REVIEW QUESTIONS


Why are nonqualified plans increasingly popular?

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



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


Why is universal life insurance generally preferred as the funding vehicle in executive bonus plans?

I.  It is flexible and adapts easily to variations in premium payments
II.  It provides easy access to policy cash values
III. It often produces greater cash values when compared to annuities and other types of permanent life insurance

A   I only
B  II only
C  I and II only
D I, II, and III


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



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


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  withdrawal of funds from the trust
C  purchase of life insurance by Joanne on her own life
D  contribution by BWG to the trust


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


All of the following statements about the defined benefit approach to determining executive bonuses are correct EXCEPT:

A   the employer selects an amount of income to be paid at retirement under the plan
B   it is more complex than the defined contribution approach
C  the cash value of the life insurance policy at retirement determines the amount of income the executive will receive
D  the employer must calculate the contribution amount level that will provide the promised retirement benefit



All of the following are advantages of executive bonus plans EXCEPT

A  the premiums paid are considered contributions to a nonqualified plan and are deductible by the employer
B  plan costs are reduced because the employer need not include all employees
C  there are generally no reporting or disclosure requirements that apply
D  plan administration is very simple



What happens to an executive's benefits under an executive bonus plan at retirement?

A   Benefits under the life insurance policy stop.
B  The employer must continue making bonused premium payments until age 65.
C  The executive may not continue paying premiums on the policy.
D  None of the above



Which of the following is a disadvantage to employers sponsoring executive bonus plans?

I.  Loss of control over the life insurance policy
II.  Inability to recover costs
III. No tax benefits for sole proprietors or S corporation owners

A  I only
B  I and II only
C  II and III only
D  I, II and III only



If Joe receives $15,000 in bonused premiums from his employer

A  he must pay income tax only on this amount
B  he must pay Social Security tax only on this amount
C he must pay both income tax and Social Security tax on this amount
D  there is no additional income tax liability


If an executive owns a life insurance policy and names her husband beneficiary, what are the tax consequences when she dies?

I. The proceeds will be included in her estate.
II. The proceeds will be excluded from her estate.
III. The beneficiary must pay income tax on the proceeds.

A    I only
B   II only
C   I and III only
D   II and III only

Jeff's basis in his life insurance policy purchased under an executive bonus plan is $500,000. At his retirement, the policy's cash value is $900,000. If Jeff withdraws $500,000, takes an additional $400,000 in policy loans and then allows the policy to lapse, what are the tax consequences?

A The $400,000 is considered taxable income, subject to capital gains tax rates.
B The $400,000 is considered taxable income, subject to ordinary income tax rates.
C Jeff will owe no income tax on either the $500,000 or the $400,000 loan.
D none of the above are true



If Susan withdraws money from a life insurance policy that is not a modified endowment contract, the withdrawal will be taxed according to

A  LIFO accounting
B FIFO accounting
C  capital gains treatment
D  constructive receipt doctrine



Jim's employer paid $10,000 in premiums for 20 years on a life insurance policy under an executive bonus plan. At Jim's retirement, his policy's cash value is $500,000. If Jim received no dividends but took a $20,000 loan, what is Jim's basis in the policy?

A  $180,000
B  $200,000
C  $220,000
D  $500,000



If Jim surrenders his life insurance policy for cash, the amount of the proceeds that exceeds his cost basis will be taxed as:

A  long-term capital gain
B  ordinary income
C  dividend income
D  modified endowment income



To be deductible by the employer, premiums paid under an executive bonus plan must meet which of the following requirements?

A  They must be ordinary and necessary expenses
B They must be paid or incurred by the employer
C They must be paid for services actually rendered
D  All of the above


A qualified plan is unsuitable for use as deferred compensation because

A  Contributions to qualified plans are nondeductible items for federal income tax purposes
B  Qualified plans may not discriminate in favor of highly compensated employees
C  Benefits under qualified plans are not subject to dollar limits
D  Investment earnings in a qualified plan are tax-deferred


Which of the following generally would NOT be a triggering event that would cause payments of deferred compensation amounts to commence?

A  Employee's terminating employment to work for a competitor
B  Employee's disability
C  Employee's death
D  Employee's retirement


Three important elements-a promise to pay benefits, the forfeitability of promised benefits and a method to pay those benefits-define which of the following?

A   401(k) plan
B   Any qualified plan
C  Secular trust
D  Deferred compensation plan


The term "informal funding" refers to

A  the practice of establishing a deferred compensation plan on a handshake rather than putting it into writing
B  any funding plan other than life insurance
C use of a corporate-owned non-allocated asset to meet the obligations of the deferred compensation plan
D setting aside specific assets to provide deferred compensation benefits



Which of the following arrangements result in an executive's being taxed when the employer contributes to his or her deferred compensation plan?

