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84 Cards in this Set
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Describe charasteristics of unfunded nonqualified plans. Explain each briefly. |
- written agreement between ER and EE - May discriminate among EEs. It can pick and choose who it wants in the plan. - Nonq plans are exempt from many ERISA requirments. Need not follow ERISA formulas regarding vesting. - ER cannot claim a deduction for its contribution until funds are actually distributed to EE. Less advantageous for employer. - If the co has set aside assets to informally fund future benefit payments, it must recognize any earnings on those assets as income in the current year. Disadvantage to the company, most cases would like to avoid any taxation on investment earnings. Earnings within LIP and interest from tax-exempt bonds are not subject to income tax. - EEs who recieve nonq deferred compensation do not enjoy the forward averaging advantages they enjoy under other plans. Instead, all distributions must be treated as ord income. Also, NQDC bens cannot be rolled into a tax deferred account, such as an IRA. |
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Describe an excess benefit plan and the general purpose for which it is used. |
An excess benefit plan is a nonq plan that aims to increase the retirement plans of certain employees. It's maintained by an ER for sole purpose of providing benefits for certain employees in excess of the limitations on contributions and benefits imposed by IRC section 415. An excess ben plan can only be used to make a participant whole for the loss of benefits caused by the IRC section 415 limits---not the loss of beneftis caused by the qualified plan compensation limit. Can be offered to any employee. |
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What are the income tax implications for the ER who contribs 100k this year to a general fund that is intended to informally fund deferred compensation benefits for employees? The fund is available to general creditors of the ER. None of the EEs are currently taxed on their benefits. What happens to any investment earnings of the fund during the current year? |
The company cannot deduct the 100k from current income. Contribs to nonq plans can only be deducted in the year in which EEs are in constructive receipt of the benefits (unlike qualified plans). The fact that funds are availibel to general creditors fo the company means that the employees are not in construtive reciept of the funds.
Chances are that the fund will receive investment earnings during the year. Unlike a qualified plan, in which investment earning are tax deferred, the aernign sof a nonq plan represent taxible income to the employer. (the tax may be avoided, however, if the funds are invested in a cash value life policye. Investment earnings in such a policy accumulate on a tax-deferred basis). |
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Henri's co has promised to pay him deferred compensation when he retires in 2015. it has not yet, however, put any funds aside for that promeed payment. Explain income tax consequenses for EE. |
Henri is able to defer taxation on the promised benefits until they are actually received. |
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Joanne retired this year and received a 25k distribution of deferred comp. Explain income tax consequenses for EE. |
Joane must rec the 25k as ord taxable income. No opportunity to use forward averaging, nor may she defer taxation by rollin gvoer the funds into an IRA or some other qualified plan. |
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Ralph's co made him a participant in its SERP this year. Under th eterms of the plan, he will lose all deferred comp benefits if he leaves the co prior to 65. The co deposidted funds into a gen acct to meet its future SERP obligations. The account is not protected from general creditors of the company. Explain income tax consequences for EE. |
2 aspects fo this situaiton guarantee that Ralph will not have to rec the money set aside by his co as taxible income. The first is his agreement that he will lose all his interst in his deferred comp if he leaves the co prior to retirement; in effect, he is at "substantial risk of forfieture". The seocnd is the fact hatt the gen acct is not protected from the claims of the co's general creditors. |
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Describe the supplemental employee retirement plan (SERP) and explain how it differs from the excess benefit plan. |
-Excess ben plans technically can cover any employeee; SERPs can only be provided for mgnt or highly compensated EEs. -SERPs and excess ben plans can be funded or unfunded, although SERPs are usually unfunded -SERPs generally base benefits on element so fcompensation not otherwise provided under the qual plan (such as using a ben formula w/ a higher multiple of employe earnings); in fact, a SERP can provide bens that greatly exceed those provided by the co's retiremnt plan calcs. Thus, the ER can use SERP benefits to recruit mid-career executives who otherwise would be entitled to only modest retirement plan benefits due to relatively few years of service. In contrast, an excess ben plan can be used only to make a participant whole for the loss of bens caused by the IRC Section 415 limits---not for the loss of benefits caused byt he qualified plan compensation limit. -SERPs can be structured to reward continued employment or to make early retirment more attractive -SERPs are generally unfunded and, therefore, are generally exempt from most ERISA requirements.
