Plan Selection for Businesses - Review Questions Flashcards
Which of the following are ways savings are encouraged through the tax system? (Select all that are true.)
1) deferral of tax on capital gains until realized
2) deferral on tax on savings accounts
3) potential exclusion of a base amount of the capital gain of the sale of residence
4) deferral of tax and other benefits for qualified retirement and tax advantaged plans
5 ) tax free accumulation of interest on corporate bonds
1) deferral of tax on capital gains until realized
3) potential exclusion of a base amount of the capital gain of the sale of residence
4) deferral of tax and other benefits for qualified retirement and tax advantaged plans
Three ways saving is encouraged through the tax system are:
deferral of tax on capital gains until realized,
potential exclusion of a base amount of the capital gain of the sale of residence, and
deferral of tax and other benefits for qualified retirement plans and other tax advantaged plans.
In a defined contribution plan, there is one main account where all participant money is invested.
True
False
False
In a defined contribution plan, the employer establishes and maintains an individual account for each plan participant. When the participant becomes eligible to receive benefit payments, the benefit is based on the total amount in the participant’s account.
Which of the following are characteristics of employees who value immediate cash? (Check all that are true.)
1) Younger employees
2) Long-term employees
3) Short-term employees
4) Highly compensated employees
1) Younger employees
3) Short-term employees
Employees who value immediate cash are usually younger employees who do not expect to stay with the employer long. In addition, they are often lower-paid employees as well.
Who benefits when the plan contribution formula is based on an employee’s years of service? (Check all that are true.)
1) Owners
2) Key employees
3) Seasonal employees
4) Part-time employees
5) Contractors
1) Owners
2) Key employees
Plan contributions based on an employee’s years of service generally benefit the owners and key employees who typically have longer service
Review Question
What is the longest vesting period permitted for a defined contribution plan?
Choose the best answer.
2
3
5
6
7
6
The longest vesting period for employer contributions to a defined contribution plan is six years.
Which of the following statements are true regarding defined benefit plans? (Select all that are true.)
1) A defined benefit plan can be designed to allow full benefits to accrue after a specified period with no further
benefits accruing thereafter.
2) A defined benefit plan makes it relatively easy to design a window plan to encourage early retirement.
3) Defined benefit plans are not subject to minimum funding rules.
4) Defined benefit plans do not allow companies to encourage early retirement by subsidizing benefits.
1) A defined benefit plan can be designed to allow full benefits to accrue after a specified period with no further
benefits accruing thereafter.
2) A defined benefit plan makes it relatively easy to design a window plan to encourage early retirement.
A defined benefit plan can be designed to allow full benefits to accrue after a specified period with no further benefits accruing thereafter. In addition, a defined benefit plan makes it relatively easy to design a window plan to encourage early retirement.
A local business owner has engaged your services to design a retirement plan for her organization. Which of the following topics would be among the first to address in your discussions in order to promote the full engagement and buy-in possible?
Choose the best answer.
1) Comparison of how the plan will benefit highly compensated vs. non-highly compensated employees.
2) Consideration qualified vs. non-qualified plan types.
3) The business owner’s own individual personal planning objectives in establishing the plan.
4) Analysis of various vesting schedules and their impact on employee retention.
3) The business owner’s own individual personal planning objectives in establishing the plan.
All of the options above should be addressed at some point in the planning process, but early on particular attention should be made to the owner’s personal planning objectives.
When computing the applicable earnings amount used to calculate the employer contribution for a business owner with self-employment income, all of the following are deducted from earnings EXCEPT:
Choose the best answer.
1) The amount of the employer contribution to be made
2) Applicable federal income taxes
3) Employer portion of self-employment tax
4) Deductions from gross earnings itemized on Schedule C
2) Applicable federal income taxes
Federal income taxes are not deducted.
In addition to promoting tax-advantaged savings, retirement plans may serve several functions related to compensation policy. Which of the following are compensation policy objectives that may be reasonably achieved through the adoption of a well-designed retirement plan?
I) Providing an important incentive to motivate high employee performance.
II) Promoting the reorganization of compensation distribution in the business.
III) Helping to discourage the formation of a collective bargaining unit.
IV) Serving as an important selling point when recruiting new employees.
Choose the best answer.
1) IV only
2) II and III
3) I, II, and IV
4) I, III, and IV
4) I, III, and IV
Motivation and recruitment are supported by a retirement plan, which also discourages the desire for collective bargaining. A retirement plan doesn’t help with reorganizing compensation distribution in the organization.
When designing an employer-sponsored retirement plan it is important to have an understanding of the specific objectives that may be met by each plan. Of the following statements which does NOT describe a correct association between a plan type and an associated employer objective that it may meet?
Choose the best answer.
1) An employer whose primary objective is providing adequate retirement income may want to consider
establishing a defined contribution plan.
2) To promote high levels of plan performance a business may fund a plan with shares of stock in the company.
3) A defined benefit plan may be used if the employer wishes to encourage retirement at a specific age.
4) Younger employees generally benefit the most from elective savings accounts.
1) An employer whose primary objective is providing adequate retirement income may want to consider
establishing a defined contribution plan.
A defined contribution (DC) plan does not provide any predictable benefit for retirement. There is no way to know what the value of a DC plan will be at retirement.
The class of employees who would benefit the most from the introduction of a defined benefit plan could be described as:
I) Within 10 years of retirement
II) Under 35 years old
III) In the upper 10% of employees when ranked by income
IV) Frequently shifting employers
Choose the best answer.
1) II only
2) I and III
3) I only
4) II and IV
2) I and III
A defined benefit plan would help anyone with a short runway to retirement as well as high income participants. It may not be as useful for young participants or those who may change employers often.
You are working with a business owner whose primary concern is accumulating assets for their own retirement. After reviewing the outlays required to implement a qualified plan, you are asked if it would not be more efficient to simply fund a non-qualified account? In preparing an analysis comparing the implementation of a plan with straightforward nonqualified savings, which of the following would NOT be a consideration included in the analysis?
Choose the best answer.
1) The business owner’s current marginal tax rate.
2) The expected rate of return for invested assets.
3) Required employer contributions under the plan.
4) The marginal tax rates of participants.
4) The marginal tax rates of participants.
Which of the following would be the most viable means of using retirement plan design to reduce employee turnover?
Choose the best answer.
1) Funding a plan with employer stock
2) The introduction of an extended vesting schedule
3) Adding a loan feature to the company’s existing qualified plan
4) Utilizing an attractive employer matching contribution
2) The introduction of an extended vesting schedule
