salary reductions

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

True

  1. A cash balance plan establishes a separate fund for each plan participant.

False

  1. Defined benefit plans provide more benefit security than do age-weighted or cross-tested plans.

True

  1. All group insurance programs offered to employees must comply with ERISA reporting and disclosure requirements.

False

  1. A cross-tested plan uses a fixed age-weighted formula. The plan is designed to maximize benefits for a firm’s highly compensated employees while providing whatever is necessary for remaining employees to satisfy nondiscrimination regulations.

False

  1. An employee cannot be covered under both a defined benefit and a defined contribution plan.

False

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

True

  1. Unlike a traditional IRA, a Roth IRA contribution is not restricted by active participation in an employer’s retirement plan.

True

  1. An early distribution penalty can be assessed on Roth IRA withdrawals.

True

  1. Account holders with more than one Roth IRA can treat them as separate accounts when calculating tax consequences of distributions from any of them.

False

  1. A trust cannot provide for creditor protectioninsurance

True

  1. Including a spendthrift clause is recommended for children with money management or substance abuse problems.

True

  1. All of the following are true regarding tax implicatons of cash balance plans, except

a. employer contributions to the plan are deductible when made

b. taxation of the employee on employer contributions is deferred

c. the plan is not subject to minimum funding rules of the Internal Revenue Code

d. certain employers who adopt a cash balance plan may be eligible for a business tax credit up to $500

e. employees may make voluntary contributions to a “deemed IRA” established under the plan

  1. 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d. account funds can be withdrawn without a premature distribution penalty if the employee becomes disabled or dies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

  1. Which of the following types of employer plans are exempt from most or all ERISA provisions?

a. plans of state, federal, or local governments or governmental organizations

b. plans of churches, synagogues, or related organizations

c. plans maintained solely to comply with workers’ compensation, unemployment compensation, or disability insurance laws

d. all of the above

e. none of the above because no employer plans are exempt from ERISA provisions

  1. Irrevocable Life Insurance Trusts (ILIT) are primarily designed to ensure that the death benefit is excludable from the insured’s federal gross estate.

a. true

b. false

  1. Are all of the items listed below reasons why having a will is important? (True or False) True

The state directs how the decedent’s property is transferred
A spouse’s share of the decedent’s estate may be equal to a child’s
Children may be treated equally although not equitably
May require the appointment of an administrator who will usually have to furnish a surety bond, thereby raising the costs of administration
The administrator of the estate is determined by the court

  1. Paul owns the following property:

Boat (fee simple)
Condominium on the beach (tenancy in common with his brother and sister)
House and two cars with his wife, Karen (tenancy by the entirety)
Checking account with his son, William (POD)
Karate business (JTWROS with his partner, Mike)
Which items will go through probate?

Karate business (JTWROS with his partner, Mike)
House and two cars with his wife, Karen (tenancy by the entirety)
Checking account with his son, William (POD)
Because it has beneficiary designation

Which property ownership could he sell without the consent of a co-owner?

Boat (fee simple)
Because the owner have full ownership of the property

  1. Two brothers have consulted you about the purchase of a lakefront cottage. The brothers plan to use the cottage on a seasonal basis. They are unsure of how they should title the property. Which of the following items of information do you need to obtain before making a recommendation?

The purchase price of the cottage
How much each brother plans to contribute toward the purchase of the cottage
Whether the brothers want their interest in the cottage to pass under their wills when they die
1 and 2
3 only
1, 2, and 3
2 and 3

  1. Are all of the items listed below reasons why having a will is important? (True or False) True

The state directs how the decedent’s property is transferred
A spouse’s share of the decedent’s estate may be equal to a child’s
Children may be treated equally although not equitably
May require the appointment of an administrator who will usually have to furnish a surety bond, thereby raising the costs of administration
The administrator of the estate is determined by the court

  1. Annual additions to an age-weighted plan include

a. employer contributions to participants’ accounts

b. employee contributions to own account

c. forfeitures from other accounts

d. only a and b

e. all of the above

  1. Which plan has benefit levels that are guaranteed by both the employer and the Pension Benefit Guaranty Corporation (PBGC)?

a. money purchase plan

b. target benefit plan

c. cross tested plan

d. defined benefit plan

e. tax-deferred annuity

  1. Advantages of defined benefit plans include all of the following, except

a. defined benefit plans are easy to design and easy to explain to employees

b. employees obtain a tax-deferred retirement savings medium

c. retirement benefits at adequate levels can be provided for all employees regardless of age

d. benefit levels are guaranteed both by the employer and, for some plans, by the PBGC

e. for an older highly compensated employee, a defined benefit plan will allow the maximum amount of tax-deferred retirement saving

  1. 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

  1. 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

  1. A tax-free rollover of a Roth IRA can be made to

a. another Roth IRA

b. a traditional IRA

c. a tax-deferred annuity

d. a and b

  1. a and c
  2. Ways that a Roth IRA differs from a traditional IRA include:

a. initial investment and earnings can be withdrawn tax-free

b. Roth IRA contributions can be made past age 59½

c. Roth IRAs are never subject to minimum distribution rules

d. a and b

e. a and c

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