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Describe a top hat plan |
Unfunded nonqualifeid deferred compensation plan maintained by an er for the purpose of providing deferred comp bens for a select group of mgmt or highly compensated ees only. By definition, a top hat plan must be unfunded. Even though a top hat plan is always unfunded, it is nevertheless subject to the reporting, disclosure, and enforcement requriments of ERISA, although it is not sbjt to other ERISA provisions. The reporting and disclosure requirements can usually be satisfied by a single filing of a brief statement with the department of labor (DOL) or by providing plan documents to the DOL if requested. |
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About notq deferred comp: According to the DOL, when is a deferred comp plan considered to be formally funded? |
nonq deferred comp plan is considered to be funded (and sbjt to the requirements of ERISA) if an amount is irrevocably placed by the er with a third party for hte benefit of a participant, and neither the er nor any o fits creditors has any current or contingent interest in that amount. |
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What is the advantage to an employee of a plan being funded? About nonq deferred comp. |
Some execs like a funded plan because it assures future payments. The ers promise to pay benefits is, in effect, secured by the funds. |
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About nonq deferred comp: What are the tax consequences of the plan being funded? |
When a plan is funded, the ee loses the benefit of tax deferral and is considered to be in constructive receipt of the fund---and so must recognize the funds as current income. However, steps can be taken to defer taxes on funded nonqualified plan benefits. |
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Describe the following requiremnets imposed by IRC section 409A on unfunded nonq plans:
a. deferral election rules
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As a general rule, an unfunded NQDC plan must provide that a comp for services to be performed in the next (or a subsequent) taxable year may be deferred at the participant's election only if the election to defer is made no later than the close of the preceding tax year (ie no later than 12/31 of the preceeding year). A new plan participant (whether a new plan or newly eligible) has 30 days to make a deferral election under th eplan.
Where comp is performance based (that is, under an incentive plan), the deferral election must be made no later than six months prior to the end of the 12-month performance period. Also, the incentive plan must be communicated within 90 days of the beginning of the performance period and the plan must have a 12 month performance period and use quantitative measures to assess performance. |
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Describe the following requiremnets imposed by IRC section 409A on unfunded nonq plans:
Time and form of pmts |
As a general rule, the time at which distributions are to be made and the form of payments must be specified is when the initial deferral election is made. Also, a plan may specify the time and form fo payments that are to be made as the result of a distribution event. For example, a participant may elect to receive 25% of his or her acount balance at age 50 and the remaining 75% at age 60. Also, a plan may allow particiapnts to elect different forms of payment for different permissibel distribution events. For exemple, a participant may elect to receive a lump-sum distribution if he or she becomes diabled and an annuity at age 65. If a plan permits a subsequent election to delay a payment or to change the form of a deferred compensation payment, the plan must meet the following conditions:
-The election may not be effective until at least 12 months have elapsed from the date the election was made. -payments subject to the election must be deferred for at least an addtnl five years from the og date the pmt was scheduled -The elction may not be made within 12 months of the origionally scheduled pmt |
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Describe the following requiremnets imposed by IRC section 409A on unfunded nonq plans:
Circumstances under which distributions may be made (permissible distribution events) |
Dists from an unfunded NQDC plan may only be made for followign reasons:
-separation from service -death -disability -at the age, date, or fixed schedule specified prior to the first deferral -at the change of control or effective ownership of the co -in the event of an unforeseeable emergency -at plan termination |
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Describe the following requiremnets imposed by IRC section 409A on unfunded nonq plans:
Prohibition on acceleration of distributions |
A dist must be made on acct of a permissible event described in the question preceding; otherwise, an acceleration of distributions is not allowed. As a general rule, changes in the form of a distribution that accelerates payments after they have already commenced violates the rule prohibiting accelration of distributions. Key ees of public corps may not receive benefits until six months have elapsed since separation from service. |
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What is a death benefit only plan, and what is uniquely different about it when compared to other nonqualified forms of deferd comp? |
Unlike other NQDC plans, death ben only (DBO) plans provide no lifetime payment to the Ee. The only benefit is the payment o fa death benefit toa designated beneficiary, and the only if th eemployee dies while in active service to the company. |
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Expalin what is meant by a "forfeiture provision" in a nonqualified plan |
A forfeiture provision is a requirement found in a nonqualified deferred compensation plan which states, in effect, that an ee's right to deferred compensation payments is contingent upon satisfaction of some stipulated condition, such as future service. |
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XYZ corp has handful of highly paid execs. Under the forumula of the co' squalifed retiremtn plan each should receive retiremtn bens equal to 60% of their final annual salary. Unfortunately, the ERISA cap onteh abolute amount that can be paid to an individual will reduce the retirment benefits of these executives to an amoun tthat ranges from 25% to 40% of their final salires. What can the co do to improve the retiremtn income of these execs? |
The situation can be partially remedied by an excess benefit plan, the intention of which is to overcome the limitations imposed by the ERISA cap on individual benefits.
