Ch. 17 Profit Sharing Plan

Question 1

Profit Sharing Plan

Answer 1

A defined contribution plan featuring a flexible, employer contribution provision

Question 2

How can contributions be formed?

Answer 2

purely discretionary or some type of formula

Question 3

Employer contributions are allocated to individual accounts on a _____ basis

Answer 3

nondiscriminatory

Question 4

What do plan benefits consist of?

Answer 4

the amount accumulated in each participant’s account at retirement or termination

Question 5

How are plan benefits usually distributed?

Answer 5

lump sum or installment payments

Question 6

When is it indicated?

Answer 6

employer profits vary year to year
employer wants incentive feature
Young employees willing to bear risk
Employer want to supplement an existing plan

Question 7

5 advantages

Answer 7

1. max contribution flexibility
2. contributions can be made even if company has no profits
3. tax deferred retirement savings
4. Simple and inexpensive
5. participants benefit from good investment return

Question 8

5 disadvantages

Answer 8

1. Benefits may be inadequate for employees entering the plan at later ages
2. limited funding available for HCEs
3. Employees bear investment risk
4. employer funding less predictable
5. closely held companies may have to open their books to employees

Question 9

Discretionary contribution provision

Answer 9

employer can determine the amount each year

Can omit contribution in a given year but IRS requires “recurring and substantial” contributions

Question 10

Formula provision

Answer 10

Specified amount contributed each year when the company has profits

Question 11

How are “profits” usually defined?

Answer 11

profits determined on a before-tax basis

Question 12

If the plan is drafted properly, it is possible for the employer to include a _______ provision if certain adverse financial circumstances occur

Answer 12

fail-safe

Question 13

All plans must have a formula for …… to ……

Answer 13

allocating employer contributions; participant accounts

Question 14

Allocation ____ discriminate in favor of HCEs

Answer 14

cannot

Question 15

Can it be integrated with social security?

Answer 15

yes

Question 16

___% tax deduction limit for employer

Answer 16

25

Question 17

____ are usually added to the remaining participants’ accounts

Answer 17

forfeitures

Question 18

When are benefits payable?

Answer 18

termination or retirement

Question 19

Generally allow _____ distributions

Answer 19

in-service

Question 20

Funds available for “in-service” distributions must be _____

Answer 20

vested

Question 21

IRS usually requires a ___ year period before withdrawal

Answer 21

2

Question 22

When will a 10% penalty apply?

Answer 22

distribution prior to age 59 1/2

Question 23

What kind of funds qualify for in-service distribution?

Answer 23

medical emergencies, home repair, educational expenses

Question 24

Taxation of the amount in the plan are deferred until _____

Answer 24

they are withdrawn