FINC 355 RETIREMENT AND ESTATE PLANNING HOMEWORK 4

DIRECTIONS: Here is the Homework #4 Assignment. Use the Homework #4 Answer Sheet for your responses to the questions. When you have completed Homework #4 submit the Answer Sheet to your Homework #4 Assignment Folder. Please submit your Homework #4 in MS Word format with the following file name: LastNameFirstInitial_Homework04AnswerSheet.docx. For example, if you name is John Smith, the file name of your Answer Sheet should be SmithJ_Homework04AnswerSheet.docx. 1- Ocatagon Industries has an age-weighted profit sharing plan that uses a fixed age-weighted

formula for allocating employer contributions. The plan covers 50 employees. The owner and two key employees are highly compensated, each earning $500,000 per year. Average pay for the rank-and-file employees is $35,000 per year. This year, the company allocated $1,000 to each employee’s retirement account. The tax implications of such an allocation include which of the following?

a. because the plan is top-heavy, Ocatagon cannot receive a tax deduction until an employee withdraws funds from his or her retirement account

b. participant does not pay income tax on employer contributions and earnings until the plan participant withdraws the funds

c. plan distributions for hardship withdrawals made to employees before age 59 1/2 are tax free

e. a and c

2- Allen Industries has a money purchase benefit plan that is integrated with Social Security. The integration level is $30,000. Employer contributions are 15% above and 10% below the integration level. Bill Wheaton earns $75,000 this year. Allen Industries will contribute $_____ to Bill’s money purchase plan this year:

a. $9,750 b. $4,500 c. $6,750 d. $3,000 e. none of the above

3- A disadvantage of profit sharing plans is that

a. employee bears the investment risk b. actuarial costs make the plan expensive to administer c. there is no predictable level of employer funding under the plan d. a and b e. a and c

FINC 355 RETIREMENT AND ESTATE PLANNING HOMEWORK 4

4- All of the following are true regarding money purchase plans, except

a. most money purchase plan benefit formulas use a factor related to the employee’s service that favors owners and key employees

b. nondiscrimination regulations provide a safe harbor for money purchase plans c. a plan benefit formula can be integrated with Social Security d. forfeitures, unvested amounts left behind by employees in their plans, can be used to

reduce future employer contributions e. money purchase plan funds are generally invested in a pooled account managed by

the employer or a fund manager selected by the employer

5- If employer contributions to a profit sharing plan are based on a discretionary provision, all of the following are true, except

a. the employer can determine each year the amount to be contributed b. the employer can omit a contribution c. if too many years go by without an employer contribution, the IRS will likely claim that

the plan has been terminated d. when a qualified plan is terminated, all nonvested amounts in participants’ accounts

are forfeited. e. all of the above are true

6- Evergreen Semiconductors, Inc., is a young and innovative company with 25 employees between 24 and 35 years of age. Turnover has averaged about 2% per year for the 9- year old company. Profit has been intermittent. The owners believe that a substantial investment will need to be made in new equipment next year. Which of the following retirement savings plans is best for Evergreen?

a. money purchase plan b. target benefit plan c. nonqualified deferred compensation plan d. defined benefit plan e. profit sharing plan

7- John Wald has participated in his company’s profit sharing plan for the past 15 years and currently has an account balance of $250,000. Last month, his 12-year-old son had to have an emergency appendectomy. Complications extended his hospital stay to a week. Right before the accident, John used all of the family savings to purchase a new car. John must pay a $2,000 deductible and an additional $5,000 for medical expenses not covered under his medical plan. If John withdraws $7,000 from his profit sharing plan,

a. he is in big trouble because withdrawals from a profit sharing plan are not allowed by law

b. he must pay income tax and a 10% penalty on the amount withdrawn c. he must pay income tax but face only a 5% penalty for early withdrawal because it is

a hardship withdrawal

FINC 355 RETIREMENT AND ESTATE PLANNING HOMEWORK 4

d. all withdrawals from a profit sharing plan are penalty free, but income tax must be paid

e. he would pay income tax, but no early withdrawal penalty to the extent the medical expenses are tax-deductible

8- Which of the following is (are) true regarding an ESOP or stock bonus plan?

a. participant’s accounts are stated in terms of stock b. employer contributions to employee accounts can be in stock or cash c. stockholders must be given the right to vote on all issues d. a and b e. a and c