However, an excess ben plan can be used only to make a particpiant whole for the loss of benefits caused by the IRC section 415 limits---not the loss of bens caused by the qualified plan comp limit. Therefore, a top hat plan, not an excess benefit plan, isusually the best choice for employees who earn considerably more than the qualifed plan comp limit. |
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A merger w/ another corp has forced a large co to thin its managerial ranks in several departments. Early retiremnt, offered on a targeted basis, is one of the devices the company plans to use to reduce its head count. How could nonqualified deferred comp be used for this purpose? |
Because nonq plans are exempt from most of the requrements of ERISA, they are highly flexible and may be designed to meet any number of business and employee objectives. They can include some EEs and not others. Theyc an include higher leveles of comp or other conditions to which the employer and employee agree.
To encourage early retiremtn by mgmt or highly compensated ees, for example, the co can emply a SERP. It could be structured to privide regualr income- or a lump sum - to fill the income gap between the date of early retiremnt and the date at which the EE woudl be entitled to receive ss benefits and retiremtn income from the co's qualified retirment plan. |
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Describe the doctrine of constructive receipt and explain how it can be avoided in a nonq plan |
Requirese funds to be taxed to an ee if they are made available or payable to the ee. this doctrine applies evn though the funds are not actually received by or paid to the employee. Construtive receipt can be avoided by including a forfeiture provision in the plan document. The plan documents should also state that the assets are subject to the employer's general creditors. |
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Describe the caracteristics of an "unfunded" deferred comp plan. Explain pros and cons. |
An unfunded deferred comp plan is an agreement in which er promises to pay future benefits to one or more ees from the ers general assets. That promise is not secured or guaranteed in any way.
pros for ee: tax deferral of the beneftis, which aren't recd as current income until they are actually received.
cons for ee: employer may fail to make good (bankrupcy) |
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Describe the concept of the "informally funded" plan and explain how it differs from funded and unfunded plans. |
An informally funded nonq deferred comp plan is a type of unfunded plan. It consists of er-owned assets (ie a reserve of cash, li, securities, etc.) that ay be used to pay plan benefit sin the future. In this sense, it is like a funded plan. However, the assets are subject ot the claims of the ERs creditors, which is typical of unfunded plans.
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What are pros and cons of th einformally funded plan for the ee? |
pros: not requried to rec the ers contrib to the reserve for tax purposes because the ee has no ability to claim the funds. As a result, the deferred compensation is only taxible when it is recieved.
cons: future bens are only secured by the company's promise |
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What are some important uses of LI in deferred comp plans? |
1 to fund future obligations for pmt 2 make addnl LI coverage availibel to a co's execs |
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Describe the use of co-owned LI in funding future deferred comp obligations, and explain the unique tax advantage of this form of funding. |
Co's can finance their deferred compensation obligations by purchasing cash value insurance policies on the lives of participating ees. The company is both owner and eneneficiary of these policies and makes all premium pnts. Every pmt increases the cash value of the policy; the co can then borrow from the policy's cash value to make prem pmts or to pay deferred comp bens.
in the even to fan ees death, the ben goes to the co.
If the policy is properly structure, cash value life insuranc ehas two benefical tax features for hte co: the earning so f acash value policy grow tax deferred and interest on loans taken by th eco from the policy i stax deductible w/in certain limits |
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Describe the genral characterists of split-dollar LI |
Arrangement between ee and a co whereby the premium pmts and the proceeds of the policy are shared. For instance, if the ee dies while the policy is in force, the death benefit goes to the ees beneficiary, but only after the co has recouped the amt it has spent on premiums. Because of recent legislation and the issuance of restrictive IRS guidleins, most split dollar arrangemnts created under pior law are no longer useful for tax and financial planning purposes |
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From the ees perspective, ID the broader issues involved in securing an ers promise to pay deferred comp |
Biggest issue is fialure to make good on primis. If they want to guarnatee the pmose, the ee must rec any contribs as current income. |
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Describe the 'rabbi trust' and expalin its pros and cons in securing the ees interest in deferd comp |
form of irrevocable grantor trust established by the er. it cna be used to protect the ees interst in future pmts or deffered comp. Contribs are made to the te trust by the ER. Contribs and subsequent earnings (if any) may be used only to pay out deferred compensation. Earnings are taxable to the ggrantor (er). however, should the er become bankrupt or insolvent, assets int eh trust may be used to satasfy the ers obligations to creditors.
