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HS 354 > Competency 11 Knowledge Check > Flashcards

Competency 11 Knowledge Check Flashcards

1
Q
  1. Defined-benefit plans are still quite popular as nonqualified arrangements for CEOs and other highly compensated employees
A

True. (LO 11-1-1)

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2
Q

Employers often design their supplemental executive retirement plans (SERPS) to put “golden handcuffs” on their top executives

A

True. (LO 11-1-1)

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3
Q
  1. Nonqualified defined-benefit plans are commonly designed with a life annuity and 10-year certain payments as the basic distribution option
A

True. (LO 11-1-1)

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4
Q
  1. One benefit of nonqualified deferred compensation plans is that benefits are secure as long as the employer sets aside money to pay the promised benefits.
A

False. In all nonqualified plans, the employee is an unsecured creditor of the company and assets set aside to pay benefits are available to the claims of the company’s creditors. (LO 11-1-1

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5
Q
  1. Most tax advantages of a nonqualified plan are lost when you are an equity owner of an S-Corp.
A

True. (LO 11-1-1)

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6
Q
  1. Board members of a non-profit organization are often from the “for-profit” business world and may be unaware of the complexities of nonqualified deferred compensation in the non-profit environment
A

True. (LO 11-1-1)

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7
Q
  1. Grantor or “Rabbi Trusts” can be used as a way to protect nonqualified plan assets from being used as general operating assets for the employer that established the plan
A

True. (LO 11-1-1)

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8
Q
  1. An arbitration clause in a nonqualified deferred compensation agreement protects the company but not the executive
A

False. Arbitration speeds up the process and is less costly to both parties. It is most advantageous to the executive, since the executive will not have to go through the expense of going to court to receive benefits. (LO 11-1-1)

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9
Q
  1. Company owned life insurance (COLI) is a great way to fund supplemental executive retirement plans because policies can be purchased on the lives of all employees.
A

False. COLI is an appropriate funding vehicle for a nonqualified plan but not for the reason given. Today, companies can only purchase life insurance on the top 35 percent of the employees and the employees must give their consent to purchase the life insurance. (LO 11-1-1)

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10
Q

10.Long-term care insurance for employees paid for by the employer is fully deductible to the employer, but the benefits provided result in imputed taxable income for the employee.

A

False. Long-term care benefits are one of the few insurance arrangements that allow for an income tax deduction by the employer but has no income tax consequences to the employee. (LO 11-1-2)

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11
Q

11.Group term life insurance policy benefits that exceed $50,000 result in imputed income to the employee

A

True. (LO 11-1-2)

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12
Q

12.One disadvantage to employer provided long-term care insurance is the nondiscrimination requirement that applies to that plan

A

False. There are no discrimination regulations that apply to this type of benefit. (LO 11-1-2)

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13
Q

13.The trend for retiree medical benefits offered to retired executives has been to establish cost-sharing arrangements between the employer and retiree

A

True. (LO 11-1-2)

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14
Q

14.Group term life insurance benefits that exceed $50,000 generally result in a significant amount of taxable income and in most cases no benefit payoff

A

True. The actuarial odds of death occurring while the participant is still employed are about 2%. (LO 11-1-2)

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15
Q

15.A Sec. 162 bonus life insurance plan will be more attractive to the individual who expects higher tax rates in the future

A

True. If there are lower taxes today and uncertainty about higher tax rates in the future, paying taxes now instead of deferring these taxes could be a benefit. (LO 11-1-3)

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16
Q

16.Employees with high salaries and income often do not qualify for a Sec. 162 bonus life insurance plan because of strict state and federal income caps on Sec. 162 insurance plans

A

False. There are no state or federal income caps that restrict people from taking part in a Sec. 162 bonus life insurance plan. (LO 11-1-3)

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17
Q

17.There are no specific limits on the amount of contributions made into a Sec. 162 bonus life insurance plan. However, the product needs to be managed to ensure that it satisfies the requirements to remain a life insurance policy and satisfies the MEC requirements if lifetime withdrawals are expected

A

True. (LO 11-1-3)

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18
Q

18.An executive may want to reposition assets by making additional contributions to a Sec. 162 bonus life insurance policy in order to take advantage of the asset protection aspect of the plan

A

True. (LO 11-1-3)

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19
Q

19.An insured can generally borrow against his or her Sec. 162 bonus life insurance policy

A

True. (LO 11-1-3)

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20
Q

20.Accounting changes have made stock options a less popular executive benefit.