A  qualified plan
B  SERP
C  rabbi trust
D secular trust

Dan's employer made him the owner of a life insurance policy it purchased on his life. Dan is subject to tax under

A economic benefit doctrine  
B transfer for value rule
C like-kind exchange rule
D at-risk doctrine


What is the maximum amount of employee compensation that a public corporation may deduct?

A.     $500,000
B.     $1,000,000
C.     $2,000,000
D.     $2,500,000



What are the typical ownership and beneficiary arrangements for disability policies used to provide disability benefits in a deferred compensation plan?

A.     Employer owns policy, beneficiary is employee
B.     Employer owns policy and is the beneficiary
C.     Employee owns policy and is the beneficiary
D.     Employee owns policy, beneficiary is employer




Which of the following may not be a beneficiary of the life insurance policy in an executive bonus plan without loss of the employer’s tax deduction?

A.     A spouse
B.     A trust
C.     Minor children
D.     The employer



What is the IRS penalty for taking a withdrawal from a life insurance policy in an executive bonus plan before the insured’s age 59½?

A.     10%
B.     15%
C.     25%
D.     There is no IRS penalty associated with a withdrawal from a life insurance policy in an executive bonus plan




John Waller’s executive bonus plan policy received employer premiums of $100,000 over the years, and John added an additional $25,000 in premiums.  When he surrenders his policy for its $300,000 cash value, how much is taxable?

A.     $300,000
B.     $200,000
C.     $175,000
D.     Nothing



What is the government table on which excess group term insurance amounts are taxed?

A.     P.S.58 rates
B.     Table 2001 rates
C.     Table I rates
D.     P.S.38 rates




John Wilson is an executive in a company that has a group carve out plan.  John’s employer pays $400 per year for John’s group term life insurance and $600 per year for John’s group carve out policy.  If John is in a 25% tax bracket, how much additional income tax will he pay as a result of these premium payments?

A.     $100
B.     $150
C.     $250
D.     nothing




Which of the following would NOT be an employee benefit of participation in a group carve out plan?

A.     Post-retirement death benefits
B.     Portability
C.     Tax-deferral of employer premium payments
D.     Supplemental executive retirement plan



In which of the following nonqualified plans does an employer normally receive a tax deduction when making contributions?

A.     Traditional split dollar plan
B.     Salary continuation plan
C.     True deferred compensation plan
D.     Executive bonus plan



Which of the following is NOT a business need that could be met through a nonqualified plan?

A.     Obtaining compensation for the death of a key executive
B.     Attracting key talent
C.     Retaining key executives
D.     Rewarding high-impact achievers



Which of the following is NOT a type of nonqualified deferred compensation plan?

A.     excess benefit plan
B.     executive bonus plan
C.     top hat plan
D.     supplemental executive retirement plan



Under the terms of a ________, the executive participant may receive a percentage of final salary for 10 or more years beyond retirement in addition to any regular pension benefit.

A.     SERP
B.     executive bonus plan
C.     rabbi trust
D.     group carve out plan



What normally occurs in a SERP if the executive terminates his employment before retirement?

A.     The executive receives a lump-sum distribution
B.     The executive forfeits the salary continuation benefits
C.     The executive’s benefits are reduced by one-half
D.     Nothing, salary continuation plan benefits are always fully vested




What is the principal difference between top hat and SERP nonqualified deferred compensation plans?

A.     Deductibility of plan contributions
B.     Whose money is used to provide the benefits
C.     The executives that are covered by the plan
D.     Cost recovery


Which of the following is considered the simplest of nonqualified plans?

A.     Split dollar plans
B.     Deferred compensation plans
C.     Group carve out plans
D.     Executive bonus plans



Under which of the following nonqualified plans is a life insurance policy owned by the participating executive?

A.     Executive bonus plans
B.     True deferred compensation plans
C.     Salary continuation plans
D.     Endorsement split dollar plans



In a ___________ plan, an employer agrees to pay some or all of the premiums on a life insurance policy owned by an executive.

A.     defined benefit pension
B.     executive bonus
C.     salary continuation
D.     profit sharing



What type of life insurance plan is normally used to replace excess group term life insurance in a group carve out plan?

A.     Term insurance
B.     Whole life insurance
C.     Universal life insurance
D.     Endowment insurance




Which of the following benefits is NOT typically found in nonqualified plans?

A.     Employer tax-deductibility of plan contributions
B.     The ability to tailor a plan to fit the executive’s needs
C.     Employer cost recovery
D.     The ability to favor one key employee



Which of the following business needs may be met through a nonqualified plan?

A.     Humanely retiring all of a firm’s employees
B.     Attracting a key executive
C.     Arranging for business succession
D.     Funding an ESOP



 Which of the following nonqualified plans is routinely referred to a “golden handcuffs”?

A.     Excess Benefit Plans
B.     Executive bonus plans
C.     Salary continuation plans
D.     Group carve out plans



Which of the following is NOT a qualified plan requirement?