- rabbi trust effectivly locks up the assets and reserves them fo rthe benefit of the ee---even as it preserves the tax-deferral benefits that most employees want. A merger or sale of the business will not threaten the ee's deferred compensation. However, bankrupcy or insolvency will unlock the trust, putting ht eees interesbehind those of the company's creditors. |
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Describe secular trust and compare it to rabbi trust |
Secular is fully funded, and places assets off limits to everyone but hte ee for whos benefit is established. Unilike rabbi trust, secular trust reserves assets exclusively for the bneenfit of the named ees. the co could go down in flames or be sold and trhe ee would still be paid their deferred comp. The downdie i sthe athe contribs are currently taxible to ee. If ee is indifferent to the benefit of tax deferral, the greater security provided by the secular trust may be the best way o fsecuring hte er's promis to pay. |
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what is the purpose of a 3rd party guarantee? |
3pg's (bank letters of credit, surety bonds, and indemnity insurane) are supposed to pay an ees promiesed deferred comp benes in the event a co fails to make good on its promise to do so |
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What is the general rule when deferred comp is placed into an escor wacct for the nenefit of the ee, and how can tax deferral fo rthe ee be acheieved? |
The general rule covering adeferred comp placed in escrow is that it will immediately be taxible to the ee if the ees right sto the amount set aside are nonforfeitable. A valid structuring of hte escrow agreement, therefor, places the executives deferred comp in a trusted escrow or fund acct in which the ee is not immediately vested. In this case the excutive reghts to the specified amts ar limited to those of an unsecure dgeneral creditr of the er, not those of a bonafide beneficary. |
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How can executive avoide consgtrucive reciept under fully funded plan when the interest is nontransferable? |
If a funded plan provides substancial risk of forfeiture profision and ithe interst is nontransferable, an exec under such a plan can avoid construtive receipt of th edeferred funds. A substantial risk of frofeiture exists when the ees retention of his or her interest in the trust is predicated on performance, or frefaring from performance, of substaintial servicees for the ER. A requirement that the employee provide consulting services during retirement would establish substantial risk of forfeiture; loss of benefits at death or disability does not constitute a substantial risk of forfeiture. These plans are governed by Section 83 of the IRC and are frequently funded with ER stock |
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When would an employee-grantor secular trust be appropreate? |
If the employee wants more security, especially against an employers insolvency, and does not midn current taxation conseuences, the employee should consider an ee-grantor secular trust. The secular trust is a funded plan that uses an irrevocable trust like the rabbi trust. However, assets in the trust are not availible to the company's general creditors. The EE is thus in constructive receipt of hte deferred funds if there is no substantial risk of forfeiture. The main advantages to the ee are the distribution at a later time is guaranteed and the ee is typically provided w the funds to pay the resulting tax liabilyt. For th eer, the advantage is current tax deduction if there is no substantial risk of forfeiture. Esp for small, closely held corporation, this provides a tax benefit if th ecorporate rate is higher than the ee/shareholder individual rate. An ee-grantor secular trust can avoid paying income tax by investing in LI, an annuity, or tax-exempt bonds. |
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2. From an employee’s standpoint, one disadvantage of a nonqualified deferred compensation plan is the lack of portability. tf |
False An employee’s benefit in a nonqualified deferred compensation plan cannot be rolled over to an IRA or a qualified plan. |
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2. In a pure deferred compensation arrangement, the employer makes a commitment to provide a specific deferred benefit, but the employee does not forgo current compensation to “fund” that benefit. tf |
False In a pure deferred compensation arrangement, the employee agrees to give up a specified portion of current compensation (salary, raises, or bonuses); in turn, the employer promises to pay a benefit in the future. |
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3. SERPs are similar to excess benefit plans, but can be provided only for management or highly compensated employees. tf |
True SERPs are similar to excess benefit plans, and can be funded or unfunded. However, SERPs can be provided only for management or highly compensated employees. |
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4. Because a top hat plan is always unfunded, it is not subject to the reporting, disclosure, and enforcement requirements of ERISA. tf |
False Even though a top hat plan is always unfunded, it is nevertheless subject to the reporting, disclosure, and enforcement requirements of ERISA (although it is not subject to other ERISA provisions). |
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5. After the year begins, an election made for salary deferrals to a nonqualified plan for that year can only be amended for salary earned after the date of the amendment. tf |
False One big disadvantage of the deferral rules is that, after a year begins, an election made for that year cannot be modified or revoked; it becomes irrevocable. Of course, an election to modify (or revoke) the amount of deferrals for the following year (or subsequent years) may be made on or before December 31 of the prior year. |
