Finc 355 and 430 week 3

Quiz 3

NAME ____________________________ Due Date: June 22, 2014 (in assignment folder)

Please provide name above and provide answers in the chart below and submitting homework in MS Word in assignment folder for Quiz 3. (I’ll deduct points if you don’t).

1. Which of the following are methods for integrating defined benefit formulas with Social Security?

(1) top-heavy method

(2) safe harbor method

(3) excess method

(4) offset method

A. (1) and (2) only

B. (2) and (3) only

C. (3) and (4) only

D. (1) (3) and (4) only

2. What is the maximum number of years of service a plan may require before a participant is 100% vested in a qualified defined benefit plan?

A. 1

B. 3

C. 5

D. 7

3. As an actuary, you are helping Roadster Custom Auto Shop determine the annual cost of its 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

4. Which of the following spousal survivorship benefits are required by pension plans?

(1) qualified pre-retirement survivor lump sum

(2) qualified pre-retirement survivor annuity

(3) qualified joint and survivor annuity

(4) qualified joint and survivor lump sum

A. (1) only

B. (1) and (2) only

C. (2) and (3) only

D. (2) (3) and (4) only

5. What percentage of each annuity payment normally will be considered taxable income to a plan participant who has no cost basis in the plan?

A. 25%

B. 50%

C. 75%

D. 100%

6. Defined benefit plans must have a joint and survivor annuity as the default form of benefit.

A. True

B. False

7. Foster Tate, age 64, died this year before retiring. Foster’s beneficiary receives a lump sum death benefit of $200,000 from a cash value life insurance plan that was part of Foster’s retirement plan. The cash value of the insurance was $120,000 at the time of Foster’s death. Foster had reported a total of $20,000 of insurance costs for this contract on his income tax returns. The taxable amount of this benefit to the beneficiary is

A. zero – life insurance proceeds are never taxed

B. $200,000

C. $120,000

D. $100,000

E. $80,000

8. If the participant dies at age 60 without a designated beneficiary, minimum distributions must be made

A. over the life expectancy for age 60 under the uniform lifetime table

B. over the life expectancy for age 60 under the single life table

C. over the life expectancy for age 61 under the single life table

D. under the five-year rule

9. Qualified plans and IRAs may be subject to both estate tax and income tax

A. True

B. False

10. Distributions are not required from Roth IRAs until after the death of the IRA owner.

A. True

B. False

11. When rolling over an existing IRA to a Roth IRA, all of the following are true, except

A. the amount rolled over is not included in the gross income of the IRA account holder for federal income tax purposes

B. there is no limit on the rollover, and it can be a total or partial rollover of an existing IRA

C. distributions from the Roth IRA are received tax free if they are made after a 5-year holding period and they are made after age 59 ½, death, disability, or for a first-time home purchase

D. no minimum distribution rules apply to the Roth IRA except at death

E. all of the above are true

12. Ann has a Roth IRA. She died this year. Her son Jim is the designated beneficiary. Jim is not required to start minimum distributions next year because Roth IRAs are not subject to the required minimum distribution rules after death.

A. true

B. false

13. Under the “prudent man” rule, a fiduciary must consider

A. diversification of plan portfolio

B. liquidity and current return of the portfolio relative to the anticipated cash flow requirements of the plan

C. the projected return of the portfolio relative to the plan’s funding objectives

D. all of the above

E. only A and B

14. Which of the following pension plans are exempt from ERISA reporting requirements?

(1) qualified stock bonus plans

(2) state and federal government plans

(3) unfunded excess benefit plans

(4) plans of churches or synagogues

A. (1) only

B. (1) and (2) only

C. (1) (2) and (3) only

D. (2) (3) and (4) only

15. Wheels, a small bike sales and repair shop, has ten employees, five full-time and five part-time. Walt Morgan, the owner, can’t afford to provide many employee benefits, but he does provide all employees three full-pay sick days a year. He funds the sick pay out of his general assets. He also provides his full-time employees with basic health insurance that has a high deductible to keep costs down. Walt pays an annual premium for this insurance out of his general assets. Under ERISA,

A. Walt must file an annual report to the IRS

B. Walt must provide employees with a Summary Plan Description

C. Walt must do either a or b

D. Walt must do both a and b

E. Walt qualifies for the small welfare plan exemption

16. Which of the following correctly describe taxation of an insured death benefit received by a beneficiary from a qualified plan?

(1) the pure insurance element is normally income tax free

(2) 100% of the benefit is distributed tax free

(3) non-death benefit distributions are taxed as qualified plan distributions

(4) Table 2001 costs paid by the participant may not be recovered tax free

A. (1) and (3) only

B. (1) (2) and (3) only

C. (2) (3) and (4) only

D. (1) (2) (3) and (4)

17. Harold Walters, age 39, runs a tax accounting service. He employs five people. He wants to install a defined benefit plan for himself and his employees funded with life insurance, but he wants to retain some control over the plan investments. As his financial advisor, you tell Harold that the type of funding that would best meet his requirements is a(n)

A. fully funded plan

B. envelope funding plan

C. plan funded with whole life insurance

D. plan funded with term insurance

E. combination plan

18. Advantages of using life insurance in a qualified plan include all of the following except

A. predictable plan costs for employer

B. life insurance is a very safe investment

C. retirement benefits can be guaranteed by insurance company and employer

D. low-cost installation and service of the plan

E. greater rates of return on insurance cash value than alternative investments

19. The penalty for early withdrawal from a qualified plan does not apply to distributions from the plan if the employee has separated from service after attaining age 55.

A. True

B. False

20. Jim Tandy, age 65, will retire next month from Algor Industries. Last month, Jim withdrew $40,000 from his qualified retirement savings plan at work. Before the withdrawal, Jim had an account balance of $500,000. While employed at Algor, Jim made $100,000 of after-tax contributions to his retirement plan. The taxable portion of his withdrawal is

A. $8,000

B. $20,000

C. $32,000

D. $40,000

E. not enough information to calculate

21. testamentary trust is drafted as part of the testator's will and only becomes effective upon the testator's death.

A. True

B. False

22. Without a will that specifically states who will care for minor children, the local child welfare agency will unilaterally make these decisions.

A. True

B. False

23. A will and associated documentation bundled together are called estate planning.

A. True

B. False

24. A life estate is:

A. a home that is willed to a beneficiary for the remainder of his or her natural life.

B. a legal term used to describe one's domicile at the time of death.

C. the right of a person, called the life tenant, to live on the property until the death of the life tenant.

D. also known as estate de la chaim in some southern regions of the United States.

25. Which of the following are characteristic(s) of living trusts, also known as inter vivos trusts?

A. They become effective during the testator's lifetime.

B. They are not part of a decedent's probate estate.

26. Property that is owned severally is owned by several individuals.

A. True

B. False

27. The term escheats refers to:

A. eminent domain.

B. the passing of property to the state when there is no surviving spouse or any ascertainable kin.

C. the passing of property to specific kin.

D. the nonpassage of property due to a will challenge.

28. If Sam's will leaves $5,000 to be paid from his money market account at Second Street Bank in Hometown, Homestate, to his son, Jack, the gift is an example of a:

A. Demonstrative bequest

B. Devise

C. General legacy

D. Residuary depository

29. Descendants are relatives who follow the decedent commonly and are called issue or offspring.

A. Adopted children are treated as issue of their adoptive parents but not as issue of their natural parents

B. Adopted children are treated as issue of both their adoptive and natural parents

C. Children born out of wedlock are not treated as issue

D. None of the above

30. Executing a codicil is one method of changing the terms of a will.

A. True

B. False