Xenon Corp

Directors of Xenon Corporation are considering changing from a traditional defined benefit plan to another type of plan. They have asked you to explain the advantages and disadvantages of such a change. You explain that if Xenon Corp. converts to

a. a defined contribution plan, most or all plan assets would be credited immediately to vested employees

b. a cash balance plan, Xenon Corp. must increase the level of contribution to older employees

c. a cash balance plan, Xenon Corp. would no longer need actuarial services

d. only a and b

e. only a and c

  1. Maxton Manufacturing, Inc., uses prior year testing to monitor discrimination in its Section 401(k) plan. Last year, the actual deferral percentage (ADP) for all nonhighly compensated employees at Maxton was 4%. This year, the ADP for highly compensated employees at Maxton can be as high as

a. 2%

b. 4%

c. 5%

d. 6%

e. 8%

  1. The retirement plan for Bethel Shalom synagogue must adhere to ERISA reporting and disclosure rules.

a. true

b. false

  1. Harper Engineering, Inc., offers several benefits to employees. Which of its benefits would be exempt from the ERISA reporting and disclosure requirements?

a. Harper pays for life insurance to provide for employee dependents if the employee dies

b. Harper gives each employee a small gift worth less than $5 on St. Patrick’s Day

c. Harper has a scholarship program that pays for employee tuition for industry-relevant continuing education, based on the employee passing the course, out of the employer’s general assets

d. b and c

e. a and c

  1. Sentenal Corp., a restaurant supply company, is a closely held business. Tom Brady, founder and owner of the business is 59. Jeff Alcorn, age 53, is a key employee. The business employs 10 other rank-and-file employees earning an average of $30,000 per year. Both Tom and Jeff would like to contribute between $30,000 and $40,000 per year to a qualified retirement account. The advantages of using a profit sharing, age-weighted plan at Sentenal rather than a defined benefit plan include:

a. the age-weighted plan is simpler to install

b. the age-weighted plan is less expensive to administer

c. the age-weighted plan allows more flexibility in plan contributions

d. all of the above

e. only a and b

  1. The law firm of Willie, Cheatum, and Howe is structured as a professional corporation that has three key employees between ages 39 and 43, two law clerks in their late 20s, and two secretaries, both age 31. The three key employees earn $500,000 per year. The law clerks are paid $30,000 and the secretaries are paid $15,000 annually. Turnover for both the law clerks and secretaries has been rather high, with at least one law clerk and one secretary leaving about every 6 months for the past year. Characteristics of the firm that would make a cross-tested plan a less than optimal solution for the firm include

a. the plan would have to be reconsidered at each new hire

b. the plan would provide relatively few advantages given the age of the highly compensated group

c. having more than one highly compensated employee makes coverage tests related to the plan more difficult to apply

d. all of the above

e. none of the above

  1. Shannon McDougal will retire December 31 of this year. Shannon has worked for Shamrock Construction for 30 years. During his last 5 years, he earned $40,000, $47,000, $44,000, $46,000, and $48,000. Shamrock’s retirement plan uses a unit credit formula that awards employees 1.5% for each year of service using a financial average of the last 3 years. Shannon’s annual benefit will be:

a. $19,500

b. $20,250

c. $20,700

d. $21,150

e. $21,600

  1. April Showers, age 30, opened the Unique Boutique 5 years ago. April has five employees ranging in age from 25 to 42. Earnings have fluctuated. Profits have been made only in the last two years. April should

a. not have a defined benefit plan because it is designed for older business owners

b. have a defined benefit plan because it will maximize April’s tax deduction

c. not have a defined benefit plan because there are a large number of years until the owner or employees retire

d. have a defined benefit plan because the owner can get $1,500 tax credit for establishing a new retirement plan

e. not establish a defined benefit plan because it is not likely April can meet the annual funding requirements

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