Review Questions Module 3
EXECUTIVE BONUS



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 reciept 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



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


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




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



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 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





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 include which of the following?

A.     identify the plan participants by name
B.     state that the bonus is additional compensation
C.     identify each participant as a member of a select group of corporate managers
D.     all of the above


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