A

True. (LO 11-1-4)

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21
Q

21.Phantom stock can be especially appropriate in the closely-held business setting

A

True. (LO 11-1-4)

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22
Q
  1. Life insurance is an important tool for retirement planning because it can help protect wealth and replace income in the event of an early death
A

True. (LO 11-2-1)

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23
Q
  1. When planning for the amount of life insurance protection, it may be best to make a conservative assumption that the spouse would not go back into the workforce
A

True. (LO 11-2-1)

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24
Q
  1. Life insurance coverage should only be obtained on the working, income-generating spouses
A

False. Non-working spouses may contribute to a lot around the home. For instance, the non-working spouse could be the primary caretaker of children and perform a variety of other functions that would greatly increase costs to the working spouse if the non-working spouse died. (LO 11-2-1)

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25
Q
  1. The amount of life insurance coverage should always be ten times the individual’s earnings from employment
A

False. The amount of insurance will depend on a number of factors. (LO 11-2-1)

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26
Q
  1. Younger couples will generally choose annual renewable term policies
A

False. The appropriate term for the insurance should generally match the length of the client’s insurance need. (LO 11-2-1)

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27
Q
  1. Income replacement needs generally cease at retirement
A

False. In retirement, people have to plan for a loss or reduction of Social Security, pension, or annuity income that may occur at the loss of a spouse or partner. (LO 11-2-1)

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28
Q
  1. Insurability and price are two major concerns when purchasing life insurance policies at an older age
A

True. (LO 11-2-1)

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29
Q
  1. Household cash flow needs generally are cut in half after the first spouse’s death.
A

False. Household spending typically does not drop significantly after the loss of one spouse. This consideration is important when determining the necessary amount of life insurance coverage. (LO 11-2-1)

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30
Q
  1. If withdrawals are expected during an insured’s lifetime, the tax treatment of the withdrawals depends upon whether the policy is a modified endowment contract (MEC).
A

True. (LO 11-2-2)

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31
Q

10.Borrowing against a life insurance policy that is not a MEC results in a taxable event.

A

False. This would be the result if the policy was a MEC. Loans from other policies can be taken without tax consequences. (LO 11-2-2)

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32
Q

11.Using the cash value benefits of a life insurance policy to meet college funding needs can be risky because the cash value withdrawals will affect determinations for any FAFSA financial aid awards

A

False. Cash value benefits of a life insurance policy can be tapped to meet college funding needs without affecting FAFSA financial aid determinations. (LO 11-2-2)

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33
Q

12.When using a life insurance policy with cash value benefits as part of a retirement plan, it is important to be conservative when estimating what cash value may be available in retirement

A

True. (LO 11-2-2)

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34
Q

13.Cash value withdrawals from a life insurance policy will never impact death benefits

A

False. Cash value withdrawals will sometimes decrease death benefits. (LO 11-2-2)

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35
Q

14.Purchasing life insurance to guarantee a legacy can make it easier for some to spend their retirement assets.

A

True. (LO 11-2-3)

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36
Q

15.A single premium life insurance policy with a death benefit that will be larger than the investment allows an individual to have more funds available to meet final expenses

A

True. (LO 11-2-3)

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37
Q

16.Life insurance on the first spouse that dies can provide additional income for the survivor to address a loss of pension or Social Security benefits

A

True. (LO 11-2-3)

38
Q

17.A single life insurance policy is generally the best approach if the goal is to both create a predictable death benefit and build cash value that is intended to be used during retirement

A

False. It may be better to have two policies as the type of policy that works best for each of these objectives may be different. (LO 11-2-3)

39
Q

18.For a couple looking to build cash value for retirement, a second-to-die life insurance policy is generally the wrong type of policy

A

False. When the objective is to build cash value to be used in retirement, there is a benefit to reducing the cost of insurance—which will be the case by using a second-to-die policy. (LO 11-2-3)

40
Q

19.It is easy to accurately predict the accumulated cash value in an indexed universal life policy

A

False. There are many moving parts (returns, cost of insurance, expenses) making it difficult to estimate how the policy will perform. (LO 11-2-3)

41
Q
  1. Federal civilian employees are eligible for either the Civil Service Retirement System (CSRS) or Federal Employee Retirement System (FERS), depending on when they came into federal service
A

