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
Other Employer Retirement Plans
Chapter 26: Nonqualified Deferred Compensation
True/False
26.1
IRS, ERISA and other governmental regulatory requirements do not apply to nonqualified
plans.
26.2 An employer can use a nonqualified plan as a form of “golden handcuffs” that bind an
executive to remain with a company and meet certain conditions.
26.3
Amounts deferred under nonqualified deferred compensation are never subject to social
security taxes or Medicare taxes.
Answers:
26.1 False [p. 220]
26.2 True [p. 220]
26.3 False [p. 220]
Multiple Choice
26.4
Under a nonqualified plan, a promise by an employer to pay an employee does not create
an economic benefit if the promise is
a.
b.
c.
d.
e.
unfunded
secured by a trust not in the employee’s name
currently taxed
only a or b
only b or c
Answer: A [pp. 226, 231]
26.5
All of the following approaches are commonly used to increase the security of benefits for
an employee under a nonqualified deferred compensation plan except:
a.
b.
c.
d.
e.
employer’s general assets
reserve account maintained by employer
third-party guarantees
corporate-owned life insurance
employer reserve account with employee investment direction
Answer: A [pp. 225-226]
26.6
Under a nonqualified deferred compensation plan, constructive receipt occurs in which of
the following:
a.
b.
c.
d.
funds are available to employee without restriction
employee does not actually receive payment
employee has right to draw on the funds
employee has right to receive future payments and can elect at any time to accelerate
the payments
e. employer sets aside
Answer: B [p. 226]
Application
26.7
Bob Everett is covered under a funded nonqualified deferred compensation plan that has
an irrevocable trust set up for his benefit. Bob must pay income tax as soon as he is
vested in contributions made to the fund, even though he does not have a right to withdraw
cash from the fund until he retires.
a. True
b. False
Answer: A [p. 225]
26.8
Bill U. Later has elected to defer earnings under an unfunded deferred compensation
agreement AFTER he performed services for his company. To defer taxation on the
deferred income
a. he must avoid constructive receipt of the income
b. plan provisions must clearly stipulate "substantial risk of forfeiture" conditions
c. he can also elect to receive the deferred income as 10 equal payments rather than a
lump sum
d. a and b
e. a and c
Answer: B [p. 226]
26.9
Makework Corp. has an unfunded nonqualified deferred compensation plan. Employees
covered under the plan can defer taxes on plan contributions if plan funds are
a.
b.
c.
d.
e.
available to company creditors
subject to substantial risk of forfeiture
placed in a designated trust
a and b
b and c
Answer: D [pp. 225-226]
26.10 Reed Collier works for Encyclopedia, Inc. He has an informally funded nonqualified
deferred compensation plan. Encyclopedia, Inc. can use life insurance to fund this plan.
a. True
b. False
Answer: A [p. 225]