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6. The Pension Protection Act of 2006 (PPA) made it easier for an employer to fund nonqualified plans when the employer is unable to adequately fund qualified plans.tf |
False The PPA amended Section 409A to prohibit employers from making contributions to a rabbi trust or other funding vehicle for deferred compensation plans if the employer’s defined benefit plan is “at risk.” |
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7. Similar to the tax treatment of life insurance proceeds in general, the death benefit payments from a DBO plan are exempt from ordinary income taxation. tf |
False In contrast to the tax treatment of life insurance proceeds in general, the death benefit payments from a DBO plan are subject to ordinary income taxation. |
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8. For a plan to satisfy the substantial risk of forfeiture requirement, an employee must perform substantial services in the future to receive payments from the plan. tf |
True Generally, substantial risk of forfeiture means that the employee’s right to deferred compensation payments must be contingent upon the performance of substantial services in the future. These services might include employment until retirement age, or the performance of post-retirement consulting services for the company, or a prohibition on competing with the company. |
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9. As with qualified plans, earnings of a nonqualified plan are taxed only when received by the participating employees. tf |
False The employer must recognize any earnings on those investments as current income and pay taxes on them. |
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10. If a lump-sum distribution is received from a nonqualified deferred compensation plan, forward averaging may be used. tf |
False If a lump-sum distribution is received from a nonqualified deferred compensation plan, forward averaging may not be used. Such distributions of benefits are taxed as ordinary income. |
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11. If a lump-sum distribution is received from a nonqualified deferred compensation plan, forward averaging may be used. tf |
False If a lump-sum distribution is received from a nonqualified deferred compensation plan, forward averaging may not be used. Such distributions of benefits are taxed as ordinary income. |
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1. Which one of the following is a correct statement about nonqualified deferred compensation plans? a. An executive's interest is served by shifting the receipt of compensation from a period of high taxation to one of lower compensation b. An executive can avoid current income taxation on amounts deferred to a secular trust c. The law limits annual benefits payable from a nonqualified deferred compensation plan to 210k |
a An executive’s interest is served by shifting the receipt of compensation from a period of high taxation to one of lower taxation. This is the classic deferred compensation situation. An executive's interest is served by shifting the receipt of compensation from a period of high taxation to one of lower taxation. However, the wisdom of shifting compensation during a current period of relatively low marginal tax rates must be examined carefully on a case-by-case basis. |
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2. John, a single individual with no dependents, is the vice president of marketing for a telecommunications company. He is currently in a high tax bracket, but he expects to see that situation change after retirement. A death benefit only plan might satisfy an important and immediate need for John. tf |
False Because John has no dependents, a death benefit only plan would not serve an important and immediate need for him. |
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1. Deferred compensation plans are unfunded when the employer’s promise to pay the deferred amount is evidenced by a negotiable note. tf |
False Deferred compensation plans are unfunded when the employer’s promise to pay the deferred amount is merely a promise and is not secured in any way or evidenced by any negotiable notes. |
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2. Most nonqualified deferred compensation plans are funded. tf |
False The majority of nonqualified deferred compensation agreements today are unfunded. |
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3. An employee who participates in a funded nonqualified deferred compensation plan must recognize deferred benefits as current income, even though those benefits will not be received for years to come. tf |
True The Internal Revenue Code treats the guaranteed deferred amount of a funded nonqualified deferred compensation plan as being received in the year in which it is earned or when the employee is “substantially vested” in the plan. Therefore, an employee who participates in a funded nonqualified deferred compensation plan must recognize deferred benefits as current income, even though those benefits will not be received for years to come. |
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4. Assets that are in an informally funded nonqualified deferred compensation plan are for the exclusive benefit of participating employees. tf |
False The employee has no rights or security interest in the funds, and the funds are at all times subject to the claims of the company’s general creditors. |
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5. The Pension Protection Act of 2006 (PPA) placed new restrictions on which employees can be insured under corporate-owned life insurance policies. tf |
