A nonqualified salary reduction plan needs to be limited to a select group of highly compensated and management employees in order to avoid coverage under ERISA.
a) True
b) False
a) True
In order to determine whether it is more advantageous to pay taxes at current rates or to defer taxes and pay increased rates at a later time, a planner must consider the tax rate when the funds are to be distributed, the length of the deferral, and the interest rate that the deferred funds earn.
a) True
b) False
a) True
To use a Sec. 162 bonus life insurance plan, the sponsor must cover all employees who have been employed for 1 year.
a) True
b) False
b) False
Like other nonqualified compensation programs, a Sec. 162 program can
be drafted to cover a specified group of executives.
At the time a nonqualified stock option is exercised, the excess of the fair market value of the stock over the option price is taxed at capital-gains rates.
a) True
b) False
b) False
At the time an option is exercised, the excess of the fair market value of the stock over the option price is taxed as ordinary income. Also, note that the employer receives a corresponding tax deduction.
Incentive stock options (ISOs) are more flexible than nonqualified stock options.
a) True
b) False
b) False
ISOs are less flexible than nonqualified stock options because there are certain limits on the value of options that can become exercisable annually, and there are certain holding-period requirements before sale.
With ISOs, the employer receives a tax deduction at the time the participant exercises the option.
a) True
b) False
b) False
The employer is never eligible for a tax deduction with ISOs as long as there is no disqualifying disposition of the stock received upon the exercise of
the ISO.
In an ISO, if the shares are held for at least 2 years from the date the option was granted and at least 1 year from exercise, at the time of the stock's sale the increase in the stock's value from the date of the grant of the option to the date of sale is taxed as long-term capital-gains.
a) True
b) False
a) True
The first step in determining a strategy for exercising stock options is to establish clear financial objectives.
a) True
b) False
a) True
Because stock prices historically rise over time, an argument can be made that stock options should typically be held until the end of the option period.
a) True
b) False
a) True
A taxpayer can make nondeductible contributions to an IRA even if he or she only has passive income (such as investment earnings).
a) True
b) False
b) False
No contribution (deductible, nondeductible, or Roth IRA) can be made by a taxpayer whose gross income is only comprised of passive income.
Self-employed persons who have a salary income from another job cannot make an IRA contribution if they have a net loss from self-employment equal to the salary amount.
a) True
b) False
b) False
Self-employed persons who have a net loss from self-employment can make IRA or IRA annuity contributions if they have salary or wage income. They do not have to reduce the amount of the salary income by the net loss.
A spousal IRA can be set up only if the taxpayer contributes to his or her own IRA.
a) True
b) False
b) False
Spousal IRAs can be set up even if the taxpayer does not contribute to his or her own account.
An excess contribution is subject to a 50 percent excise tax.
a) True
b) False
b) False
An excess contribution is subject to a 6 percent excise tax.
A single taxpayer with an adjusted gross income (AGI) of $200,000 in 2009 who is not an active participant can make a $5,000 deductible IRA contribution for 2009.
a) True
b) False
a) True
A person is generally an active participant if he or she receives contributions for the year in a simplified employee pension plan.
a) True
b) False
a) True
An employee who is covered only by a nonqualified plan will be considered an active participant.
a) True
b) False
b) False
A participant in a nonqualified plan is not considered an active participant.
A person is an active participant for IRA purposes even in years when the profit-sharing plan does not make contributions and no other allocations are made to the participant’s account.
a) True
b) False
b) False
In a profit-sharing plan where employer contributions are discretionary, the participant must actually receive some contribution or an allocation of forfeitures for active-participant status to be triggered.
If a married couple filing jointly has AGI of less than $150,000 in 2009, a $5,000 deductible contribution to a spousal IRA is generally allowed for a nonworking spouse.
a) True
b) False
a) True
Contributions to a Roth IRA are sometimes eligible for a tax deduction.
a) True
b) False
b) False
Contributions to a Roth IRA are never deductible.
A single taxpayer who is an active participant and has an AGI of $80,000 in 2009 cannot make a Roth IRA contribution.
a) True
b) False
b) False
Active participant status has no bearing on the ability to contribute
to a Roth IRA. Because this individual has earned less than $105,000, he or she can contribute $5,000 to a Roth IRA for the year.
