TOOLS & TECHNIQUES OF LIFE INSURANCE PLANNING



TOOLS & TECHNIQUES OF EMPLOYEE BENEFIT AND RETIREMENT PLANNING

11th Edition

College Course Materials

Deanna L. Sharpe, Ph.D., CFP®, CRPC®, CRPS®

Associate Professor

CFP® Program Director

Personal Financial Planning Department

University of Missouri-Columbia

Please Note: Correct answers for each question are indicated in bold type. After each question, the number of the page containing information relevant to answering the question is given. When a calculation is necessary or the reasoning behind a given answer may be unclear, a brief rationale for the correct answer is also given.

Part A: Retirement Planning

ERISA and Tax Rules for Qualified Plans

Chapter 7: Qualified Plans: General Rules for Qualification

True/False

7.1 The ratio benefit test states that a qualified plan must cover a percentage of nonhighly compensated employees that is at least 70% of the percentage of highly compensated employees covered.

7.2 A top-heavy plan is one that provides more than 60% of its aggregate accrued benefits or account balances to key employees.

7.3 When applying coverage tests to evaluate the presence of discrimination in qualified plan offerings, an employer must include all employees, even those who have a collective bargaining agreement on retirement benefits.

Answers:

7.1 true [p. 63]

7.2 true [p. 72]

7.3 false [p. 64]

Multiple Choice

7.4 A qualified plan must satisfy which of the following tests?

a. ratio percentage test

b. average benefit test

c. highly compensated test

d. either a or b

e. either b or c

Answer: D [p. 63]

7.5 Social security integration

a. reduces the cost of offering a qualified plan

b. allows an employer to make greater contributions or benefits for highly paid employees

c. must maintain a certain ratio of contributions to non-highly compensated individuals versus highly compensated individuals to retain “permitted disparity”

d. only a and b

e. only a and c

Answer: D [p. 65]

7.6 For a defined contribution plan, annual additions include which of the following?

a. employer contributions

b. employee salary reductions

c. plan forfeitures

d. all of the above

e. only a and b

Answer: D [p. 72]

Application

7.7 The owner of Hilton Tours is considering installing a money purchase plan and integrating it with Social Security. Which of the following is true?

a. Social Security integration will allow Hilton Tours to make greater contributions to higher paid employees

b. Hilton’s owner must use the excess method for integrating defined contribution formulas with Social Security

c. Hilton’s owner must use the offset method for integrating defined contribution formulas with Social Security

d. a and b

e. a and c

Answer: D [p. 68]

7.8 Dalton Construction has a defined contribution plan that provides 65% of account balances to the three owners, each of whom have a 10% ownership of the company. To remain qualified, which of the following vesting schedules would Dalton be permitted to use?

a. 5 year cliff

b. 3 to 7 year

c. 3 year cliff

d. a and b

e. b and c

Answer: C [p. 72]

7.9 As an actuary, you are helping Roadster Custom Auto Shop determine the annual cost of their defined benefit plan. In making your calculations, you must make reasonable assumptions about:

a. employee turnover rate

b. employee salary scale

c. future investment and inflation rates

d. all of the above

e. only b and c

Answer: D [p. 69]

7.10 Bankroll Corp. sponsors a profit sharing plan in which Bankroll’s 4 employees made elective deferrals. The payroll of Bankroll Corp. is $500,000. Bankroll’s deduction under the limits enacted by EGTRRA 2001 is:

a. $40,000

b. $75,000

c. $125,000

d. $165,000

e. $500,000

Answer: C [p. 70]

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