True Unless new restrictions are met, the death proceeds of corporate-owned life insurance policies that exceed the basis become taxable income to the corporation. The proceeds may be tax free to the corporation if the insured meets the following requirements: he or she was employed by the policyowner during the 12 months prior to his or her death or at the time the contract was issued, or he or she was either a director or highly compensated employee. |
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1. A rabbi trust provides employees with some security of a funded plan and the tax deferral advantages of an unfunded plan. tf |
True A trust created under this type of arrangement provides employees with some degree of security. Normally, this earmarking of funds would require an employee to recognize the employer’s contributions as current income. However, the assets placed in the rabbi trust are tax deferred for the employees because they remain available to the claims of the company’s general creditors. This enables the rabbi trust to avoid the issue of constructive receipt. |
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2. In essence, a rabbi trust is an escrow account established by an employer to provide funds to satisfy its nonqualified plan obligations to employees. tf |
False A rabbi trust is a trust established by an employer to provide funds to satisfy its nonqualified plan obligations to employees. |
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3. A secular trust allows an employee to avoid being subject to future tax rates (which are expected to be higher than current tax rates). tf |
True If tax rates are expected to be higher when an employee retires, a secular trust may be the most tax-efficient way of providing retirement income. |
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4. An employee may arrange for a third party to pay deferred benefits if the company fails to make good on its promise.
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True This can be accomplished through a number of instruments: a bank letter of credit, a surety bond, or indemnity insurance. The institutions issuing these instruments guarantee payment of a specified amount of deferred compensation should the company fail to make payment. |
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1. Which one of the following is a characteristic common to both qualified plans and nonqualified deferred compensation plans? a. written agreement b. benefits may not be assigned or alienated c. automatic survivor benefits must be provided |
written agreement Both qualified plans and nonqualified deferred compensation plans consist of a written agreement between an employer and an employee. |
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Which one of the following nonqualified deferred compensation plans should be used to make Susan whole for the loss of benefits caused by the qualified plan compensation limit? a. excess benefit plan b. top hat plan c. pure deferred compensation plan |
top hat plan A top hat plan is usually the best choice to make a participant whole for a loss of benefits caused by the qualified plan compensation limit. |
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4. Which one of the following retirement plans is subject to the reporting and disclosure requirements and the enforcement and claims provisions of ERISA only? a. funded excess benefit plan b. qualified profit sharing plan c. top hat plan |
top hat plan Top hat plans are subject to the reporting and disclosure requirements and the enforcement and claims provisions of ERISA only. |
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5. Which one of the following retirement plans is exempt from the requirements of ERISA? a. funded excess ben plan b. supplemental executive retirement plan c. unfunded excess ben plan |
unfunded excess benefit plan Unfunded excess benefit plans are exempt from the requirements of ERISA. |
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6. Which one of the following is a characteristic common to both excess benefit plans and top hat plans? a. plan may be established for any employee b. benefits usually are paid for by the employer c. the plan may be funded or unfunded |
b Benefits usually are paid for by the employer. Both excess benefit plans and top hat plans usually provide for employer-paid benefits. |
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7. Which of the following statements regarding the Pension Protection Act of 2006 (PPA) is correct? The PPA allows employers in bankruptcy to make contributions to nonqualified plans as long as the contributions do not exceed the Code Section 415(b)(I)(A) limit.
The PPA prohibits an employer from funding a deferred compensation plan six months prior and six months after any defined benefit plan is terminated in an involuntary or distress termination.
The PPA prohibits an employer from funding a deferred compensation plan three months prior and three months after any defined benefit plan is terminated in an involuntary or distress termination. |
The PPA prohibits an employer from funding a deferred compensation plan six months prior and six months after any defined benefit plan is terminated in an involuntary or distress termination. |
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8. A properly designed death benefit only (DBO) plan is excluded from federal estate tax if the employee-participant owns what percentage of a closely held corporation's stock? a. 50% or less b. 51% or less c. 60% or less |
50% or less A properly designed DBO plan is excluded from federal estate tax if the employee owns 50% or less of a closely held corporation’s (i.e., the employer’s) stock. |
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9. If Company X contributes $10,000 in 2014 to Jennifer Barrett’s excess benefit plan (which she will receive only after retirement in 2020), when can Company X take a deduction for the contribution to the plan?