A Roth IRA distribution will be a qualified distribution if the participant is aged 63 at the time of the distribution and has maintained the Roth IRA for at least 3 years.
a) True
b) False
b) False
A Roth IRA distribution will not be a qualified distribution until after the 5-tax-year period beginning with the first tax year for which a contribution was made. Note that if the distribution is a nonqualified distribution, the distribution may still be tax free to the extent that it represents a return of the participant's contributions.
Beginning in 2010 , all taxpayers, regardless of AGI, can convert a traditional IRA to a Roth IRA.
a) True
b) False
a) True
A conversion from an IRA to a Roth IRA can be accomplished tax free.
a) True
b) False
b) False
Amounts converted from an IRA to a Roth IRA are taxed as ordinary income. However, the 10 percent premature penalty tax will not apply.
IRAs are typically invested in life insurance.
a) True
b) False
b) False
IRAs cannot be invested in life insurance.
IRAs cannot be invested in any type of collectible.
a) True
b) False
b) False
IRAs generally cannot invest in collectibles, but they can be invested in precious metals and certain coins.
Taxpayers should generally choose Roth IRA contributions over nondeductible IRA contributions.
a) True
b) False
b) True
A taxpayer in the 15 percent tax bracket who expects to be in a higher bracket in retirement should consider the Roth IRA over the deductible IRA contribution.
a) True
b) False
a) True
Older persons should never convert an IRA into a Roth IRA.
a) True
b) False
b) False
Conversion to a Roth IRA for an older person may have estate planning
benefits.
Which of the following statements concerning salary deferral nonqualified
deferred-compensation plans that are designed to defer taxes until benefits are distributed is correct?
after-tax basis can be easily calculated.
d) The form and timing of benefit payments can typically be made at the time of distribution.
C) A rabbi trust can protect assets used to fund benefits against a change in corporate control.
Assets cannot be held outside of the reach of the company’s creditors without adverse tax consequences.
The tax benefits are tied in part to the tax rate at the time benefits are distributed in the future.
Under Code Sec. 409A the form and timing of benefits have to be determined at the time of the salary
deferral election.
Which of the following statements concerning a Roth IRA is correct?
B) Certain qualifying withdrawals from a Roth IRA are income tax free.
Roth IRA contributions are never deductible.
The contribution limits are tied together, and a $5,000 contribution to a Roth IRA means no contribution can be made to a traditional IRA.
Active participant status has no effect on Roth IRA eligibility.
Which of the following statements concerning contributions to IRAs and Roth IRAs is (are) correct?
I. IRA and Roth IRA contributions for a year must be made no later than the following
April 15.
II. A retired person with no employment income can still make an IRA contribution as long as she has not yet attained age 70 1/2.
A) I only
II is incorrect because an individual must have earnings from employment to make an IRA contribution.
Which of the following statements concerning planning with IRAs is (are)
correct?
I. A Roth IRA conversion can have estate planning benefits.
II. The Roth IRA generally has more valuable tax benefits than the nondeductible traditional IRA.
C) Both I and II
All the following statements concerning nonqualified stock options are correct
EXCEPT
whether the stock price dips below the option price.
D) Stock options provide substantial value to the participants regarldless of whether the stock price dips below the option price.
Options have little or no current value when the stock price drops below the option price.
Randy is a single taxpayer who has AGI of $85,000 and is an active participant in an employer sponsored retirement plan. All the following statements concerning Randy’s IRA and Roth IRA options for 2009 are correct EXCEPT
A) Randy may make a $5,000 deductible contribution to a traditional IRA, assuming no other IRA or Roth IRA contributions for the year.
Since Randy is an active participant, his AGI exceeds the phaseout limits and he can not make a deductible IRA contribution.
All of the following statements regarding contributions to a traditional IRA are correct EXCEPT:
C) Taxpayers who are active participants in an employer-maintained retirement plan are ineligibleto make any tax-deductible contributions
to an IRA.
A taxpayer that is an active participant in an employer sponsored plan can still make a deductibletraditional IRA contribution if their AGI doesn’t exceed the phase-out limits.
Contributions to a traditional IRA may be nondeductible if the individual is an active participant inanother retirement plan. Which of the following individuals is/are considered an active participant?
I. An individual making salary reduction contributions to a SIMPLE IRA plan sponsored by his orher employer.
II. An individual who is eligible for their employer’s defined benefit plan, but chooses not toparticipate.
C) Both I and II.
II is correct. With a defined benefit plan, an individual will be considered an active participant if he or sheis eligible to participate.
