FINC 355 RETIREMENT AND ESTATE PLANNING
HOMEWORK 4
DIRECTIONS: Here is the Homework #4 Assignment. Use the Homework #4 Answer
Sheet for your responses to the questions. When you have completed Homework #4
submit the Answer Sheet to your Homework #4 Assignment Folder.
Please submit your Homework #4 in MS Word format with the following file name:
LastNameFirstInitial_Homework04AnswerSheet.docx. For example, if you name is John
Smith, the file name of your Answer Sheet should be
SmithJ_Homework04AnswerSheet.docx.
1- Ocatagon Industries has an age-weighted profit sharing plan that uses a fixed age-weighted
formula for allocating employer contributions. The plan covers 50 employees. The
owner and two key employees are highly compensated, each earning $500,000 per
year. Average pay for the rank-and-file employees is $35,000 per year. This year, the
company allocated $1,000 to each employee’s retirement account. The tax implications
of such an allocation include which of the following?
a. because the plan is top-heavy, Ocatagon cannot receive a tax deduction until an
employee withdraws funds from his or her retirement account
b. participant does not pay income tax on employer contributions and earnings until the
plan participant withdraws the funds
c. plan distributions for hardship withdrawals made to employees before age 59 1/2
are tax free
e. a and c
2- Allen Industries has a money purchase benefit plan that is integrated with Social Security.
The integration level is $30,000. Employer contributions are 15% above and 10% below
the integration level. Bill Wheaton earns $75,000 this year. Allen Industries will
contribute $_____ to Bill’s money purchase plan this year:
a.
b.
c.
d.
e.
$9,750
$4,500
$6,750
$3,000
none of the above
3- A disadvantage of profit sharing plans is that
a.
b.
c.
d.
e.
employee bears the investment risk
actuarial costs make the plan expensive to administer
there is no predictable level of employer funding under the plan
a and b
a and c
FINC 355 RETIREMENT AND ESTATE PLANNING
HOMEWORK 4
4- All of the following are true regarding money purchase plans, except
a. most money purchase plan benefit formulas use a factor related to the employee’s
service that favors owners and key employees
b. nondiscrimination regulations provide a safe harbor for money purchase plans
c. a plan benefit formula can be integrated with Social Security
d. forfeitures, unvested amounts left behind by employees in their plans, can be used to
reduce future employer contributions
e. money purchase plan funds are generally invested in a pooled account managed by
the employer or a fund manager selected by the employer
5- If employer contributions to a profit sharing plan are based on a discretionary provision, all of
the following are true, except
a. the employer can determine each year the amount to be contributed
b. the employer can omit a contribution
c. if too many years go by without an employer contribution, the IRS will likely claim that
the plan has been terminated
d. when a qualified plan is terminated, all nonvested amounts in participants’ accounts
are forfeited.
e. all of the above are true
6- Evergreen Semiconductors, Inc., is a young and innovative company with 25 employees
between 24 and 35 years of age. Turnover has averaged about 2% per year for the 9year old company. Profit has been intermittent. The owners believe that a substantial
investment will need to be made in new equipment next year. Which of the following
retirement savings plans is best for Evergreen?
a.
b.
c.
d.
e.
money purchase plan
target benefit plan
nonqualified deferred compensation plan
defined benefit plan
profit sharing plan
7- John Wald has participated in his company’s profit sharing plan for the past 15 years and
currently has an account balance of $250,000. Last month, his 12-year-old son had to
have an emergency appendectomy. Complications extended his hospital stay to a
week. Right before the accident, John used all of the family savings to purchase a new
car. John must pay a $2,000 deductible and an additional $5,000 for medical expenses
not covered under his medical plan. If John withdraws $7,000 from his profit sharing
plan,
a. he is in big trouble because withdrawals from a profit sharing plan are not allowed by
law
b. he must pay income tax and a 10% penalty on the amount withdrawn
c. he must pay income tax but face only a 5% penalty for early withdrawal because it is
a hardship withdrawal
FINC 355 RETIREMENT AND ESTATE PLANNING
HOMEWORK 4
d. all withdrawals from a profit sharing plan are penalty free, but income tax must be
paid
e. he would pay income tax, but no early withdrawal penalty to the extent the medical
expenses are tax-deductible
8- Which of the following is (are) true regarding an ESOP or stock bonus plan?
a.
b.
c.
d.
e.
participant’s accounts are stated in terms of stock
employer contributions to employee accounts can be in stock or cash
stockholders must be given the right to vote on all issues
a and b
a and c
9- Sandy Beech earns $40,000 as a guide for Tropical Tours, Inc. Tropical Tours typically
contributes 10% of profit to its profit sharing plan. Total payroll for Tropical Tours is
$120,000. This year, Tropical Tours will contribute $21,000 to its profit sharing plan.
