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: Employee Benefit Planning
Fringe Benefits
Chapter 57: Loans to Executives
True/False
57.1
A loan to an executive provides tax advantages to the employer who makes the loan
57.2
The only cost associated with provision of a loan to executives is the administrative cost.
57.3
An executive loan is considered a welfare benefit plan under ERISA
Answers:
57.1 False [p. 411]
57.2 False [p. 411]
57.3 False [p. 413]
Multiple Choice
57.4
Disadvantages of loans to executives include each of the following except:
a.
b.
c.
d.
e.
tax rules for below market loans are complex
unfavorable tax treatment of term loans
employer bears the cost of loan administration
loan provisions must comply with ERISA
employer bears the risk of default
Answer: D [p. 411]
57.5
For which of the following reasons do employers offer loans to executives?
a. purchase of a home
b.
c.
d.
e.
payment of college or private school tuition
cost of a divorce settlement
all of the above
only a and b
Answer: D [p. 411]
57.6
Which of the following is (are) characteristics of a “demand loan”?
a.
b.
c.
d.
e.
payable in full at any time at the request of the lender
interest arrangements are based on the future services of the employee
employee cannot transfer interest benefits
all of the above
only a and b
Answer: D [p. 412]
Application
57.7
Beason Manufacturing loans executive Tom Rice $35,000, interest-free, payable in 7
years. The present value of the loan is $25,000. Which of the following is (are) true?
a.
b.
c.
d.
the IRS views the transaction as Tom receiving an additional $10,000 compensation
the IRS views the transaction as Tom receiving an additional $35,000 compensation
this type of loan structure is a demand loan since payment is demanded in 7 years
since the applicable federal rate is used to determine the present value of the loan, the
loan is deemed to be made at fair market rates
e. Beason must have a bank guarantee to make this loan to Tom to safeguard
shareholder interests.
Answer: A [p. 414]
57.8
George Hooper, owner of Hooper Drilling and Excavating, is considering making a $50,000
loan to a top executive. George has asked you to explain the regulations that apply to
such a loan. You tell George all of the following except:
a. ERISA requirements must be met
b. Truth in Lending requirement may apply if George makes 24 more such loans in a
calendar year
c. as a closely held corporation, Hooper Drilling and Excavating is not subject to the same
limitations facing a publicly held corporation
d. the interest rate on the loan can be below market
e. Hooper Drilling and Excavating must bear the cost of loan administration and risk of
loan default
Answer: A [pp. 411, 413]
57.9
MasterMind, Inc., a publicly traded firm, is considering loaning a top executive $40,000 to
entice him to relocate and manage a new branch office. Owners of MasterMind, Inc. need
to be informed that such action violates the law.
a. true
b. false
Answer: A [p. 413]
57.10 Ben Movin, an executive at Golden Corporation, moved from a branch office in California
to corporate headquarters in North Dakota. Ben obtained a $15,000 bridge loan from the
company to cover expenses until the closing on his old house at the end of next month and
the closing on his new home two weeks after that. Which of the following requirements
must Ben meet relative to this loan?
a. his loan must be paid in full 15 days after sale of his former principle residence
b. the principle of the bridge loan must not exceed a reasonable estimate of Ben’s equity
in his former principle residence
c. Ben cannot use his former residence as a rental property
d. all of the above
e. only b and c
Answer: D [p. 413]