Plan Selection for Businesses - Review Questions

Question 1

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

Answer 1

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.

Question 2

In a defined contribution plan, there is one main account where all participant money is invested.

True
False

Answer 2

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.

Question 3

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

Answer 3

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.