finc 355 week 4

Quiz 4

NAME ____________________________ Due Date: June 29, 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 4. (I’ll deduct points if you don’t).

1. Which of the following is true about employer contributions to a money purchase plan?

A. contributions cannot exceed 30% of an employee’s compensation

B. in 2013, the maximum dollar amount of annual contributions to an employee’s account cannot exceed $90,000

C. plan contributions go into a pooled account rather than into individual employee accounts

D. plan benefits accumulate in individual employee accounts, which will be available at retirement or termination of employment

2. Which of the following may be considered a disadvantage for employees of money purchase pension plans?

A. employees bear investment risk under the plan

B. employers bear investment risk under the plan

C. plan distributions may be eligible for the 10-year special averaging computation

D. good investment results increase plan benefits

3. A self-employed person with less than 10 employees can use a money purchase plan to fund his or her own retirement.

A. True

B. False

4. The IRS generally allows money purchase plans to provide for “in-service distributions”—that is, benefits payable before termination of employment.

A. True

B. False

5. 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. $51,000

B. $150,000

C. $225,000

D. $276,000

E. $318,000

[calculated as $51,000 + .25(100,000) +.25(100,000) + .25(100,000) + .25(600,000); the owner’s contribution is capped at $51,000 (in 2013) because 25% of $250,000 is greater than the $51,000 statutory limit; the maximum contribution for all other workers is 25% of their compensation, 25% of ($300,000 + $600,000)]

6. Which one of the following provides the greatest amount of flexibility for employer profit sharing plan contributions?

A. a discretionary provision

B. a formula provision

C. a money purchase paired plan provision

D. a target benefit provision

7. After the minimum two-year holding requirement, what amounts may be withdrawn from a participant’s profit sharing plan account prior to retirement or termination?

A. 100% of account assets

B. no more than 25% of the account’s current value

C. an amount not to exceed the participant’s vested account balance

D. an amount not to exceed the entire account balance, as long as hardship requirements have been met

8. In a profit sharing plan, it is common to use “participant investment direction,” meaning accounts can be invested at the participant’s direction.

A. True

B. False

9. A disadvantage of profit sharing plans is that

A. employee bears the investment risk

B. actuarial costs make the plan expensive to administer

C. there is no predictable level of employer funding under the plan

D. A and B

E. A and c

10. 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. $3,000

B. $4,000

C. $7,000

D. $12,000

E. need more information to calculate

11. Which of the following are reasons why an employer might use an ESOP/stock bonus plan?

(1) to guarantee specific retirement income amounts for employees

(2) to provide a tax-advantaged means for employees to acquire company stock

(3) to allow the company to borrow money for business needs

(4) to broaden company ownership to help prevent a hostile takeover

A. (1) only

B. (1) and (2) only

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

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

12. 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 $5,000. Jackson pays taxes on

A. $500

B. $4,500

C. $5,000

D. no tax at time of distribution; all initial deposits and gains taxed when stock is sold

E. $500 at time of distribution; gains are taxed when the stock is sold

13. Which of the following types of contributions into a savings or thrift plan are allowable?

(1) after-tax employee

(2) matching employer

(3) pre-tax employee

(4) deductible employee

A. (1) only

B. (1) and (2) only

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

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

14. Savings plans and profit sharing plans share which of the following features?

A. generous provision for employee withdrawal of funds

B. all contributions made on a before-tax basis

C. participants can select investment vehicles from a broad range of options

D. A and B

E. A and C

15. 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

16. In addition to elective salary reduction contributions, which of the following may be used as an alternative for making contributions into a 401(k) plan?

A. employer after-tax matching contributions

B. employee pre-tax matching contributions

C. annual bonus received in cash or for contribution to the plan

D. SEP contributions

17. Employees can make in-service withdrawals from their 401(k) plans

A. True

B. False

18. Traditional 401(k) plans can be funded entirely through salary reductions by employees, enabling employers to bear no additional cost for employee compensation.

A. True

B. False

19. Elective deferrals in a 401(k) plan can be distributed upon occurrence of all of the following, except

A. retirement

B. disability

C. severance from employment with the employer

D. attainment of age 55 ½ by the participant

E. plan termination (if the employer has no other defined contribution plan other than an ESOP)

20. Which of the following is a primary objective of cross-tested plans?

A. to provide higher allocations for older plan entrants

B. to guarantee annual employer contributions to meet retirement income targets

C. to provide maximum benefits to new/young employees

D. to provide maximum benefits to highly compensated employees

21. A target plan is a pension plan that uses an age-weighted contribution formula.

A. True

B. False

22. Tom Smyth owns a business that sponsors a cross-tested defined benefit plan, but he wants to adopt a simpler alternative that would still allow a current tax deduction and be easier to explain, design, and administer. Tom’s best alternative, given his concerns, would be

A. another defined benefit plan

B. a money purchase plan

C. a nonqualified deferred compensation plan

D. an individual retirement savings plan

E. a target benefit plan