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 Contribution Plans
Chapter 17: Profit Sharing Plan
True/False
17.1
Employees who take out a loan from their profit sharing plan must pay 10% of the loan
amount as a penalty as well as reasonable interest on the funds borrowed.
17.2
In a profit-sharing plan, forfeitures may be reallocated or used to reduce future employer
contributions
17.3
If an employer has a profit, at least some contribution must be made that year to the profit
sharing plan.
Answers:
17.1 false [p. 156]
17.2 true [p. 153]
17.3 false [p. 153]
Multiple Choice
17.4
An advantage of a profit sharing plan from the employer’s point of view includes which of
the following?
a.
b.
c.
d.
e.
employer contributions to the plan are discretionary
plan can benefit long term employees
non-vested benefits can be reallocated to remaining employees
allows integration with Social Security
all of the above
Answer: E [p. 153]
17.5
A disadvantage of profit sharing plans is that
a.
b.
c.
d.
e.
employee bears the investment risk
actuarial costs make the plan expensive to administer
there is no predictable level of employer funding under the plan
a and b
a and c
Answer: E [p. 154]
17.6
Which of the following is (are) true regarding vesting in a profit sharing plan
a. cliff vesting can be used in profit sharing plans
b. plan forfeitures can be reallocated in proportions that favor owners and highly
compensated employees
c. vesting provisions favor long term employees
d. a and c
e. forfeitures are typically returned to the employer’s general assets.
Answer: D [pp. 155-56]
Application
17.7
Evergreen Semiconductors, Inc. is a young and innovative company with 25 employees
between 24 and 35 years of age. Turnover has averaged about 2% per year for the 9 year
old company. Profit has been intermittent. The owners believe that a substantial
investment will need to be made in new equipment next year. Which of the following
retirement savings plans is best for Evergreen?
a.
b.
c.
d.
e.
money purchase plan
target benefit plan
nonqualified deferred compensation plan
defined benefit plan
profit sharing plan
Answer: E [p. 153]
17.8
John Wald has participated in his company’s profit sharing plan for the past 15 years and
currently has an account balance of $250,000. Last month, his 12-year-old son had to
have an emergency appendectomy. Complications extended his hospital stay to a week.
Right before the accident, John used all of the family savings to purchase a new car. John
must pay a $2,000 deductible and an additional $5,000 for medical expenses not covered
under his medical plan. If John withdraws $7,000 from his profit sharing plan,
a. he is in big trouble since withdrawals from a profit sharing plan are not allowed by law
b. he must pay income tax and a 10% penalty on the amount withdrawn
c. he must pay income tax, but face only a 5% penalty for early withdrawal since it is a
hardship withdrawal
d. all withdrawals from a profit sharing plan are penalty free, but income tax must be paid
e. he would pay income tax, but no early withdrawal penalty to the extent the medical
expenses are tax deductible
Answer: E [p. 156]
17.9
Sandy Beech earns $40,000 as a guide for Tropical Tours, Inc. Tropical Tours typically
contributes 10% of profit to their profit sharing plan. Total payroll for Tropical Tours is
$120,000. This year, Topical Tours will contribute $21,000 to their profit sharing plan.
Sandy’s share this year will be:
a.
b.
c.
d.
e.
$3,000
$4,000
$7,000
$12,000
need more information to calculate
Answer: C [p. 155; $21,000 x ($40,000/$120,000)]
17.10 T. L. Timber, age 40, works for Treeline, Inc., a logging company. Treeline uses both
compensation and service as a basis for allocating Treeline’s $20,000 annual contribution
to Treeline’s profit sharing plan. How much would be allocated to T. L.’s account if he
received 40 units of credit for his 20 years of service and 160 units for $80,000 in
earnings? Total units for all employees are 1,000
a.
b.
c.
d.
e.
$ 100
$2,000
$4,000
$8,000
need more information to calculate
Answer: C [p. 155; Treeline’s allocation formula considers service as well. T. L. has 40+160 = 200
units; 200 units / 1000 units = 0.2; 0.2 x $20,000 = $4,000]