Final Examination Questions

Replace #1 with the question that follows correct answer B

1: What determines the value of a nonqualified plan?
Its enabling the employer to recover its costs
Its enabling the employer to meet its objectives in establishing the plan
Its ability to allow the employer to discriminate
Its ability to minimize employer benefit costs

Why are nonqualified plans increasingly popular?
A  Benefits paid from a deferred compensation plan are tax-free
B  Qualified plans are subject to complex nondiscrimination rules
C  Deferred compensation payments to a beneficiary are not subject to estate tax
D  Earnings on assets held in a qualified plan are not sheltered from current income tax


2: Which of the following is NOT typically found in nonqualified plans?
Employer tax-deductibility of plan contributions
The ability to tailor a plan to fit the executive's needs
Employer cost recovery
The ability to favor one key employee

3: Which of the following business needs may be met through a nonqualified plan?
Humanely retiring all of a firm's employees
Attracting a key executive
Arranging for business succession
Funding an ESOP

4: Which of the following nonqualified plans is routinely referred to as golden handcuffs?
Split dollar plans
Executive bonus plans
Salary contribution plans
Group carve out plans

5: Which of the following is NOT a qualified plan requirement?
Minimum coverage requirement
Non-discrimination requirement
Vesting requirement
Cost recovery requirement

6: All of the following benefits are frequently included in a deferred compensation plan EXCEPT:
retirement benefits
medical reimbursement benefits
disability benefits
pre-retirement benefits

7: What is the normal tax treatment of survivor benefits received under a deferred compensation plan?
Survivor benefits are always tax-free
Survivor benefits are subject to capitol gains tax
Survivor benefits are income taxable up to the policy's cash value
Survivor benefits are fully taxable as income

8: Which of the following organizations may establish a deferred compensation plan for an executive?
A regular corporation
An S corporation
A sole proprietorship
All of the above, Regular corporation, S corporations, and sole proprietorships may all establish deferred compensation plans for executives

9: All of the following would be reasons for an executive in a close corporation to prefer a deferred compensation plan rather than an ownership stake EXCEPT:
Lack of a ready market in which to sell shares
Deferred compensation plans normally give vested interest
Restrictions on the right to sell shares
A desire on the part of the owners to limit ownership

10: Which of the following trusts exempts certain deferred compensation assets from being attached by an employer's creditors?
Rabbi trust
Secular Trust
Grantor retained income trust
all of the above


replace 11-15 with questions at the bottom of this page  correct answer sequence: B C D C B
11: What portion of the annual premium in a traditional split dollar plan is paid by the employer?
The entire premium
The portion of the premium that is equal to the policy's cash value increase
One-half the annual premium
The portion of the premium that is equal to the reportable economic benefit

12: Who or what owns the life insurance policy in a traditional split dollar plan?
The insured
A trust
The employer
The beneficiary

13: What is the most frequent use of split dollar plans to meet business needs?
Funding a deferred compensation plan
To provide death benefits in qualified plans
To provide key person coverage
To fund buy-sell agreements

14: What is the principal determinant of the tax treatment given split dollar plans?
The type of split dollar plan
The size of the death benefit
The ownership of the policy
The age of the insured

15: If an employee owns the life insurance policy in the split dollar plan and is not required to repay the employer's premium payments, the premium payments are:
below market loans
additional compensation
a gift
a bequest

16: Who normally owns the life insurance policy in an executive bonus plan?
The insured
The employer
The beneficiary
A trust
17: The executive bonus plan premium payment is _______ to the insured.
taxable as ordinary income
tax-free
tax-deferred
taxable as a dividend

18: The board resolution authorizing an executive bonus plan should accomplish all of the following EXCEPT:
identify the plan participants by name
state that the bonus is additional compensation
recite the ERISA provision under which the plan will be approved
identify each participant as a member of a select group of corporate managers

19: In what way does universal life facilitate the operation of an executive bonus plan?
Premium flexibility permits different bonus payments each year only
Universal life cash value withdrawals permit easy access to cash value only
Both premium flexibility and easy cash value access
neither premium flexibility and easy cash value access

20: When may the executive access the policy's cash value in an executive bonus plan?
At retirement only
At any time permitted by the board resolution
At retirement or in the case of hardship only
At any time

21: What are the consequences if a group term life insurance plan is deemed discriminatory?
The employer is fined
its tax advantages may be lost
The plan is disqualified
The employees are subject to tax audit

22: In a group carve out plan, term life insurance amounts in excess of _____ are replaced by individual life insurance policies
$50,000
$75,000
$100,000
$250,000

23: The employer's premium for group term life insurance is tax-deductible to the employer as:
additional compensation
Bonus compensation
an employee benefit
a dividend

24: The employer's premium for the individual life insurance policies issued in the group carve out plan is tax-deductible to the employer as:
compensation
an employee benefit
a dividend
a charitable contribution

25: What happens to the $50,000 of group term life insurance in a a group insurance plan with a group carve out if the executive terminates his service with the employer?
The coverage terminates
The coverage is portable and stays with the executive
The coverage reduces by 50%
The coverage becomes fully paid-up for the executive


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Replace 11-15 with the following  (correct answer sequence: 11 B    12 C   13 D   14 C   15 B)


11. Which of the following is the case in a typical deferred compensation agreement?
A  Benefits are based on the employee's compensation from the employer both before and after adoption of the plan
B  The employer is named beneficiary if life insurance is used to fund the plan
C  The employee gains a nonforfeitable right to assets set aside to fund the plan after no more than five years of service
D  Benefits are paid after an employee's termination of employment without further restriction


12.  How much income must an employee report for federal tax purposes if an insurance policy is transferred to him or her at retirement?
A  zero
B  cash value minus basis
C  fair market value of policy at time of transfer
D  amount of deduction employer took prior to retirement


13  Ralph is covered by a deferred compensation agreement with his employer Picnic, Inc. Ralph can do which of the following?
A   Demand payment at any time
B   Borrow from his account
C   Demand payment after five years of service
D   None of the above



14  Joanne and her employer The Bridget-Widget Group (BWG) maintain a deferred compensation plan using a rabbi trust. What event triggers taxation for Joanne?
A  purchase of insurance on Joanne's life by BWG
B  purchase of life insurance by Joanne on her own life
C  withdrawal of funds from the trust
D  contribution by BWG to the trust



15.  Which of the following types of plans would be suitable for Kathy and Marcia who are "maxed out" under their employer's qualified retirement plan?
A  Executive Bonus plan
B  Excess Benefit plan
C SERP
D Top Hat plan