umuc finc355 homework 3 latest 2017

Homework 3

DIRECTIONS: Here is the Homework #3 Assignment. Use the Homework #3 Answer Sheet for your responses to the questions. When you have completed Homework #3 submit the Answer Sheet to your Homework #3 Assignment Folder.

Please submit your Homework #3 in MS Word fromat with the following file name: LastNameFirstInitial_Homework03AnswerSheet.docx. For example, if you name is John Smith, the file name of your Answer Sheet should be SmithJ_Homework03AnswerSheet.docx.

Number

Question

1 The IRS caught the plan trustee for Hopper Manufacturing violating the prohibited transaction rules. Hopper Manufacturing:

a. must pay a initial penalty equal to 5% of the amount involved

b. must pay a 100% penalty if the transaction is not corrected within time limits set by the IRS

c. may face penalties for breech of fiduciary responsibility

d. all of the above

e. only a and b

2 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. the estimated retirement age of all employees covered by the plan

b. the formula that Sherin chose to use to calculate employee retirement benefits

c. interest earnings on the fund

d. all of the above

e. only a and b

3 ERISA requires report and disclosure of benefits to plan participants under the

a. Summary Plan Description

b. Summary Annual Report

c. Individual Accrued Benefit Statement

d. all of the above

e. only a and b

?

4 Adequate liquidity is one of several specific investment objectives in a qualified plan. Which of the following types of assets offers the most liquidity?

a. common stock traded on the stock market

b. real estate

c. equipment leasing

d. long term debt

e. collectibles

5 Harper Engineering, Inc. offers several benefits to employees. Which of its benefits would be exempt from the ERISA reporting and disclosure requirements?

a. Harper pays for life insurance to provide for employee dependents if the employee dies

b. Harper gives each employee a small gift worth less than $5 on St. Patrick’s Day

c. Harper has a scholarship program that pays for employee tuition for industry-relevant continuing education based on the employee passing the course, out of the employer’s general assets

d. b and c

e. a and c

6 Walter Graves, owner of Graves Excavating wants to deposit employer stock in a qualified individual account plan. The stock is not publicly traded. Which of the following is (are) true for Walter?

a. ERISA limits such contributions to 10% of fair market value of the assets

b. employer stock will provide the qualified plan with ample liquidity

c. Walter could use a profit-sharing plan to accomplish his objective

d. a and c

e. b and c

7 The retirement plan for Bethel Shalom synagogue must adhere to ERISA reporting and disclosure rules.

a. true

b. false

?

8 Wheels, a small bike sales and repair shop, has ten employees, 5 full time and 5 part time. Walt Morgan, the owner, can’t afford to provide many employee benefits, but he does provide all employees three full-pay sick days a year. He funds the sick pay out of his general assets. He also provides his full time employees with basic health insurance that has a high deductible to keep costs down. Walt pays an annual premium for this insurance out of his general assets. Under ERISA:

a. Walt must file an annual report to the IRS

b. Walt must provide employees with a Summary Plan Description

c. Walt must do either a or b

d. Walt must do both a and b

e. Walt qualifies for the small welfare plan exemption

9 Which of the following is (are) true regarding a cash balance plan?

a. employee bears investment risk

b. each participant has a hypothetical account that the employer credits at least annually

c. plan benefits older workers more than younger workers

d. a and c

e. b and c

10 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. a flat amount

b. a flat percentage based on years of service

c. a flat percentage based on final average pay

d. a flat percentage based on career average pay

e. a unit credit formula

11 In a combination plan, retirement benefits are funded with a combination of

a. whole life policies

b. term life policies

c. assets in a ‘side fund’

d. a and c

e. b and c

?

12 A cash balance plan and a traditional defined benefit plan share which of the following characteristics:

a. Pension Benefit Guaranty Corporation coverage

b. employer bears investment risk

c. able to use Social Security integration

d. all of the above

e. only a and b

13 Alternatives to using life insurance in a qualified plan include

a. group term life insurance

b. split dollar life insurance

c. personally owned life insurance

d. all of the above

e. only a and b

14 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. $19,500

b. $20,250

c. $20,700

d. $21,150

e. $21,600

15 Bane Industries, Inc. has 1,000 employees. The average age of the workforce at Bane is 45 and 80% of the workers earn a mid-range income. Ten percent of workers are highly compensated and 10% of workers are low wage workers. Advantages of using a cash balance plan at Bane Industries include:

a. employer can spread administrative cost over a large number of employees

b. younger workers have time to accumulate retirement savings

c. employee bears investment risk

d. only a and b

e. only a and c

?

16 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

17 Well Corporation has a life insurance policy on the life of the owner Ben Well as part of his defined benefit plan. Ben plans to retire in five years at the age of 65. At that time, he will receive $2,000 per month. The face value of his insurance policy is $210,000. The IRS will treat Ben’s life insurance plan as an incidental death benefit.

a. true

b. false

18 John Appleton, owner of Appleton Enterprises, Inc. is considering installing a retirement plan in his company. He wants a plan that allows the use of Social Security integration. Which of the following plans would permit this?

a. cash balance plan

b. typical defined contribution plan

c. typical defined cost plan

d. a and b only

e. a and c only

19 Hal Staton died earlier this year at age 70. Hal was covered by life insurance provided by his employer’s defined benefit plan. Hal’s son, Walt Santon is the beneficiary of his father’s death benefit. The death benefit was $100,000. When Hal died, the policy had a cash value of $10,000. Walt:

a. receives the entire death benefit tax free

b. must pay tax on the entire $100,000

c. must pay tax on any death benefits received above $50,000

d. receives $90,000 tax free

e. must pay tax on $90,000

20 Sarah Tensley, owner of Riverwood Spas, a dealer for saunas and hot tubs, installed a qualified retirement plan in her business three years ago. Sarah’s strength is in public relations and sales. She says “numbers make me nervous,” so she has delegated the handling and investment of the retirement plan to a trustee.

a. Sarah has freed herself from any fiduciary responsibility, having transferred all of that responsibility to the plan trustee

b. Sarah should be sure that her liability insurance covers any liabilities that arise out of breech of fiduciary responsibility

c. Sarah can reimburse the plan trustee for any losses the trustee might incur as a result of performing fiduciary duties.

d. a and b

e. b and c