"Profit Share Employee"
TOOLS & TECHNIQUES OF EMPLOYEE BENEFIT AND RETIREMENT PLANNING 9th Edition College Course Materials Deanna L. Sharpe, Ph.D., CFP®, CRPC®, CRPS® Associate Professor CFP® Program Director Personal Financial Planning Department University of Missouri-Columbia Please Note: Correct answers for each question are indicated in bold type. After each question, the number of the page containing information relevant to answering the question is given. When a calculation is necessary or the reasoning behind a given answer may be unclear, a brief rationale for the correct answer is also given. Part A: Retirement Planning Defined Contribution Plans Chapter 18: Savings/Match Plan True/False 18.1 A savings plan is a qualified defined contribution plan that encourages employee after-tax contributions 18.2 Employer matching contributions to a savings plan are subject to the same vesting requirements as applied to top-heavy plans. 18.3 A savings plan is subject to ERISA reporting and disclosure rules. Answers: 18.1 true [p. 177] 18.2 true [p. 178] 18.3 true [p. 180] Multiple Choice 18.4 A savings/match plan works best in a company that has: a. relatively young employees b. employees willing to accept investment risk c. employees who vary widely in their need or desire to save for retirement d. all of the above e. only b and c Answer: D [p. 177] 18.5 Savings plans and profit sharing plans share which of the following features? a. generous provision for employee withdrawal of funds b. all contributions made on an after-tax basis c. participants can select investment vehicles from a broad range of options d. a and b e. a and c Answer: E [p. 178] 18.6 All of the following are true statements about savings plans except: a. life insurance can be used in a savings plan b. the employer can make a matching contribution to the savings plan c. employer matching contributions must follow a 2 to 6 year vesting schedule d. employees can select investment vehicles among a set of predetermined options e. employee contributions are not tax deductible Answer: C [p. 179] Application 18.7 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 Answer: D [p. 177] 18.8 Sam Blodgett, an employee at Cog Industries, has an employer-sponsored saving plan. Cog offers employees a choice of 12 different mutual funds, three are index funds, and among the rest are ones emphasizing international investments, small cap, large cap, and bonds. Cog gives employees a 3% match for contributions with a 3 year cliff vesting in those employer contributions. Two years ago, on a tip from his brother-in-law, Sam decided to place all of his investment in one “hot” small cap mutual fund. Unfortunately for Sam, about half of the companies in the fund went bankrupt or were close to it last year and the value of his shares plummeted. Sam wants to sue Cog for his losses. Sam a. has a case because Cog has a fiduciary responsibility to its employees b. has a case because Cog did not offer financial planning advice to Sam c. does not have a case because Cog matches employee contributions and thus shares investment risk d. does not have a case because Cog offered at least three different diversified investment alternatives e. does not have a case because federal law exempts employer from any investment choice made by an employee Answer: D [p. 179] 18.9 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 Answer: A [p. 179] 18.10 Last year, employee contributions and employer matching contributions amounted to 4% of compensation for all non-highly 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. make sure employee contributions meet the requirements for a SIMPLE 401(k) plan d. a and b e. a and c Answer: D [p. 179]