Chapter 1

Question 1

A SEP is a qualified retirement plan subject to the requirements of Code Sec. 401(a)

Answer 1

False
A SEP is not a qualified plan, even though it is eligible for many of the same tax advantages. The SEP is subject to Code Sec. 408. The distinction is important when learning about the retirement field because qualified plans are subject to one set of rules while other plans, such as SEPs, SIMPLEs, and 403(b) plans, are each subject to a unique set of rules.

Question 2

In a tax-advantaged retirement plan, the employer is only eligible for a deduction when the employee has taxable income

Answer 2

False
This describes the tax treatment that is applicable to nonqualified plans. In qualified and tax-advantaged plans, the employer can take a deduction even though the employee does not have taxable income at that time.

Question 3

In order to avoid current taxation of earnings, tax-advantaged retirement plan funds must be invested in tax-sheltered investments, such as life insurance or municipal bonds

Answer 3

False
Plan funds invested in either tax-advantaged or non-tax-advantaged investments are accumulated on a tax-deferred basis in a qualified plan or other tax-advantaged retirement plans. This gives qualified plans the advantage (over nonqualified plans) of being able to invest in higher-yield taxable investments. In most cases, tax-free investments are not a good investment choice

Question 4

Participants in a tax-advantaged plan can generally delay paying taxes at termination of employment by rolling the benefit into another tax-advantaged plan or IRA.

Answer 4

True

Question 5

A strength of tax-advantaged retirement plans is that the plan can include highly compensated employees and exclude the rank-and-file.

Answer 5

False
One trait that all tax-advantaged retirement plans share is that, in order for the owners and managers to participate in the tax benefits, the plan must cover a significant number of rank-and-file employees

Question 6

Many workers have the opportunity to make contributions to an employer-sponsored retirement plan and/or contribute to a Roth IRA.

Answer 6

True

Question 7

he higher the employee’s tax bracket, the greater the tax savings by using a tax-advantaged retirement plan

Answer 7

True

Question 8

Saving on a pre-tax basis in a tax-advantaged retirement plan is generally a more efficient way to save for retirement than saving on an after-tax basis

Answer 8

True

Question 9

Retirement plans play a key role in making a company competitive in the marketplace because they help the employer to attract and retain employees

Answer 9

True

Question 10

A well designed and properly implemented retirement plan can entice an employee to remain with the company

Answer 10

True

Question 11

Pensions are often negotiated in labor contracts because they constitute wages and are a condition of employment that is subject to the collective-bargaining process

Answer 11

True

Question 12

Retirement plans can provide for a graceful transition in the workforce by allowing for early retirement and providing “golden handshakes” to older employees experiencing a decline in productivity

Answer 12

True

Question 13

Qualified and other tax-advantaged retirement plans represent one of the best tax shelters available for business owners

Answer 13

True

Question 14

Funds in a qualified plan may be protected in bankruptcy proceedings

Answer 14

True

Question 15

Contributions to a qualified plan can reduce a small business’s exposure to the accumulated earnings tax

Answer 15

True

Question 16

One downside of qualified plans is that they cannot be designed in a fashion to incentivize increased productivity

Answer 16

False.
Profit sharing plans can be designed to motivate employees by sharing with them profits of the company. This can help drive increased productivity and beneficial employee behavior.

Question 17

Qualified plans can help small business owners deal with their struggles with liquidity issues

Answer 17

True