Tom and Laura (each age 45), a married couple filing jointly, had $130,000 of adjusted gross incomethis year. Tom participates in his company 401(k) plan, and he contributed $6,000 this year. Laura does not participate in a retirement plan with her employer. If they each contribute the maximum to a Traditional IRA, what is their total federal income tax deduction?
D) $5,000
Tom is an active participant; therefore, his deduction is zero because their AGI exceeds the $89,000-109,000 (for 2010) phase-out limit for married filing joint taxpayers. Laura can deduct her $5,000contribution because their AGI is below the $167,000-177,000 (for 2010) phase-out that applies to aspouse that is not an active participant.
Which of the following statements is/are correct regarding Roth IRAs?
I. In most cases an individual can contribute both the maximum contribution to a Roth IRA andthe maximum contribution to a traditional IRA for a given tax year.
II. Contributions to a Roth IRA are never deductible for federal income tax purposes.
B) Only II.
I is incorrect. If an individual contributes the maximum to a traditional IRA, he or she cannot contribute toa Roth IRA.
Husband and Wife have an adjusted gross income of $200,000. Husband is an active participant inhis company’s retirement plan. Wife is unemployed. How much can they contribute to an IRA?
B) They can each contribute the maximum to a non-deductible traditional IRA.
Since their AGI is $200,000, neither spouse is eligible to contribute to a Roth IRA due to the AGI phaseoutlimits applicable to Roth IRA contributions. Also, neither spouse will be allowed a deduction forcontributions to a traditional IRA.
Which of the following is a prohibited investment in an IRA?A. U.S. Platinum coins.
A) Whole life policy.
Life insurance is a prohibited investment in an IRA.Although collectibles such as coins are considered prohibited investments, certain U.S. gold, silver, andplatinum coins are actually permitted investments in an IRA.
All of the following are reasons employers establish nonqualified plans EXCEPT:
D) To allow an immediate income tax deduction for the employer.
With a nonqualified plan, an employer will not receive an immediate income tax deduction.
Which of the following statements is/are correct regarding non-qualified deferred-compensation plans?
D) They can provide for deferral of taxation until the benefit is received.
Deferred compensation plans are not taxed to the executive until the benefit is received, thus providingdeferral of income until that time.
Which of the following statements is/are correct regarding non-qualified deferred compensationarrangements?
I. A salary reduction plan is a combination of a defined-benefit and a defined-contribution plan.
II. A supplemental executive retirement plan (SERP) is a plan that allows executives to voluntarilyelect to defer the receipt of compensation until termination of employment or other statedevent.
D) Neither I nor II.
A salary reduction plan is a plan that allows executives to voluntarily elect to defer thereceipt of compensation until termination of employment or other stated event.
SERP is a plan that complements an existing qualified plan. With a SERP, the employer(not the employee) provides the funds.
When determining if an executive would be better off paying taxes currently versus participating in anonqualified deferred compensation plan, all of the following factors must be considered EXCEPT:
C) The inflation rate applicable during the deferral period.
The inflation rate is not a factor considered when determining if an executive would be better off payingtaxes currently versus participating in a nonqualified deferred compensation plan.
A salary reduction plan will be exempt from ERISA if the plan is considered a “top hat” plan. If an employer wants to implement a “top hat” plan, which of the following is/are features that should beincluded in the plan?
I. The plan should cover at least 20% of the employer’s workforce.
II. Covered employees should be highly compensated in relative and absolute terms.
B) Only II.
I is incorrect. The group of covered employees should be less than 10% of the total workforce to beconsidered a select group for purposes of a “top hat” plan.
Which of the following is a requirement of Internal Revenue Code Section 409A?
a) Benefits may only be distributed after an employee separates from service or becomesdisabled.
b) Certain employees of publicly-traded companies cannot receive a distribution within 6 monthsafter separation from service.
d) If the agreement is funded, the company must transfer assets to an offshore trust that will beused to pay future benefits.
d) The initial election to defer compensation must be made within three months after thebeginning of the performance period.
b) Certain employees of publicly-traded companies cannot receive a distribution within 6 monthsafter separation from service.
Benefits may be distributed upon the occurrence of several events, including separationfrom service, death, disability, a change in ownership, or based upon a specified time selected on thedate of deferral.
Under Section 409A, if the company transfers assets to an offshore trust, a taxable eventwill occur.
The initial election to defer compensation must generally be made before the taxable yearin which the services are performed.
