Review Questions Module 2

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

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
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

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
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 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 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 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

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

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