Final Examination

1

Why are nonqualified plans increasingly popular?

A. Benefits paid from a deferred compensation plan are tax-free B. Qualified plans are subject to complex nondiscrimination rules C. Deferred compensation payments to a beneficiary are not subject to estate tax D. Earnings on assets held in a qualified plan are not sheltered from current income tax

2

Which of the following 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

3

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

4

Which of the following nonqualified plans is routinely referred to as golden handcuffs?

A. Split dollar plans B. Executive bonus plans C. Salary continuation plans D. Group carve out plans

5

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

6

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

7

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 gains tax C. Survivor benefits are income taxable up to the policy's cash value D. Survivor benefits are fully taxable as income

8

Which of the following organizations may establish a deferred compensation plan for an executive?

A. A regular corporation B. An S corporation C. A sole proprietorship D. Any of the above — regular corporations, S corporations, and sole proprietorships may all establish deferred compensation plans

9

All of the following would be reasons for an executive in a close 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

10

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. None of the trusts listed here

11

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

12

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

13

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

14

Joanne and her employer maintain a deferred compensation plan using a rabbi trust. What event triggers taxation for Joanne?

A. Purchase of insurance on Joanne's life by the employer B. Purchase of life insurance by Joanne on her own life C. Withdrawal of funds from the trust D. Contribution by the employer to the trust

15

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 C. SERP D. Top Hat plan

16

Who normally owns the life insurance policy in an executive bonus plan?

A. The insured B. The employer C. The beneficiary D. A trust

17

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

18

The board resolution authorizing an executive bonus plan should accomplish all of the following EXCEPT:

A. Identify the plan participants by name B. State that the bonus is additional compensation C. Recite the ERISA provision under which the plan will be approved D. Identify each participant as a member of a select group of corporate managers

19

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

20

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

21

What are the consequences if a group term life insurance plan is deemed discriminatory?

A. The employer is fined B. Its tax advantages may be lost C. The plan is disqualified D. The employees are subject to tax audit

22

In a group carve-out plan, group term life insurance amounts in excess of _______ are replaced by individual life insurance policies.

A. $50,000 B. $75,000 C. $100,000 D. $250,000

23

The employer's premium for group term life insurance is tax-deductible to the employer as:

A. Additional compensation B. Bonus compensation C. An employee benefit D. A dividend

24

The employer's premium for the individual life insurance policies issued in the group carve-out plan is tax-deductible to the employer as:

A. Compensation B. An employee benefit C. A dividend D. A charitable contribution

25

What happens to the $50,000 of group term life insurance in a group carve-out plan if the executive terminates service with the employer?

A. The coverage terminates B. The coverage is portable and stays with the executive C. The coverage reduces by 50% D. The coverage becomes fully paid-up for the executive

26

What normally occurs in a SERP if the executive terminates 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

27

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

28

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

29

Which of the following arrangements results in an executive being taxed when the employer contributes to his or her deferred compensation plan?

A. Qualified plan B. SERP C. Rabbi trust D. Secular trust

30

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

31

What is the government table on which excess group term insurance amounts are taxed?

A. P.S.58 rates B. Table 2001 rates C. Table I rates D. P.S.38 rates

32

John Wilson's employer pays $400 per year for his group term life insurance and $600 per year for his group carve-out policy. If John is in a 25% tax bracket, how much additional income tax will he pay as a result of these premium payments?

A. $100 B. $150 C. $250 D. Nothing

33

Which of the following would NOT be an employee benefit of participation in a group carve-out plan?

A. Post-retirement death benefits B. Portability C. Tax-deferral of employer premium payments D. Supplemental retirement income

34

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

35

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 receipt doctrine

36

If an executive surrenders his or her life insurance policy for cash, the amount of the proceeds that exceeds the cost basis will be taxed as:

A. Long-term capital gain B. Ordinary income C. Dividend income D. Modified endowment income

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