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.
Chapter 16: Money Purchase Pension Plan
True/False
16.1 A money purchase plan provides adequate retirement benefits for all older employees.
16.2 A money purchase plan must provide a joint and survivor annuity as the automatic form of benefit.
16.3 A self-employed person with less than 10 employees can use a money purchase plan to fund his or her own retirement.
Answers:
16.1 false [p. 147]
16.2 true [p. 150]
16.3 true [p. 151]
Multiple Choice
16.4 Advantages of a money purchase plan from the employer’s point of view include which of the following: a. ability to use employee salary reductions or before-tax bonuses to decrease employer contribution to the plan b. tax deduction when contributions made to employee account c. employees bear investment risk d. only a and b e. only b and c
Answer: E [pp. 149-50]

16.5 A service related factor can be added to the benefit formula for a money purchase plan.
Service related factors usually favor: a. owners and key employees b. newer employees c. older employees d. younger employees e. employees whose salaries are below a median salary
Answer: A [p. 149]
16.6 Which of the following is (are) true regarding the tax implications of having a money purchase plan? a. employer contributions and plan earnings are tax deferred for the employee b. employers beginning a new plan are eligible for a $2,500 business tax credit in the first year to help with start-up costs c. the employer tax deduction is limited to 25% of total payroll of the employees covered under the plan d. only a and b e. only a and c
Answer: E [pp. 150-51]
Application
16.7 Allen Industries has a money purchase benefit plan that is integrated with Social Security.
The integration level is $30,000. Employer contributions are 15% above and 10% below the integration level. Bill Wheaton earns $75,000 this year. Allen Industries will contribute
$_____ to Bill’s money purchase plan this year: a. $9750 b. $4500 c. $6750 d. $3000 e. none of the above
Answer: A [p. 150; $30,000 x .10 = $3,000; ($75,000 - $30,000) = $45,000 x .15 = $6,750; $3,000
+ $6,750 = $9,750]
16.8 Master Widget, Inc. is considering installing a money purchase plan. The company has
100 employees. Two are owners, two are key employees, and the rest are line workers.
Turnover is 10-14% per year among the line workers. The owners have asked you, their financial advisor, to tell them which of the following options would maximize contributions for owners and key employees while minimizing plan expenses. a. use a flat percentage benefit formula with gradual vesting b. use a flat percentage benefit formula with 3-year cliff vesting c. use a service-related benefit formula with gradual vesting

d. integrate plan with Social Security with gradual vesting e. integrate plan with Social Security with 3-year cliff vesting
Answer: E [p. 150; 3 year cliff vesting will minimize plan costs since forfeitures can be used to reduce future employer contributions; either a service-related benefit formula or integration with
Social Security would tend to maximize contributions for the owners as compared with the line workers]
16.9 The owner of Whitney Corporation, Inc. earned $250,000 in 2009. In the same year, three highly compensated employees earned $100,000 each. The remaining 30 line workers earn about $20,000 each, for a total payroll of $600,000 for this group of workers. Whitney
Corporation made the maximum allowable contribution to each employee’s money purchase plan in 2009. In 2009, what was the total amount that Whitney Corporation contributed to their money purchase plan? a. $49,000 b. $150,000 c. $225,000 d. $274,000 e. $318,000
Answer: D [p. 150 – calculated as $49,000 + .25(100,000) +.25(100,000) + .25(100,000) +
.25(600,000); the owner’s contribution is capped at $49,000 (in 2009) because 25% of $250,000 is greater than the $49,000 statutory limit; the maximum contribution for all other workers is 25% of their compensation, 25% of ($300,000 + $600,000)]
16.10 Bardwell Manufacturing, Inc. began 15 years ago. The two co-owners now earn $300,000 per year each. Four supervisors earn $40,000 each annually and have been with the company for 10 to 11 years. Fifteen line employees earn a total of $300,000 and have been with the company from 2 months to 5 years. All employees are over age 21. The coowners want to install a 15% money purchase plan and structure the plan in a way that maximizes their plan contributions. Which vesting schedule would be most appropriate for
Bardwell? a. 6 year graded vesting b. 3 to 7 year vesting c. 3 year cliff d. 2 to 6 year vesting e. 100% immediate vesting
Answer: C [p. 150 – Line employees have a shorter tenure with the company, implying greater turnover. Making employees wait until 3 years have passed to be vested means that plan forfeitures can be added to the accounts of those remaining with the company.]