True. People who came into federal service before 1983 are in the CSRS and people who came after 1983 are in the FERS. (LO 11-3-1)

42
Q
  1. Federal employees in the FERS pay both a contribution percentage of their pay and Social Security
A

True. While CSRS employees did not pay into Social Security, FERS pay Social Security taxes. (LO 11-3-1)

43
Q
  1. Both CSRS and FERS benefits are based on the number of years of service and the average pay over the highest five years of salary
A

False. Average pay is based on the highest three years of salary. (LO 11-3-1)

44
Q
  1. Military employees receive retirement benefits under FERS.
A

False. Military members have a different retirement program. (LO 11-3-1)

45
Q
  1. Federal civilian employees and military employees can elect to continue government-provided long-term care insurance after they retire
A

True. (LO 11-3-1)

46
Q
  1. Military employees do not have to pay Social Security taxes
A

False. Like members of the FERS, military employees do pay Social Security. (LO 11-3-1)

47
Q
  1. Federal civilian employees contribute .8% of their pay to the FERS
A

True. (LO 11-3-2)

48
Q
  1. Under FERS, if an employee with 20 years of service retires as early as possible, his or her pension will be reduced 5 percent for every year prior to age 62.
A

True. (LO 11-3-2)

49
Q
  1. Thrift Savings Plans are no longer offered to any employee starting after 2010
A

False. Thrift Savings Plans are still part of the benefits package offered to federal civilian and military employees. (LO 11-3-2)

50
Q

10.Federal civilian employees with prior military service can buy additional years of service for FERS benefits based on their military service

A

True. (LO 11-3-2)

51
Q

11.The multiplier used to calculate the FERS pension benefit payment increases from 1% to 1.1% if the employee has 10 years of service and retires after age 60.

A

False. If the employee has 20 years of service and retires after age 62, the multiplier goes up to 1.1%. (LO 11-3-2)

52
Q

12.FERS benefits tend to be higher than CSRS benefits.

A

False. Benefits are generally much larger for CSRS because employees under this system do not receive Social Security benefits. (LO 11-3-3)

53
Q

13.There is no early retirement reduction for the CSRS retirement system.

A

True. (LO 11-3-3)

54
Q

14.Under the CSRS program, an employee could retire at age 55 if he or she had 30 years of service.

A

True. (LO 11-3-3)

55
Q

15.The CSRS system allows for voluntary after-tax contributions of up to 10 percent of lifetime earnings

A

True. (LO 11-3-3)

56
Q

16.The Thrift Savings Plan (TSP) is available to both civilian and military employees

A

True. However, a matching contribution is only available to FERS employees. (LO 11-3-4)

57
Q

17.The maximum allowable salary deferral contribution to the Thrift Savings Plan is the same as with a 401(k) plan

A

True. (LO 11-3-4)

58
Q

18.Expenses related to the Thrift Savings Plan are very high because there are so many different available investment options

A

False. Investment options are limited and the expenses for these investment alternatives are very low. (LO 11-3-4)

59
Q

19.A lump cash payout is the only distribution option for a Thrift Savings Plan.

A

False. Annuities can be purchased as well. (LO 11-3-4)

60
Q

20.Military employees are typically entitled to pension payments after 20 years of service

A

True. (LO 11-3-5)

61
Q

21.Active military personnel must wait until they reach age 62 before they can begin to receive pension payments

A

False. Payments may begin as soon as they retire. However, reservists have to wait until age 60. (LO 11-3-5)

62
Q

22.Military pension benefits are adjusted annually for cost of living increases

A

True. (LO 11-3-5)

63
Q

23.Each military branch has different payment structures and branch-specific rules for determining retirement benefits

A

False. All military branches are treated equally for retirement related payments and benefits. (LO 11-3-5)

64
Q

24.Military employees can opt for plans that provide a portion of their benefits to their surviving spouse or children if they pass away

A

True. There are multiple options available to provide for surviving spouses and children. (LO 11-3-5)

65
Q

25.The military pension program provides benefits that are generally higher than under FERS.