To be considered properly made under Section 409A, a deferral election must meet all the followingrequirements EXCEPT:
C) It must be revocable by the employee within 60 days of the election.
To be considered properly made under Section 409A, a deferral election must be irrevocable.
Which of the following statements is correct regarding an executive bonus life insurance plan?
A) If a corporation pays the premiums directly to the insurer, the amounts paid are included in theemployee’s taxable income.
Regardless of whether the premiums are paid to the employee or the insurance company directly, theemployee will be taxed on the amount of premiums each year.
The employee owns the policy and names the beneficiary.
Executive bonus life insurance plans can discriminate.
The second bonus is used to pay the taxes on the first bonus.
Which of the following statements is/are correct regarding non-qualified stock options?
I. The excess of the fair market value of the stock over the option exercise price is taxed asordinary income to the employee at the time of exercise.
II. A cashless exercise of the non-qualified stock option will cause the employee to pay alternative minimum tax if the option price is less than 50% of the value of the stock on thedate of exercise.
A) Only I.
II is incorrect. Alternative minimum tax only applies to incentive stock options, not to nonqualified stockoptions.
Diana has a nonqualified stock option that gives her the right to purchase 500 shares of employer stock at $10 per share. She exercises the option when the market value of the stock is $50. What is her employer’s income tax deduction at the time she exercises the option?
D) $20,000
The employer will have a deduction equal to the bargain element (excess of market value over optioncost) at exercise.($50 -$10) x 500 shares = $20,000Diana will also report $20,000 of ordinary income at the time of exercise.
All of the following statements are correct regarding incentive stock options (ISOs) EXCEPT:
C) The excess of the fair market value of the stock over the option exercise price is taxed asordinary income to the employee at the time of exercise.
At exercise, the employee will have an alternative minimum tax adjustment relating to the ISO. There isno ordinary income upon exercise of an ISO.
All of the following statements are correct regarding restricted stock EXCEPT:
B) Restricted stock is essentially a bookkeeping entry on behalf of the executive.
Phantom stock is essentially a bookkeeping entry. Restricted stock is actual stock granted to anexecutive, stamped with restrictions.
Which of the following statements is correct regarding stock options that are provided by employers aspart of an executive compensation package?
A) An incentive stock option has more favorable income tax treatment to the executive than a nonstatutory stock option.
Executive stock options do not offer protection against the downside risk associated withequity securities. Instead, they benefit from upward movements in the price of the stock.
Unlike options that are traded on the open market, employee stock options that are grantedby an employer typically do not expire for several years.
The option is considered “exercised” when the employee purchases the underlying stock atthe option’s strike price. The grant occurs when the company gives the stock option to the employee.
Which of the following statements is/are correct regarding nonqualified stock options?
I. Insiders are prohibited from selling their stock within six months of the option issue date.
II. Vesting schedules can be implemented to provide incentive for the executive to remain withthe company for a minimum period of time.
C) Both I and II.
Four years ago, Karen was granted a nonqualified stock option (NQSO) giving her the right topurchase 8,000 shares of her employer’s stock at $19 per share. Three months ago, Karen exercisedthe options when the fair market value of the stock was $27 per share. Assuming Karen still owns theshares, which of the following statements is correct regarding the income tax ramifications of theexercise of the NQSO?
C) Karen has ordinary income in the amount of $64,000.
When a nonqualified stock option is exercised, the difference between the fair market value of the stockand the option price (the bargain element) on the date of exercise is taxed as ordinary income. Therefore, Karen will recognize ordinary income in the amount of $64,000, calculated as follows:
Fair market value of stock on date of exercise (8,000 shares x $27 per share) = $216,000
Less: Amount paid for stock at exercise (8,000 shares x $19 option price) = (152,000)
Equals: Ordinary income (bargain element) $64,000
Which of the following statements is/are correct regarding stock option strategies?
I. When choosing which options to exercise, an individual should consider exercising the oldest options first.
II. If further stock appreciation is reasonably certain, an individual should consider exercising theoption early and hold the stock.
C) Both I and II.
Which of the following statements is/are correct regarding the taxation of restricted stock?
I. The employee generally reports income at the time the employer sets aside the stock for thebenefit of the employee.
II. The employer is generally entitled to an income tax deduction in the same year in which theemployee reports taxable income.
B) Only II.
I is incorrect. The employee generally reports income from a restricted stock plan when the stock is nolonger subject to a substantial risk of forfeiture.
