These review questions cover all five modules of the Nonqualified Plans course. Each question links to the relevant section of the study material. Complete all questions before proceeding to the Final Examination.
Modules covered: Introduction to Nonqualified Plans • Deferred Compensation Plans • Executive Bonus Plans • Group Carve-Out Plans • Takeover Defenses
The correct answer to each question is shown in green. Click any question to review the relevant section of the study text.
Review Questions
Benefits paid from a deferred compensation plan are tax-free
Deferred compensation payments to a beneficiary are not subject to estate tax
✓Qualified plans are subject to complex nondiscrimination rules
Earnings on assets held in a qualified plan are not sheltered from current income tax
Contributions to qualified plans are nondeductible items for federal income tax purposes
✓Qualified plans may not discriminate in favor of highly compensated employees
Benefits under qualified plans are not subject to dollar limits
Investment earnings in a qualified plan are tax-deferred
✓Obtaining compensation for the death of a key executive
Attracting key talent
Retaining key executives
Rewarding high-impact achievers
✓Employer tax-deductibility of plan contributions
The ability to tailor a plan to fit the executive’s needs
Employer cost recovery
The ability to favor one key employee
Humanely retiring all of a firm’s employees
✓Attracting a key executive
Arranging for business succession
Funding an ESOP
Minimum coverage requirement
Non-discrimination requirement
Vesting requirement
✓Cost recovery requirement
Excess Benefit Plans
Executive bonus plans
✓Salary continuation plans
Group carve-out plans
Retirement benefits
✓Medical reimbursement benefits
Disability benefits
Pre-retirement survivor benefits
Benefits are based on the employee’s compensation both before and after adoption of the plan
✓The employer is named beneficiary if life insurance is used to fund the plan
The employee gains a nonforfeitable right to assets set aside to fund the plan after no more than five years of service
Benefits are paid after an employee’s termination of employment without further restriction
Purchase of insurance on Joanne’s life by the employer
✓Withdrawal of funds from the trust
Purchase of life insurance by Joanne on her own life
Contribution by the employer to the trust
Demand payment at any time
Borrow from his account
Demand payment after five years of service
✓None of the above
Executive Bonus plan
✓Excess Benefit plan
SERP
Top Hat plan
401(k) plan
Any qualified plan
Secular trust
✓Deferred compensation plan
The practice of establishing a deferred compensation plan on a handshake rather than putting it into writing
Any funding plan other than life insurance
✓Use of a corporate-owned non-allocated asset to meet the obligations of the deferred compensation plan
Setting aside specific assets to provide deferred compensation benefits
Qualified plan
SERP
Rabbi trust
✓Secular trust
✓Economic benefit doctrine
Transfer for value rule
Like-kind exchange rule
At-risk doctrine
$500,000
✓$1,000,000
$2,000,000
$2,500,000
Employer owns policy, beneficiary is employee
✓Employer owns policy and is the beneficiary
Employee owns policy and is the beneficiary
Employee owns policy, beneficiary is employer
Excess benefit plan
✓Executive bonus plan
Top hat plan
Supplemental executive retirement plan
✓SERP
Executive bonus plan
Rabbi trust
Group carve-out plan
The executive receives a lump-sum distribution
✓The executive forfeits the salary continuation benefits
The executive’s benefits are reduced by one-half
Nothing — salary continuation plan benefits are always fully vested
Deductibility of plan contributions
✓Whose money is used to provide the benefits
The executives that are covered by the plan
Cost recovery
Zero
Cash value minus basis
✓Fair market value of policy at time of transfer
Amount of deduction employer took prior to retirement
Survivor benefits are always tax-free
Survivor benefits are subject to capital gain taxation
Survivor benefits are income taxable up to the policy’s cash value
✓Survivor benefits are fully taxable as income
A regular corporation
An S corporation
Partnership
✓Any of the above
Lack of a ready market in which to sell shares
✓Deferred compensation plans normally give participants vested interests
Restrictions on the right to sell shares
A desire on the part of the owners to limit ownership
Rabbi trust
✓Secular trust
Grantor retained income trust
None of the above
The employer selects an amount of income to be paid at retirement under the plan
