Tools & techniques of employee benefit and retirement planning 11th Edition College Course Materials

10.2 If a qualified plan is to be funded through an insurance contract, the insurer must accept the application for the contract before the end of the year, but the contract need not be formally adopted in final form at that time.

10.3 Obtaining a determination letter from the IRS cannot prevent the IRS from later stating that a qualified retirement plan is discriminatory in operation.

Answers:

10.2 true [p. 103]

10.3 true [p. 104]


Multiple Choice
10.4 To reduce costs of installing a qualified retirement plan, a small business owner could purchase a prototype plan from which of the following:

a. insurance company

b. bank

c. mutual fund provider

e. only a and c

10.5 To be eligible for a business tax credit for startup costs or employee education expenses incurred in connection with adoption of a retirement plan,

a. the employer must have 100 or fewer employees

b. employees to be covered in the plan must have earned more than $5,000 for the previous year

c. the plan must cover at least one nonhighly compensated employee.

d. all of the above

e. only a and b
Answer: D [p. 103]

10.6 Which of the following is (are) true regarding ‘retroactive amendments’?

a. the retroactive amendment procedure allows plan sponsors to retroactively eliminate certain disqualifying provisions

b. retroactive amendments can be made up to the employer’s tax filing date, excluding extensions

c. retroactive amendments can be made up to the employer’s tax filing date, including extensions

d. a and b

e. a and c
Answer: E [p. 105]

Application
10.7 Quality Lawncare’s tax year runs from January to December. In December of last year, Quality Lawncare legally adopted a qualified retirement plan. Quality Lawncare must wait until the following January before a tax deduction for contributions to the plan can be taken.

a. true

10.8 In a rush to get a qualified retirement plan installed before the deadline for the year, the owner of Baxter Concrete failed to get a determination letter from the IRS. Five years later, Baxter is audited. If the IRS finds a disqualifying provision or if an essential provision is missing from Baxter’s plan

a. Baxter’s tax deduction for the year being audited could be lost

b. Baxter’s employees could be required to pay tax on their vested benefits

c. Baxter’s plan fund could lose its tax-exempt status

d. all of the above

e. only a and b
Answer: D [p. 104]

10.9 Amalgamated Industries, Inc. wants to install a plan that will be effective in January of next year. Amalgamated Industries uses a calendar year for tax reporting. Which of the following must happen before December of next year?

a. corporate board must pass a resolution adopting the plan

b. either a trust agreement needs to be signed and established under state law or an application for a group pension contract must be made and accepted by an insurance company

c. the plan must be communicated to employees, orally or in writing

d. all of the above

e. only a and b
Answer: D [p. 103]

10.10 Acorn Booksellers is a small business interested in adopting a qualified retirement plan. The owner of Acorn wants to be able to choose from more than one financial institution when implementing the plan. Acorn’s owner also wants to determine such things as the vesting schedule, and the contribution or benefit formula. As a small business, Acorn wants to keep costs down. You recommend that Acorn use

a. a protoypte plan because it gives small employers a tax credit for implementation

b. a prototype plan because it would give Acorn choice in funding institution or medium while keeping installation and implementation costs low

c. a small business plan because it is specifically designed for small businesses

d. a master plan, because no determination letter is needed