Chapter 1 Review

Nonqualified plans -- unlike qualified plans -- enable a business to tailor a plan to meet the specific needs of both the business and its executives.  Although premiums paid for life insurance policies used to fund nonqualified plans are not tax deductible, nonqualified plans may give a business an extraordinary opportunity: the opportunity to recover its costs for plan benefits.  

Although nonqualified plans are employed in many Fortune 500 companies, they often find their greatest application in smaller, closely-held corporations and other businesses in which the owners participate in the firm's day-to-day management.  Some of the important business objectives that are furthered by these nonqualified plans include attracting, retaining and rewarding key executives.  The major types of nonqualified plans are split dollar, deferred compensation, executive bonus and group carve out plans.  

In contrast to a simple life insurance sale, the installation of a nonqualified plan in a business is more complicated.  For that reason, there is considerable need for the agent to have positioned him- or herself as an expert in nonqualified plans.  The most effective method of gaining a reputation as a knowledgeable resource is through the market development techniques used in target marketing.

Chapter 1 Review Questions

What determines the value of a nonqualified plan?

A.     Its enabling the employer to recover its costs
B.     Its enabling the employer to meet its objectives in establishing the plan
C.     Its ability to allow the employer to discriminate
D.     Its ability to minimize employer benefit costs

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.     Split dollar 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