TOOLS & TECHNIQUES OF EMPLOYEE BENEFIT AND RETIREMENT PLANNING
11th 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
ERISA and Tax Rules for Qualified Plans
Chapter 10: Installing a Qualified Retirement Plan
True/False
10.1
An employer can adopt a qualified retirement plan after the end of the plan year and
backdate documents to obtain favorable tax treatment for the year.
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:
10.1 false [p. 103]
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.
b.
c.
d.
e.
insurance company
bank
mutual fund provider
all of the above
only a and c
Answer: D [p. 105]
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
b. false
Answer: B [p. 103 – Quality Lawncare can begin taking a tax deduction for plan contributions in
the year that the plan was legally adopted]
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.
b.
c.
d.
e.
Baxter’s tax deduction for the year being audited could be lost
Baxter’s employees could be required to pay tax on their vested benefits
Baxter’s plan fund could lose its tax-exempt status
all of the above
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
e. a master plan because it would give Acorn choice in funding institution or medium while
keeping installation and implementation costs low
Answer: B [p. 105]