Sandy’s share this year will be
a.
b.
c.
d.
e.
$3,000
$4,000
$7,000
$12,000
need more information to calculate
10- Which of the following types of businesses can have an ESOP or stock bonus plan?
a.
b.
c.
d.
e.
S corporation
professional corporation
incorporated business
a and c
b and c
11- An advantage of a profit sharing plan from the employer’s point of view includes which of the
following?
a.
b.
c.
d.
e.
employer contributions to the plan are discretionary
plan can benefit long-term employees
nonvested benefits can be reallocated to remaining employees
allows integration with Social Security
all of the above
12- Stock bonus plans and ESOPs share many characteristics, but ESOPs have some unique
characteristics. Which of the following characteristics is (are) unique to an ESOP?
FINC 355 RETIREMENT AND ESTATE PLANNING
HOMEWORK 4
a.
b.
c.
d.
e.
accounts of employees over 55 must be offered diversification
employer’s ability to borrow to leverage ownership
tax-free treatment of appreciated company stock distributed to a retiree
a and b
b and c
13- The owner of Whitney Corporation, Inc., earned $250,000 in 2013. In the same year, three
highly compensated employees earned $100,000 each. The remaining 30 line workers
earn about $20,000 each, for a total payroll of $600,000 for this group of workers.
Whitney Corporation made the maximum allowable contribution to each employee’s
money purchase plan in 2013. In 2013, what was the total amount that Whitney
Corporation contributed to their money purchase plan?
a.
b.
c.
d.
e.
$51,000
$150,000
$225,000
$276,000
$318,000
14- An ESOP enables the employer company to borrow money on a favorable basis. All of the
following are true about ESOP loans, except
a. the ESOP trustee borrows money from a lending institution, such as a bank
b. the trustee uses the loan proceeds to purchase stock of the employer from the
employer corporation or from principal shareholders
c. the employer makes tax-deductible contributions to the ESOP in amounts sufficient
to enable the trustee to pay off the principal and interest of the loan to the lender
d. the leveraging feature of an ESOP loan distinguishes an ESOP from a regular stock
bonus plan
e. all of the above are true
15- Which of the following is (are) true regarding the tax implications of having a money
purchase plan?
a. employer contributions and plan earnings are tax-deferred for the employee
b. employers beginning a new plan are eligible for a $2,500 business tax credit in the
first year to help with startup costs
c. the employer tax deduction is limited to 25% of total payroll of the employees
covered under the plan
d. only a and b
e. only a and c
16- Harris Corporation has a savings plan for employees. Last year, Harris made non-elective
contributions amounting to 4% of compensation to all employee accounts. By doing this,
Harris has met the contribution requirements for a safe harbor test.
a. true
b. false
FINC 355 RETIREMENT AND ESTATE PLANNING
HOMEWORK 4
17- The stock of Vagabond Corporation is not publicly traded. Vagabond has an ESOP. A.
Wanderer, an employee
a.
b.
c.
d.
e.
can expect that stock valuations will be made by an independent appraiser
can demand that distributions from the ESOP be made in the form of employer stock
can exercise a “put option”
all of the above
only a and b
18- Jane Tally has a thrift/savings plan with her employer. She knows
a. her contribution to the plan is voluntary and made with after-tax dollars
b. 100% of her contribution to her account is vested immediately
c. her employer’s contributions to her account must comply with Internal Revenue Code
requirements for qualified plans
d. all of the above
e. only a and b
19- Which of the following is (are) true regarding elective deferrals in a Section 401(k)?
a. elective deferrals are not subject to Social Security and Federal Unemployment
payroll taxes
b. elective deferrals are always made on an after-tax basis
c. if the company elects to have a safe harbor plan, elective deferrals must meet the
actual deferral percentage test
d. account funds can be withdrawn without a premature distribution penalty if the
employee becomes disabled or dies
e. since employees elect the amount of funds to defer, nondiscrimination tests do not
apply to elective deferrals
20- Last year, employee contributions and employer matching contributions amounted to 4% of
compensation for all nonhighly compensated employees at Addison Corporation, a 400employee company. Which of the following options allow Addison to preserve a
nondiscriminatory plan during this plan year?
a. satisfying the requirements of a safe harbor 401(k) plan
b. keeping the average ratio of nonhighly compensated employee contributions to
highly compensated employee contributions at or below 4% to 6%
c. making sure employee contributions meet the requirements for a SIMPLE 401(k)
plan
d. a and b
e. a and c