FINC 355 RETIREMENT AND ESTATE PLANNING HOMEWORK 3

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DIRECTIONS: Here is the Homework #3 Assignment. Use the Homework #3 Answer Sheet for your responses to the questions. When you have completed Homework #3 submit the Answer Sheet to your Homework #3 Assignment Folder. Please submit your Homework #3 in MS Word format with the following file name: LastNameFirstInitial_Homework03AnswerSheet.docx. For example, if you name is John Smith, the file name of your Answer Sheet should be SmithJ_Homework03AnswerSheet.docx.

1-Sherin Blake, owner of Blake Architectural Design, Inc., has hired an actuary to calculate the funding  requirement  for  the  company’s  defined  benefit  plan.  To  make  an  accurate   calculation, the actuary will have to consider

a. the estimated retirement age of all employees covered by the plan b. the formula that Sherin chose to use to calculate employee retirement benefits c. interest earnings on the fund d. all of the above e. only a and b

2-Joan Garvey owns Garvey Management, a property management company. Last year, Garvey Management installed a qualified defined benefit plan. A small portion of the plan is invested in real estate. Joan hired Hank Thomas, an actuary, to evaluate the plan on an  annual  basis.  Hank’s  lease  in  his  old  office  space  ran  out,  and  Joan offered to let him occupy an office rent-free  in  one  of  the  buildings  that  is  in  the  qualified  plan’s  portfolio.   This arrangement would be an acceptable transaction under ERISA.

a. true b. false

3- A severance pay plan is not treated as a pension plan under ERISA if

a. payments do not depend directly or indirectly on retirement of employee b. total  plan  payments  are  less  than  twice  the  employee’s  annual  compensation  the  

year immediately before separation from service c. all payments to any employee are generally completed within two years of separation

from service d. all of the above e. only a and b

4- Under  the  “prudent  man”  rule,  a  fiduciary  must  consider

a. diversification of plan portfolio b. liquidity and current return of the portfolio relative to the anticipated cash flow

requirements of the plan c. the  projected  return  of  the  portfolio  relative  to  the  plan’s  funding  objectives

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d. all of the above e. only a and b

5- Adequate liquidity is one of several specific investment objectives in a qualified plan. Which of the following types of assets offers the most liquidity?

a. common stock traded on the stock market b. real estate c. equipment leasing d. long-term debt e. collectibles

6- Shannon McDougal will retire December 31 of this year. Shannon has worked for Shamrock

Construction for 30 years. During his last 5 years, he earned $40,000, $47,000, $44,000, $46,000,  and  $48,000.  Shamrock’s  retirement  plan  uses  a  unit  credit  formula  that   awards employees 1.5% for each year of service using a financial average of the last 3 years.  Shannon’s  annual  benefit  will  be:

a. $19,500 b. $20,250 c. $20,700 d. $21,150 e. $21,600

7-The IRS caught the plan trustee for Hopper Manufacturing violating the prohibited transaction rules. Hopper Manufacturing

a. must pay an initial penalty equal to 5% of the amount involved b. must pay a 100% penalty if the transaction is not corrected within time limits set by

the IRS c. may face penalties for breach of fiduciary responsibility d. all of the above e. only a and b

8-12.9 Walter Graves, owner of Graves Excavating wants to deposit employer stock in a qualified individual account plan. The stock is not publicly traded. Which of the following is (are) true for Walter?

a. ERISA limits such contributions to 10% of fair market value of the assets b. employer stock will provide the qualified plan with ample liquidity c. Walter could use a profit-sharing plan to accomplish his objective d. a and c e. b and c

9- The  “small  welfare  plan  exemption”  that  exempts  an  employer  from  filing an annual report applies to welfare plans

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a. with fewer than 100 participants b. that are fully insured c. that  are  paid  out  of  employer’s  general  assets d. all of the above e. only a and b

10- An  employer  who  wants  to  reward  an  employee’s  years  of  service and contribution to the company (measured as salary) would use a defined benefit plan formula based on a

a. flat amount b. flat percentage based on years of service c. flat percentage based on final average pay d. flat percentage based on career average pay e. unit credit formula