It is more complex than the defined contribution approach
✓The cash value of the life insurance policy at retirement determines the amount of income the executive will receive
The employer must calculate the contribution amount level that will provide the promised retirement benefit
✓The premiums paid are considered contributions to a nonqualified plan and are deductible by the employer
Plan costs are reduced because the employer need not include all employees
There are generally no reporting or disclosure requirements that apply
Plan administration is very simple
Benefits under the life insurance policy stop
The employer must continue making bonused premium payments until age 65
The executive may not continue paying premiums on the policy
✓None of the above
I only
I and II only
II and III only
✓I, II and III
He must pay income tax only on this amount
He must pay Social Security tax only on this amount
✓He must pay both income tax and Social Security tax on this amount
There is no additional income tax liability
✓I only
II only
I and III only
II and III only
The $400,000 is considered taxable income, subject to capital gains tax rates
✓The $400,000 is considered taxable income, subject to ordinary income tax rates
Jeff will owe no income tax on either the $500,000 or the $400,000 loan
None of the above are true
LIFO accounting
✓FIFO accounting
Capital gains treatment
Constructive receipt doctrine
✓$180,000
$200,000
$220,000
$500,000
Long-term capital gain
✓Ordinary income
Dividend income
Modified endowment income
They must be ordinary and necessary expenses
They must be paid or incurred by the employer
They must be paid for services actually rendered
✓All of the above
Traditional split dollar plan
Salary continuation plan
True deferred compensation plan
✓Executive bonus plan
Split dollar plans
Deferred compensation plans
Group carve-out plans
✓Executive bonus plans
✓Executive bonus plans
True deferred compensation plans
Salary continuation plans
Endorsement split dollar plans
Defined benefit pension
✓Executive bonus
Salary continuation
Profit sharing
I only
II only
I and II only
✓I, II, and III
✓The insured
The employer
The beneficiary
A trust
✓Taxable as ordinary income
Tax-free
Tax-deferred
Taxable as a dividend
Identify the plan participants by name
State that the bonus is additional compensation
✓Recite the ERISA provision under which the plan will be approved
Identify each participant as a member of a select group of corporate managers
Premium flexibility permits different bonus payments each year only
Universal life cash value withdrawals permit easy access to cash value only
✓Both premium flexibility and easy cash value access
Neither premium flexibility nor easy cash value access
At retirement only
At any time permitted by the board resolution
At retirement or in the case of hardship only
✓At any time
A spouse
A trust
Minor children
✓The employer
10%
15%
25%
✓There is no IRS penalty associated with a withdrawal from a life insurance policy in an executive bonus plan
$300,000
$200,000
✓$175,000
Nothing
P.S.58 rates
Table 2001 rates
✓Table I rates
P.S.38 rates
Post-retirement death benefits
Portability
✓Tax-deferral of employer premium payments
Supplemental executive retirement income
✓$50,000
$75,000
$100,000
$250,000
Additional compensation
Bonus compensation
✓An employee benefit
A dividend
✓Compensation
An employee benefit
A dividend
A charitable contribution
✓The coverage terminates
The coverage is portable and stays with the executive
The coverage reduces by 50%
The coverage becomes fully paid-up for the executive
Tom may continue insurance coverage after retirement
Tom may continue coverage if he leaves his job
Tom can make voluntary contributions to the universal life insurance policy that will grow tax-deferred
✓All of the above
Costs may increase
✓Costs may decrease
Both A and B
Neither A nor B
I only
✓I and II only
I and III only
II only
The premiums paid for the group term life insurance are deductible by the employer as an employee benefit
The premiums paid for the universal life insurance policy are deductible by the employer as compensation
✓Both A and B
Neither A nor B
$50,000
✓$100,000
$150,000
None must be reported
Increased
Reduced
✓Eliminated
Maintained at the same level
✓The executive
The employer
Both the executive and the employer
Neither the executive nor the employer
Term insurance
Whole life insurance
✓Universal life insurance
Endowment insurance
The employer is fined
✓Its tax advantages may be lost
The plan is disqualified
The employees are subject to tax audit
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