A

True. (LO 11-3-5)

66
Q

26.Active duty military cannot purchase disability insurance

A

True. (LO 11-3-6)

67
Q

27.Medically retired military personnel cannot be eligible for retiree pay before they have 20 years of service

A

False. Military members can be medically retired without having 20 years of service. (LO 11-3-6

68
Q

28.Very few military personnel are eligible for disability benefits

A

False. Many military members can qualify–sleep apnea qualifies. (LO 11-3-6)

69
Q

29.A disabled veteran whose condition improves may have a reduction in benefits

A

False. The disability determination occurs at retirement and future improvements cannot lower the amount paid. However, new problems might be able to increase benefit payments. (LO 11-3-6

70
Q

30.The cost of providing a 55 percent survivor benefit to a spouse is 6.5% of pay

A

True. (LO 11-3-7

71
Q

31.After retirement, if a spouse dies, the 6.5% reduction continues to apply

A

False. The reduction in benefits cease at the spouse’s death. (LO 11-3-7)

72
Q

32.Retiring military personnel may choose to continue life insurance benefits under the Veteran’s Group Life insurance program as a stop-gap measure until coverage is obtained through a new employer

A

True. (LO 11-3-7)

73
Q

33.Under certain conditions, a military member can transfer his or her GI Bill benefits to a spouse or child

A

True. Anyone on active duty after 9/11 with children born before they retire from service has the option to transfer their GI Bill benefits to a spouse or children. (LO 11-3-7)

74
Q

34.The GI Bill will cover four years of education for the price that is equal to the average cost of a public school

A

True. (LO 11-3-7)

75
Q
  1. Business owners typically look forward to retirement and have little trouble with the transition
A

False. Business owners are so focused on building and maintaining the business, it is common not to have given much thought about life after work. (LO 11-4-1)

76
Q
  1. Planning for the dissolution or exit strategy for a business owner should begin around age 50
A

False. Planning for an exit strategy should be part of the planning that occurs at the company start-up. (LO 11-4-1)

77
Q
  1. Installment sales and other deferred payment strategies require that the subsequent owners are successful in the business
A

True. (LO 11-4-1)

78
Q
  1. Operating as a corporation is good for a doctor to protect him/herself against malpractice claims
A

False. Operating as a corporation or other legal entity does not provide protection against malpractice claims. (LO 11-4-1)

79
Q
  1. Payments for continued consulting after the sale of a business is one way to receive harvest value from the business
A

True. (LO 11-4-1)

80
Q
  1. Creditor protection may be one reason that a business owner may want to establish a tax-advantaged retirement plan
A

True. (LO 11-4-2)

81
Q
  1. Small business owners should not always consider contributions for employees as a drain on their own savings as the plan may serve an important function of attracting and retaining employees
A

True. (LO 11-4-2)

82
Q
  1. Owners who establish plans need to be aware that they may be a fiduciary and subject to personal liability
A

True. (LO 11-4-2)

83
Q
  1. One of the primary advantages of a SEP is the low cost of providing benefits to nonhighly compensated employees
A

False. SEPs have very little flexibility in plan design and participants generally must receive the same contribution as a percentage of pay as the owner—which can be quite expensive. (LO 11-4-2)

84
Q

10.The qualified plan coverage rules require that 100 percent of the nonexcludible employees be covered.

A

False. In addition to excluding the excludible employees, the plan can exclude up to 30% of the nonhighly compensated workforce. (LO 11-4-2)

85
Q

11.A 401(k) plan can require somewhat lower contributions for the nonhighly compensated employees than a SEP.

A

True. (LO 11-4-2)

86
Q

12.A defined-benefit plan is a great tax shelter for the business owner who is 35 years old

A

False. The maximum contribution would be relatively modest as the owner still has many years before retirement. The maximum contribution will be much higher for the individual in his or her 50s. (LO 11-4-2)

87
Q
  1. Motivation for some of the nontraditional approaches to retirement planning (i.e. buying a vacation home) may be tied to the multiple uses of the asset or strategy
A

True. (LO 11-5-1)

88
Q
  1. With some nontraditional assets used to fund retirement needs, one of the issues will be the probability of whether the asset will actually be sold to fund retirement needs.
A

True. (LO 11-5-1)

89
Q
  1. A major drawback in using nontraditional assets to fund retirement needs (i.e. coin collection) is that there may not be a willing buyer when it becomes time to sell
A

True. (LO 11-5-1)

90
Q
  1. An advantage to using nontraditional assets to fund retirement needs (i.e. vacation home) is that it may allow for a form of forced savings
A

True. (LO 11-5-1)

HS 354 (8 decks)

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