners and partners. True Keogh plans are much simpler and less costly to administer than other forms of qualified retirement plans. False An individual who has a Keogh plan cannot also invest in a traditional or Roth IRA. False For a self-employed individual, "earned income" takes the place of "compensation" in applying the qualified plan rules. True A sole proprietor must have employees to establish a Keogh retirement plan. False For the self-employed owner of an unincorporated business, advantages of a Keogh plan over a traditional IRA include which of the following? a. employees of the business may be excluded from participation in the plan. b. contribution limits for a Keogh are higher than limits for a traditional IRA. c. income generated by investments in a Keogh are tax-deferred until withdrawn from the plan. d. a and b. e. b and c. The "earned income" that a self-employed person uses to calculate a Keogh plan deduction is a. gross business income. b. gross business income less deduction for Keogh plan. d. business income, net of business expenses, excluding the deduction for Keogh plan contributions. d. net business income including the deduction for the Keogh plan less one-half self-employment tax. e. business income less one-half self-employment tax and business expenses, excluding the deduction for the Keogh plan. The feature that sets a Keogh plan apart from other plans is that a. it is established by self-employed individuals, such as sole proprietorships or partnerships. b. it operates like a hybrid defined benefit plan. c. it operates like a hybrid defined contribution plan. d. b and c only. e. none of the above. A Keogh plan is most commonly designed as a(n) a. defined benefit plan. b. defined contribution plan. c. 401(k) plan. d. money purchase plan. e. simplified employee pension (SEP). A KEOGH plan is useful when a. a self-employed person needs to shelter current earnings from federal income tax. b. a corporation has a large younger workforce. c. a corporation adopts a corporate plan. d. a self-employed person incorporates her business and becomes an employee of the business. Otis Carrington, a fifty-year-old self-employed person, was severely injured in an auto accident and is no longer able to perform the tasks of any occupation. Which of the following is true? a. funds cannot be withdrawn from Otis' Keogh until he is age 59½ or he dies. b. Otis must first apply for and receive Social Security disability before he can withdraw funds from his Keogh plan without penalty. c. until he reaches age 59½, Otis can only withdraw his original Keogh contributions without penalty. d. Otis will pay a 10 percent early withdrawal penalty on any dollars taken out of his Keogh. e. Otis can withdraw any contributions and earnings without penalty. Tandy is a self-employed owner of Candle Creations. She has a Keogh plan that provides incidental insurance through a cash value life insurance contract. This year, her premium is $1,400, of which $800 is for pure life insurance protection and the rest is used to increase the cash value. Tandy a. can deduct $1,400 as a Keogh plan contribution. b. can deduct $800 of the premium as a plan contribution. c. must report $1,400 as taxable income. d. can deduct $600 as a Keogh plan contribution. e. must report $600 as taxable income. [Show Less]