A.     Minimum coverage requirement
B.     Non-discrimination requirement
C.     Vesting requirement
D.     Cost recovery requirement


All of the following benefits are frequently included in a deferred compensation plan EXCEPT:

A.     retirement benefits
B.     medical reimbursement benefits
C.     disability benefits
D.     pre-retirement survivor benefits


Tom is covered by a group carve-out plan. Which of the following statements about coverage under his universal life insurance policy are CORRECT?

A  Tom may continue insurance coverage after retirement.
B  Tom may continue coverage if he quits jobs.
C  Tom can make voluntary contributions to the universal life insurance policy that will grow tax-deferred.
D   All of the above


What happens to an employer's costs when it installs a group carve-out plan?

A  Costs may increase.
B  Costs may decrease.
C  Both A and B
D  Neither A nor B

Which of the following are employer benefits under group carve-out plans?

I    No plan discrimination concerns
II   Current income tax deduction for premiums
III  Cost increase is offset by premium deductions

A   I only
B  I and II only
C  I and III only
D  II only

Under a group carve-out plan, which of the following is CORRECT?

A  The premiums paid for the group term life insurance are deductible by the employer as an employee benefit.
B  The premiums paid for the universal life insurance policy are deductible by the employer as compensation.
C  Both A and B
D  Neither A nor B


If Dan receives $150,000 of coverage under a group term life insurance plan, he must report the value of what amount as taxable income?

A  $50,000
B $100,000
C  $150,000
D  None must be reported.


Under a group carve-out plan, the Table I cost to the executive is

A  increased
B  reduced
C eliminated
D maintained at the same level


Who owns the universal life insurance policy under a group carve-out plan?

A  Executive
B Employer
C  Both A and B
D Neither A nor B


What is the normal tax treatment of survivor benefits received under a deferred compensation plan?

A.     Survivor benefits are always tax-free
B.     Survivor benefits are subject to capital gain taxation
C.     Survivor benefits are income taxable up to the policy’s cash value
D.     Survivor benefits are fully taxable as income




Which of the following organizations may establish a deferred compensation plan for an executive?

A.     A regular corporation
B.     An S corporation
C.     Partnership
D.     Any of the above




All of the following would be reasons for an executive in a closely held corporation to prefer a deferred compensation plan rather than an ownership stake EXCEPT:

A.     Lack of a ready market in which to sell shares
B.     Deferred compensation plans normally give participants vested interests
C.     Restrictions on the right to sell shares
D.     A desire on the part of the owners to limit ownership



Which of the following trusts exempts certain deferred compensation assets from being attached by an employer’s creditors?

A.     Rabbi trust
B.     Secular trust
C.     Grantor retained income trust
D.     Secular trust



Who normally owns the life insurance policy in an executive bonus plan?

A.     The insured
B.     The employer
C.     The beneficiary
D.     A trust



The executive bonus plan premium payment is _________ to the insured.

A.     taxable as ordinary income
B.     tax-free
C.     tax-deferred
D.     taxable as a dividend



The board resolution authorizing an executive bonus plan should accomplish all of the following EXCEPT:

A.     identify the plan participants by name
B.     state that the bonus is additional compensation
C.     recite the ERISA provision under which the plan will be approved
D.     identify each participant as a member of a select group of corporate managers


In what way does universal life insurance facilitate the operation of an executive bonus plan?

A.     Premium flexibility permits different bonus payments each year only
B.     Universal life cash value withdrawals permit easy access to cash value only
C.     Both premium flexibility and easy cash value access
D.     Neither premium flexibility nor easy cash value access



When may the executive access the policy’s cash value in an executive bonus plan?

A.     At retirement only
B.     At any time permitted by the board resolution
C.     At retirement or in the case of hardship only
D.     At any time



What are the consequences if a group term life insurance plan is deemed discriminatory?

A.     The employer is fined
B.     Its tax advantages may be lost
C.     The plan is disqualified
D.     The employees are subject to tax audit




In a group carve out plan group term life insurance amounts in excess of ________ are replaced by individual life insurance policies.

A.     $50,000
B.     $75,000
C.     $100,000
D.     $250,000


The employer’s premium for group term life insurance is tax-deductible to the employer as:

A.     additional compensation
B.     bonus compensation
C.     an employee benefit
D.     a dividend


The employer’s premium for the individual life insurance policies issued in the group carve out plan is tax-deductible to the employer as:

A.     compensation
B.     an employee benefit
C.     a dividend
D.     a charitable contribution


What happens to the $50,000 of group term life insurance in a group insurance plan with a group carve out if the executive terminates his service with the employer?

A.     The coverage terminates
B.     The coverage is portable and stays with the executive
C.     The coverage reduces by 50%
D.     The coverage becomes fully paid-up for the executive