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
Defined Contribution Plans
Chapter 18: ESOP/Stock Bonus Plan
True/False
18.1 The IRC generally limits the amount of employer stock that can be in a retirement plan. Diversification is not required, however, for employee stock ownership plans (ESOPs).
a. true
b. false
18.2 A leveraged ESOP can borrow funds to acquire company stock. The employer can make a tax-deductible contribution to the ESOP that lets the trustee repay the loan principal and interest.
18.3 Participants in an ESOP hold company stock, but do not have voting rights on corporate issues.
Answers:
18.1 false [p. 162]
18.2 true [p. 163]
18.3 false [p. 161-62]
Multiple Choice
18.4 Which of the following types of businesses can have an ESOP or stock bonus plan?
a. S corporation
b. professional corporation
c. incorporated business
d. a and c
e. b and c
Answer: D [p. 167]
18.5 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?
a. accounts of employees over 55 must be offered diversification
b. employer’s ability to borrow to leverage ownership
c. tax free treatment of appreciated company stock distributed to a retiree
d. a and b
e. b and c
Answer: D [pp. 162-63]
18.6 Which of the following is (are) true regarding an ESOP or stock bonus plan
a. participant’s accounts are stated in terms of stock
b. employer contributions to employee accounts can be in stock or cash
c. stock holders must be given the right to vote on all issues
d. a and b
e. a and c
Answer: D [p. 161-62 – voting rights are more limited if the stock is privately held]
Application
18.7 Appleton Enterprises, Inc. is a closely held corporation that employs members of the Appleton family. The company’s ESOP has more than 10% of plan assets in Appleton stock. Appleton’s stock is not publicly traded. Appleton must give employees the right to vote on all corporate issues.
a. true
b. false
Answer: B [p. 162]
18.8 The stock of Vagabond Corporation is not publicly traded. Vagabond has an ESOP. A. Wanderer, an employee
a. can expect that stock valuations will be made by an independent appraiser
b. can demand that distributions from the ESOP can be made in the form of employer stock
c. can exercise a ‘put option’
d. all of the above
e. only a and b
Answer: D [p. 162]
18.9 Jackson Kerpatrik, age 40, is an employee of Beason Industries. Beason has an ESOP. This year, the ESOP purchased stock for $500 and allocated it to Jackson’s account. Twenty five years from today, Jackson retires and receives this stock in a lump sum distribution. At the time of his retirement, the stock that was allocated to Jackson’s account this year is worth $5000. Jackson pays taxes on:
a. $500
b. $4500
c. $5000
d. no tax at time of distribution; all initial deposits and gains taxed when stock is sold
e. $500 at time of time of distribution, gains are taxed when the stock is sold
Answer: E [p. 164]
18.10 Pamela Renquist, owner of Advance Software Solutions, Inc., wants to install a stock-based retirement plan for herself and her employees. She has a young company that has averaged 5% a year growth since opening 5 years ago. Pamela has asked you, her financial advisor, to help her understand which type of plan would be more advantageous for Advance Software Solutions, a stock bonus plan or an ESOP. You tell Pamela that
a. both plans are identical except that an ESOP can be integrated with Social Security while a stock bonus plan cannot, making an ESOP less expensive to provide
b. only a stock bonus plan requires a “put” option, making it more difficult to retire employees when company cash is short
c. the ability to use the ESOP to borrow money with tax deductible dollars could be advantageous to a young and growing business
d. an ESOP will dilute company ownership, but the diversification requirements in a stock bonus plan prevent that from happening
e. only an ESOP can be used to fund a corporate buy-sell agreement and should be used if Pamela want to control business succession
Answer: C [pp. 163-64]
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