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2020 If Company X contributes $10,000 in 2014 to Jennifer Barrett’s excess benefit plan (which she will receive only after retirement in 2020), the company cannot take a deduction for the contribution until 2020. Dollars contributed to such a plan may be deducted from a company’s taxable income, but only in the year that the employee actually receives the funds, i.e., when the employee is taxed on the benefit. |
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10. Which one of the following is a correct statement about a disadvantage of a funded nonqualified deferred compensation plan? a. bens are subject to the claims of the co's bankrupcy creditors b. the plan is exempt from the requirements of ERISA c. A participant must recognize deferred bens as current income |
A participant must recognize deferred benefits as current income. An employee must recognize funded nonqualified deferred compensation plan benefits as current income, even though those benefits will not be received for years to come. |
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11. Which one of the following is a correct statement about the constructive receipt doctrine? a. it taxes income not yet received by a taxpayer b. it taxes pmts made in the future that are based on a company's earnings c. It prevents a deferred compensation agreement from being informally funded |
It taxes income not yet received by a taxpayer. The constructive receipt doctrine taxes income that is constructively received, even though the income is not actually received. |
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12. Which one of the following is required in order for the benefits of an unfunded nonqualified salary reduction plan to be tax deferred? a. elective salary reduction contribs cannot exceed the max limits allowed by law. b. taxes may be deferred if the benefits are subject to a substantial risk of forfeiture c. taxes may be deferred if the promise to pay the deferred amounts is not evidenced by any negotiable notes |
c Taxes may be deferred if the promise to pay the deferred amounts is not evidenced by any negotiable notes. Such an agreement must be unsecured; it must not be evidenced by negotiable notes. Under such a plan, the employee’s future benefits are only secured by the company’s promise to pay, and thus they remain at risk until such time as they are actually paid. |
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13. Which one of the following statements correctly describes a secular trust? a. subject to current taxation b. consists of a revocable trust c. its assets are sbjt to the claims of the co's general creditors |
It is subject to current taxation. Earnings of an employee-grantor secular trust are currently taxable to the trust’s employee-beneficiary. |
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14. Company X has decided to informally fund its obligation to pay nonqualified deferred compensation benefits by purchasing assets and titling them in the company's name. Company X’s goal in doing this is to set up a tax-sheltered funding vehicle. Which one of the following assets should not be used in this type of arrangement? a. cash value life insurance b. tax exempt bonds c. annuitites |
annuities Under current law, an employer/owner of an annuity contract is taxed on any “internal buildup” or cash value accumulation of income within the annuity. |
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15. Which one of the following arrangements is a third-party guarantee to pay nonqualified deferred compensation benefits? a. revoacable trust b. escrow acct c. surety bonds |
surety bond Third-party guarantees to pay deferred benefits do include surety bonds, bank letters of credit, and indemnity insurance. |
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16. Which one of the following is a correct statement about third-party guarantees for nonqualified deferred compensation arrangements? a. the cost of a third-party guarantee is reasonable b. The IRS has recently approved the use of surety bonds in a number of private letter rulings c. Indemnity insurance has been approved by tax authorities as a form of third-party guarantee |
Indemnity insurance has been approved by tax authorities as a form of third-party guarantee. The use of indemnity insurance as a third-party guarantee has been clearly approved by tax authorities. |
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17. From the perspective of the employer, which one of the following is an advantage of a nonqualified deferred compensation plan? a. nonqualified plans may discriminate b. nonqualified plans are fully exempt from ERISA requirements c. The earnings of funds used to pay deferred compensation benefits are not taxable to the employer |
Nonqualified plans may discriminate. The major advantage of a nonqualified plan, from the standpoint of the employer, is the opportunity it provides to discriminate among employees. |
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18. Which one of the following is a correct statement about a funded excess benefit plan? a. It is sbjt to ERISA's vesting and participation requiremnts b. It is similar to a key employee life insurance policy c. it is subject to ERISA's fiduciary, administarative, and enforcement requrimets |
It is subject to ERISA’s fiduciary, administrative, and enforcement requirements. A funded excess benefit plan is subject to ERISA’s fiduciary, administrative, and enforcement requirements. |
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19. Which one of the following is a correct statement about top hat plans? a. it's a type of salary reduction plan b. Thye are subject to ERISSA's reproting and disclosure requirements c. Mus tbe funded |
Top hat plans are subject to ERISA’s reporting and disclosure requirements. Top hat plans are subject to ERISA’s reporting and disclosure requirements, although they are not subject to other ERISA requirements. |
