Module 2 (CRPS)
The two defined contribution plans that provide the most predictable level of retirement
benefits are the - answer A) age-weighted profit-sharing plan and the target benefit
plan.
B) money purchase plan and the new comparability profit sharing plan.
=C) target benefit plan and the money purchase plan.
D) new comparability profit sharing plan and the age-weighted profit-sharing plan.
Explanation
The target benefit plan and the money purchase plan provide the highest degree of
benefit predictability of the defined contribution plans. This is due to the fact that the
plans are pension plans, requiring mandatory funding. Because of the mandatory
funding requirements, these plans are less likely to be used than profit sharing plans,
which allow for the same level of funding.
LO 2-4
Which one of the following is an incorrect statement regarding a defined contribution
plan? - answerA) The maximum deductible employer contribution is 25% of the annual
compensation for all participating employees.
B) The maximum amount of compensation that may be taken into account for an
employee is $290,000 for 2021.
=C) No employee may receive a contribution that exceeds 25% of his or her
compensation for the year.
D) Owners may distribute up to 25% of the profits of the company to the plan each year.
Explanation
An individual participant in a defined contribution plan may receive an allocation greater
than 25% of his or her compensation, either through cross-testing or Social Security
integration. The allocation may not exceed 100% of the participant's annual
compensation.
LO 2-1
Which one of the following is incorrect regarding profit sharing plans? - answerA)
Contributions can be discretionary, but must be substantial and recurring.
B) The employer has the option of investing all of the plan's assets into the employer's
stock.
=C) To use an in-service withdrawal, the funds in the participant's account must be in
that account for a minimum of one year.
D) ESOPs are a type of profit sharing plan.
Explanation
To be permitted in-service withdrawals, the funds in the participant's account must be in
that account for a minimum of two years, not one year.
LO 2-1
, Which one of the following is correct regarding contributions to a profit sharing plan? -
answerA) They may be made until the last day of the plan year (usually December 31).
B) They may only be made in years when the employer has profits.
=C) Contributions by the employer, in aggregate, may be up to 25% of the total annual
compensation of all participating employees.
D) They may be made until the due date of the company's income tax return (not
including extensions).
Explanation
Contributions to a profit sharing plan by the employer, in aggregate, may be up to 25%
of the total annual compensation of all participating employees (sometimes referred to
as "covered compensation" or "covered payroll").
LO 2-1
As a general rule, under stock bonus plans, - answerA) loans are not permitted.
B) an income tax deduction may not be taken by the employer, since no cash was
contributed to the plan.
=C) employee-participants in a closely-held company may only vote their shares on
material issues.
D) As with an ESOP, employers contributions are made with company stock.
Explanation
For closely held companies, the participants may only vote on "material' issues. The
employee-participant may vote on all matters if the company is publicly held.
LO 2-2
Under a stock bonus plan, at the time a lump-sum distribution is made to a retiring
employee-recipient who elects net unrealized appreciation treatment, the employee
must pay - answerA) capital gains tax on the stock's cost basis.
B) capital gains tax on the stock's appreciation.
C) ordinary income tax on the stock's appreciation.
=D) ordinary income tax on the stock's cost basis.
Explanation
Under stock bonus plans, when account shares are distributed to an employee-recipient
who elects net unrealized appreciation treatment, the employee owes ordinary income
tax on the stock's cost basis.
LO 2-2
Which one of the following statements is correct regarding an employee stock
ownership plan (ESOP)? - answer=A) Ownership is diluted when stock is distributed to
employees.
B) Nonpublic companies are not required to buy back shares of departing employees.
C) The cost of establishing and managing the plan is low.
D) The plan cannot be offered by publicly traded companies.
Explanation
Under employee stock ownership plans (ESOPs), ownership is diluted when stock is
distributed to employees.
LO 2-2
The two defined contribution plans that provide the most predictable level of retirement
benefits are the - answer A) age-weighted profit-sharing plan and the target benefit
plan.
B) money purchase plan and the new comparability profit sharing plan.
=C) target benefit plan and the money purchase plan.
D) new comparability profit sharing plan and the age-weighted profit-sharing plan.
Explanation
The target benefit plan and the money purchase plan provide the highest degree of
benefit predictability of the defined contribution plans. This is due to the fact that the
plans are pension plans, requiring mandatory funding. Because of the mandatory
funding requirements, these plans are less likely to be used than profit sharing plans,
which allow for the same level of funding.
LO 2-4
Which one of the following is an incorrect statement regarding a defined contribution
plan? - answerA) The maximum deductible employer contribution is 25% of the annual
compensation for all participating employees.
B) The maximum amount of compensation that may be taken into account for an
employee is $290,000 for 2021.
=C) No employee may receive a contribution that exceeds 25% of his or her
compensation for the year.
D) Owners may distribute up to 25% of the profits of the company to the plan each year.
Explanation
An individual participant in a defined contribution plan may receive an allocation greater
than 25% of his or her compensation, either through cross-testing or Social Security
integration. The allocation may not exceed 100% of the participant's annual
compensation.
LO 2-1
Which one of the following is incorrect regarding profit sharing plans? - answerA)
Contributions can be discretionary, but must be substantial and recurring.
B) The employer has the option of investing all of the plan's assets into the employer's
stock.
=C) To use an in-service withdrawal, the funds in the participant's account must be in
that account for a minimum of one year.
D) ESOPs are a type of profit sharing plan.
Explanation
To be permitted in-service withdrawals, the funds in the participant's account must be in
that account for a minimum of two years, not one year.
LO 2-1
, Which one of the following is correct regarding contributions to a profit sharing plan? -
answerA) They may be made until the last day of the plan year (usually December 31).
B) They may only be made in years when the employer has profits.
=C) Contributions by the employer, in aggregate, may be up to 25% of the total annual
compensation of all participating employees.
D) They may be made until the due date of the company's income tax return (not
including extensions).
Explanation
Contributions to a profit sharing plan by the employer, in aggregate, may be up to 25%
of the total annual compensation of all participating employees (sometimes referred to
as "covered compensation" or "covered payroll").
LO 2-1
As a general rule, under stock bonus plans, - answerA) loans are not permitted.
B) an income tax deduction may not be taken by the employer, since no cash was
contributed to the plan.
=C) employee-participants in a closely-held company may only vote their shares on
material issues.
D) As with an ESOP, employers contributions are made with company stock.
Explanation
For closely held companies, the participants may only vote on "material' issues. The
employee-participant may vote on all matters if the company is publicly held.
LO 2-2
Under a stock bonus plan, at the time a lump-sum distribution is made to a retiring
employee-recipient who elects net unrealized appreciation treatment, the employee
must pay - answerA) capital gains tax on the stock's cost basis.
B) capital gains tax on the stock's appreciation.
C) ordinary income tax on the stock's appreciation.
=D) ordinary income tax on the stock's cost basis.
Explanation
Under stock bonus plans, when account shares are distributed to an employee-recipient
who elects net unrealized appreciation treatment, the employee owes ordinary income
tax on the stock's cost basis.
LO 2-2
Which one of the following statements is correct regarding an employee stock
ownership plan (ESOP)? - answer=A) Ownership is diluted when stock is distributed to
employees.
B) Nonpublic companies are not required to buy back shares of departing employees.
C) The cost of establishing and managing the plan is low.
D) The plan cannot be offered by publicly traded companies.
Explanation
Under employee stock ownership plans (ESOPs), ownership is diluted when stock is
distributed to employees.
LO 2-2
