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
Defined Benefit Plans
Chapter 14: Defined Benefit Pension Plan
True/False
14.1
A defined benefit plan can help an older controlling employee in a small business maximize
tax-deferred savings.
14.2
The Internal Revenue Code sets a maximum limit on the projected annual benefit that a
defined benefit plan can provide.
14.3
An employee cannot be covered under both a defined benefit and a defined contribution
plan.
Answers:
14.1 true [p. 133]
14.2 true [p. 136]
14.3 false [p. 137]
Multiple Choice
14.4
Which plan has benefit levels that are guaranteed by both the employer and the Pension
Benefit Guaranty Corporation (PBGC)?
a.
b.
c.
d.
e.
money purchase plan
target benefit plan
cross tested plan
defined benefit plan
tax deferred annuity
Answer: D [p. 133]
14.5
An employer who wants to reward an employee’s years of service and contribution to the
company (measured as salary) would use a defined benefit plan formula based on:
a.
b.
c.
d.
e.
a flat amount
a flat percentage based on years of service
a flat percentage based on final average pay
a flat percentage based on career average pay
a unit credit formula
Answer: E [p. 134]
14.6
Disadvantages of defined benefit plans include
a. employee bears investment risk
b. higher installation and administrative costs as compared with a defined contribution
plan
c. older employees will receive a lower retirement benefit than younger employees
d. a and b
e. a and c
Answer: B [p. 133]
Application
14.7
Shannon McDougal will retire December 31 of this year. Shannon has worked for
Shamrock Construction for 30 years. During his last 5 years, he earned $40,000, $47,000,
$44,000, $46,000 and $48,000. Shamrock’s retirement plan uses a unit credit formula that
awards employees 1.5% for each year of service using a financial average of the last 3
years. Shannon’s annual benefit will be:
a.
b.
c.
d.
e.
$19,500
$20,250
$20,700
$21,150
$21,600
Answer: C [p. 134 – In his last three years, Shannon earned an average of ($44,000+ $46,000 +
$48,000)/3 = $46,000; $46,000 x (.015 x 30) = $20,700]
14.8
April Showers, age 30, opened the Unique Boutique 5 years ago. April has 5 employees
ranging in age from 25 to 42. Earnings have fluctuated. Profits have been made only in
the last two years. April:
a. should not have a defined benefit plan because it is designed for older business
owners
b. should have a defined benefit plan because it will maximize April’s tax deduction
c. should not have a defined benefit plan because there are a large number of years until
the owner or employees retire
d. should have a defined benefit plan because the owner can get $1,500 tax credit for
establishing a new retirement plan
e. should not establish a defined benefit plan because it is not likely April can meet the
annual funding requirements
Answer: E [p. 133]
14.9
Sherin Blake, owner of Blake Architectural Design, Inc., has hired an actuary to calculate
the funding requirement for the company’s defined benefit plan. To make an accurate
calculation, the actuary will have to consider:
a.
b.
c.
d.
e.
the estimated retirement age of all employees covered by the plan
the formula that Sherin chose to use to calculate employee retirement benefits
interest earnings on the fund
all of the above
only a and b
Answer: D [pp. 134-35]
14.10 Mandy Thomas, age 47, is the owner of The Golf Pro Shop. Mandy wants to retire at age
55. The company adopted a defined benefit plan 2 years ago, 3 years after the business
opened. Mandy wants to increase the amount that she contributes to her own retirement.
Mandy can
a. increase the amount without limit
b. increase the amount within limits set by the Internal Revenue Code
c. increase the amount, but must also contribute to all other company employee accounts
by the same proportion
d. increase the amount, but maximum benefit will be cut in half because the plan is less
than 10 years old
e. she cannot increase her contribution
Answer: B [p. 137]