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20. In which one of the following situations would a supplemental executive retirement plan be of the most benefit? a. W corp wants to set aside 50k as a severence benefit for a key employee b. X corp would like to provide a vice president w/ additional retiremtn benefts c. Y corp would like to pay a bonus to its president |
X Corporation would like to provide a vice president with additional retirement benefits. A supplemental executive retirement plan is an unfunded plan that provides select employees with benefits in excess of those provided by the employer’s qualified retirement plan. |
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21. Which one of the following is not a requirement of a death benefit only plan? a. ee must have specified number of years of service wtih the co b. ee mus tname a benefiicary accoridng to plan rules c. ee must die after retiring from the company |
The employee must die after retiring from the company. A death benefit only plan typically requires an employee to die in the active service of the company (prior to retirement) before a benefit will be paid to the employee’s beneficiary. |
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22. Deferred compensation benefits can be lost when a financially solvent company is able to pay benefits but refuses to do so. tf |
False Deferred compensation can be lost through bankruptcy of a company or its inability to pay. If bankruptcy occurs, secured creditors stand at the head of the line of people waiting to pick over the remains of the bankrupt firm. However, deferred compensation benefits will not be lost because a financially solvent company is able to pay benefits but refuses to do so. The agreement to pay benefits represents a legally enforceable contract. |
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23. John’s company put $80,000 in deferred compensation into an account in his name and for his benefit. Although the plan will not release these funds to John until his retirement, it will allow him access to these funds in the case of a foreseeable emergency. Which one of the following rules determines the tax implications of this arrangement for John? a. constructive receipt doctrine b. economic benefit doctrine c. substantial risk of forfeiture doctiren |
constructive receipt doctrine In this situation, the constructive receipt doctrine taxes funds not actually reduced to a taxpayer’s possession, yet otherwise made available to him so that he may draw upon it at his discretion. However, the constructive receipt doctrine does not tax funds that are accessible in case of an unforeseeable emergency. |
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24. If an employee pays for the cost of a third-party guarantee, the amount of the payment will be considered taxable income to the employee. tf |
False Although the law is not entirely clear on this, it appears that the purchase of a surety bond or other guarantee by the employer may imply that the benefit is “funded,” or “secured,” which would require the employee to recognize it in his or her current taxable income. However, if the employee takes responsibility for the guarantee and pays the cost of obtaining the guarantee from his or her own pocket (without reimbursement from the company), most authorities believe that no such tax obligation will be triggered. |
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25. ERISA defines an excess benefit plan as a nonqualified deferred compensation plan that is maintained by an employer for the purpose of providing deferred compensation benefits to only a select group of management or highly compensated employees. tf |
False ERISA defines an excess benefit plan as “a plan maintained by an employer solely for the purpose of providing benefits for certain employees in excess of the limitations on contributions and benefits imposed by IRC Section 415.” |
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26. An unfunded NQDC plan cannot make distributions for reasons other than a permissible distribution event and cannot accelerate a distribution for reasons other than a permissible distribution event. tf |
True Distributions from an unfunded NQDC plan may only be made for the following reasons: upon separation from service, death, a specified time (or pursuant to a fixed schedule) stated in the plan document, change in control of a corporation, occurrence of an unforeseeable emergency, or if the participant becomes disabled. |
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27. A rabbi trust may not contain which of the following? a. an insolvency triger b. provision permitting that funds be availible to the ERs creditors if the co files for bnkrupcy c. provision requireing that the funds must be held in the US |
An insolvency trigger. The trust cannot contain an insolvency trigger, as this would violate IRC Section 409A. |
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28. Constructive receipt will cause an employer to become liable for taxes due on a nonqualified benefit. tf |
False Constructive receipt causes the employee, not the employer, to become liable for taxation on a benefit. |
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29. The funds in a secular trust will become available to the employer’s creditors in the case of bankruptcy. tf |
False Funds in a rabbi trust are available to employer creditors. Funds in a secular trust are placed in an irrevocable trust for the exclusive benefit of the employee. |
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30. Which one of the following is a characteristic of a SERP? a. SERP can cover any employee b. SERP can be either funded or unfunded c. Automatic survivor benefits must be provided |
A SERP can be either funded or unfunded. While SERPs are generally unfunded, they can be funded if the employer wishes to do so. |