11- In a combination plan, retirement benefits are funded with a combination of

a. whole life policies b. term life policies c. assets  in  a  “side  fund” d. a and c e. b and c

Answer: D

12- Which of the following types of employer plans are exempt from most or all ERISA provisions?

a. plans of state, federal, or local governments or governmental organizations b. plans of churches, synagogues, or related organizations c. plans  maintained  solely  to  comply  with  workers’  compensation, unemployment

compensation, or disability insurance laws d. all of the above e. none of the above because no employer plans are exempt from ERISA provisions

13- The retirement plan for Bethel Shalom synagogue must adhere to ERISA reporting and

disclosure rules.

a. true b. false

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14- Sarah Tensley, owner of Riverwood Spas, a dealer for saunas and hot tubs, installed a qualified  retirement  plan  in  her  business  three  years  ago.  Sarah’s  strength  is  in  public   relations  and  sales.  She  says  “numbers  make  me  nervous,”  so  she  has  delegated  the   handling and investment of the retirement plan to a trustee.

a. Sarah has freed herself from any fiduciary responsibility, having transferred all of that responsibility to the plan trustee

b. Sarah should be sure that her liability insurance covers any liabilities that arise out of breach of fiduciary responsibility

c. Sarah can reimburse the plan trustee for any losses the trustee might incur as a result of performing fiduciary duties

d. a and b e. b and c

15- Harper Engineering, Inc., offers several benefits to employees. Which of its benefits would be exempt from the ERISA reporting and disclosure requirements?

a. Harper pays for life insurance to provide for employee dependents if the employee dies

b. Harper gives  each  employee  a  small  gift  worth  less  than  $5  on  St.  Patrick’s  Day c. Harper has a scholarship program that pays for employee tuition for industry-relevant

continuing education, based on the employee passing the course, out of the employer’s  general  assets

d. b and c e. a and c

16- The duties of fiduciaries include all of the following, except

a. act with the care, skill, prudence, and diligence under the prevailing circumstances that  a  “prudent  man”  would  act  in  a  like  capacity

b. select moderate- to high-risk investments that will maximize gains in the plan c. follow the provisions of the documents governing the plan, unless inconsistent with

ERISA provisions d. act for the exclusive purpose of providing benefits to participants and their

beneficiaries e. all of the above are duties of fiduciaries

17- Harvest Cannery, Inc., has a number of employee benefits. Which of the following types of compensation would be exempt from the reporting and disclosure requirements of ERISA?

a. paying ten cents more per hour for those employees working on the 7-11p.m. shift b. an onsite first aid center at Harvest c. an onsite dining facility at Harvest d. all of the above e. a and c

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18- Alternatives to using life insurance in a qualified plan inclue

a. group-term life insurance b. split dollar life insurance c. personally owned life insurance d. all of the above e. only a and b

19- Advantages of defined benefit plans include all of the following, except

a. defined benefit plans are easy to design and easy to explain to employees b. employees obtain a tax-deferred retirement savings medium c. retirement benefits at adequate levels can be provided for all employees regardless

of age d. benefit levels are guaranteed both by the employer and, for some plans, by the

PBGC e. for an older highly compensated employee, a defined benefit plan will allow the

maximum amount of tax-deferred retirement saving

20- Wheels, a small bike sales and repair shop, has ten employees, five full-time and five part- time. Walt Morgan,  the  owner,  can’t  afford  to  provide  many  employee  benefits,  but  he   does provide all employees three full-pay sick days a year. He funds the sick pay out of his general assets. He also provides his full-time employees with basic health insurance that has a high deductible to keep costs down. Walt pays an annual premium for this insurance out of his general assets. Under ERISA,

a. Walt must file an annual report to the IRS b. Walt must provide employees with a Summary Plan Description c. Walt must do either a or b d. Walt must do both a and b e. Walt qualifies for the small welfare plan exemption

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