9- Sandy Beech earns $40,000 as a guide for Tropical Tours, Inc. Tropical Tours typically contributes 10% of profit to its profit sharing plan. Total payroll for Tropical Tours is $120,000. This year, Tropical Tours will contribute $21,000 to its profit sharing plan. Sandy’s share this year will be

a. $3,000 b. $4,000 c. $7,000 d. $12,000 e. need more information to calculate

10- Which of the following types of businesses can have an ESOP or stock bonus plan?

a. S corporation b. professional corporation c. incorporated business d. a and c e. b and c

11- An advantage of a profit sharing plan from the employer’s point of view includes which of the following?

a. employer contributions to the plan are discretionary b. plan can benefit long-term employees c. nonvested benefits can be reallocated to remaining employees d. allows integration with Social Security e. all of the above

12- Stock bonus plans and ESOPs share many characteristics, but ESOPs have some unique characteristics. Which of the following characteristics is (are) unique to an ESOP?

FINC 355 RETIREMENT AND ESTATE PLANNING HOMEWORK 4

a. accounts of employees over 55 must be offered diversification b. employer’s ability to borrow to leverage ownership c. tax-free treatment of appreciated company stock distributed to a retiree d. a and b e. b and c

13- The owner of Whitney Corporation, Inc., earned $250,000 in 2013. In the same year, three highly compensated employees earned $100,000 each. The remaining 30 line workers earn about $20,000 each, for a total payroll of $600,000 for this group of workers. Whitney Corporation made the maximum allowable contribution to each employee’s money purchase plan in 2013. In 2013, what was the total amount that Whitney Corporation contributed to their money purchase plan?

a. $51,000 b. $150,000 c. $225,000 d. $276,000 e. $318,000

14- An ESOP enables the employer company to borrow money on a favorable basis. All of the following are true about ESOP loans, except

a. the ESOP trustee borrows money from a lending institution, such as a bank b. the trustee uses the loan proceeds to purchase stock of the employer from the

employer corporation or from principal shareholders c. the employer makes tax-deductible contributions to the ESOP in amounts sufficient

to enable the trustee to pay off the principal and interest of the loan to the lender d. the leveraging feature of an ESOP loan distinguishes an ESOP from a regular stock

bonus plan e. all of the above are true

15- Which of the following is (are) true regarding the tax implications of having a money purchase plan?

a. employer contributions and plan earnings are tax-deferred for the employee b. employers beginning a new plan are eligible for a $2,500 business tax credit in the

first year to help with startup costs c. the employer tax deduction is limited to 25% of total payroll of the employees

covered under the plan d. only a and b e. only a and c

16- Harris Corporation has a savings plan for employees. Last year, Harris made non-elective contributions amounting to 4% of compensation to all employee accounts. By doing this, Harris has met the contribution requirements for a safe harbor test.

a. true b. false

FINC 355 RETIREMENT AND ESTATE PLANNING HOMEWORK 4

17- The stock of Vagabond Corporation is not publicly traded. Vagabond has an ESOP. A.

Wanderer, an employee

a. can expect that stock valuations will be made by an independent appraiser b. can demand that distributions from the ESOP be made in the form of employer stock c. can exercise a “put option” d. all of the above e. only a and b

18- Jane Tally has a thrift/savings plan with her employer. She knows

a. her contribution to the plan is voluntary and made with after-tax dollars b. 100% of her contribution to her account is vested immediately c. her employer’s contributions to her account must comply with Internal Revenue Code

requirements for qualified plans d. all of the above e. only a and b

19- Which of the following is (are) true regarding elective deferrals in a Section 401(k)?

a. elective deferrals are not subject to Social Security and Federal Unemployment payroll taxes

b. elective deferrals are always made on an after-tax basis c. if the company elects to have a safe harbor plan, elective deferrals must meet the

actual deferral percentage test d. account funds can be withdrawn without a premature distribution penalty if the

employee becomes disabled or dies e. since employees elect the amount of funds to defer, nondiscrimination tests do not

apply to elective deferrals

20- Last year, employee contributions and employer matching contributions amounted to 4% of compensation for all nonhighly compensated employees at Addison Corporation, a 400- employee company. Which of the following options allow Addison to preserve a nondiscriminatory plan during this plan year?

a. satisfying the requirements of a safe harbor 401(k) plan b. keeping the average ratio of nonhighly compensated employee contributions to

highly compensated employee contributions at or below 4% to 6% c. making sure employee contributions meet the requirements for a SIMPLE 401(k)

plan d. a and b e. a and c

Problem P1-4A

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Problem P2-5A