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Sharpe, Ph.D., CFPŽ, CRPCŽ, CRPSŽ Associate Professor CFPŽ Program Director Personal Financial Planning Department University of Missouri-Columbia Please Note: Correct answers for each question are indicated in bold type. After each question, the number of the page containing information relevant to answering the question is given. When a calculation is necessary or the reasoning behind a given answer may be unclear, a brief rationale for the correct answer is also given. Part A: Retirement Planning Defined Contribution Plans Chapter 17: Profit Sharing Plan True/False 17.1 Employees who take out a loan from their profit sharing plan must pay 10% of the loan amount as a penalty as well as reasonable interest on the funds borrowed. 17.2 In a profit-sharing plan, forfeitures may be reallocated or used to reduce future employer contributions 17.3 If an employer has a profit, at least some contribution must be made that year to the profit sharing plan. Answers: 17.1 false [p. 156] 17.2 true [p. 153] 17.3 false [p. 153] Multiple Choice 17.4 An advantage of a profit sharing plan from the employer’s point of view includes which of the following? a. employer contributions to the plan are discretionary b. plan can benefit long term employees c. non-vested benefits can be reallocated to remaining employees d. allows integration with Social Security e. all of the above Answer: E [p. 153] 17.5 A disadvantage of profit sharing plans is that a. employee bears the investment risk b. actuarial costs make the plan expensive to administer c. there is no predictable level of employer funding under the plan d. a and b e. a and c Answer: E [p. 154] 17.6 Which of the following is (are) true regarding vesting in a profit sharing plan a. cliff vesting can be used in profit sharing plans b. plan forfeitures can be reallocated in proportions that favor owners and highly compensated employees c. vesting provisions favor long term employees d. a and c e. forfeitures are typically returned to the employer’s general assets. Answer: D [pp. 155-56] Application 17.7 Evergreen Semiconductors, Inc. is a young and innovative company with 25 employees between 24 and 35 years of age. Turnover has averaged about 2% per year for the 9 year old company. Profit has been intermittent. The owners believe that a substantial investment will need to be made in new equipment next year. Which of the following retirement savings plans is best for Evergreen? a. money purchase plan b. target benefit plan c. nonqualified deferred compensation plan d. defined benefit plan e. profit sharing plan Answer: E [p. 153] 17.8 John Wald has participated in his company’s profit sharing plan for the past 15 years and currently has an account balance of $250,000. Last month, his 12-year-old son had to have an emergency appendectomy. Complications extended his hospital stay to a week. Right before the accident, John used all of the family savings to purchase a new car. John must pay a $2,000 deductible and an additional $5,000 for medical expenses not covered under his medical plan. If John withdraws $7,000 from his profit sharing plan, a. he is in big trouble since withdrawals from a profit sharing plan are not allowed by law b. he must pay income tax and a 10% penalty on the amount withdrawn c. he must pay income tax, but face only a 5% penalty for early withdrawal since it is a hardship withdrawal d. all withdrawals from a profit sharing plan are penalty free, but income tax must be paid e. he would pay income tax, but no early withdrawal penalty to the extent the medical expenses are tax deductible Answer: E [p. 156] 17.9 Sandy Beech earns $40,000 as a guide for Tropical Tours, Inc. Tropical Tours typically contributes 10% of profit to their profit sharing plan. Total payroll for Tropical Tours is $120,000. This year, Topical Tours will contribute $21,000 to their profit sharing plan. Sandy’s share this year will be: a. $3,000 b. $4,000 c. $7,000 d. $12,000 e. need more information to calculate Answer: C [p. 155; $21,000 x ($40,000/$120,000)] 17.10 T. L. Timber, age 40, works for Treeline, Inc., a logging company. Treeline uses both compensation and service as a basis for allocating Treeline’s $20,000 annual contribution to Treeline’s profit sharing plan. How much would be allocated to T. L.’s account if he received 40 units of credit for his 20 years of service and 160 units for $80,000 in earnings? Total units for all employees are 1,000 a. $ 100 b. $2,000 c. $4,000 d. $8,000 e. need more information to calculate Answer: C [p. 155; Treeline’s allocation formula considers service as well. T. 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