PART 4--STUDY QUESTIONS

(Questions followed by [A] are answered in part 5.)

1. What are the advantages for a financial services professional of becoming involved in the nonqualified deferred-compensation market? (2.1-2.2)

2. Identify the planning situations in which a nonqualified deferred-compensation plan should be used.
(2.2-2.4)

3. Rhonda Rolodex is the owner of The Mainline Office Supply Company. In order to "keep her top people happy," Rhonda would like to set up a nonqualified plan for the top 20 executives in her 200-employee company. Rhonda has asked her insurance agent how she can best accomplish this objective. What steps should the agent take when advising Rhonda? [A] (2.1-2.5)

4. Briefly describe the following:

a. incentive stock options
b. phantom stock plans
c. restricted stock plans
d. golden handshakes
e. golden parachutes

(2.4-2.5)

5. Describe a top-hat plan. (2.6-2.7)

6. Describe an excess-benefit plan. (2.7-2.8)

 7. What special business needs can a supplemental executive-retirement plan meet? (2.8)

8. Describe a 457 plan. (2.9)

9. Jersey Technical Electronics (JTE) has been a very successful business, thanks to the personal contacts Sue Edison has throughout the industry. The owners of JTE fear that Sue, now 60, will retire shortly and the business will suffer. How can a nonqualified plan with a consulting clause help? [A] (2.10-2.11)

10. How can a nonqualified plan consulting provision be designed in order to avoid the finding that an employer/employee relationship exists?  (2.11-2.12)

11. Explain how a nonqualified plan can be designed to help in the following situations: [A]

a. Rayco, Inc., is concerned about its key executives leaving prior to retirement age.
b. Lawyer Prudence Juris is concerned that one of her junior partners will leave, taking with her some of the firm's clients.

(2.11-2.12)

12. Howard Hayes, an executive at a local manufacturing firm, has asked his insurance agent what provisions he should ask the firm's owners to put into his nonqualified plan. What provisions should the agent suggest? (2.11-2.13)

13. Briefly describe how nonqualified plans can be designed with regard to their

a. benefit structure
b. eligibility provisions
c. disability provisions
d. retirement age provisions
e. death benefit provisions

(2.12-2.13)

14. Describe an executive-bonus life insurance plan. (2.13-2.14)

15. Discuss the differences between a qualified and a nonqualified plan. (2.15-2.17)

16. What is the doctrine of constructive receipt? (2.17-2.18)

17. How does the economic benefit rule work? (2.18-2.19)

18. Discuss the implications of the Code Sec. 83 rule as it applies to nonqualified plans. (2.19-2.20)

 19. Which of the following transactions are subject to taxation under the economic benefit, constructive receipt, or Sec. 83 rules? Explain. [A]

a. ABC Corporation buys life insurance on the lives of its key executives in order to pay their nonqualifed plan, which contains a golden-handcuffs provision. ABC owns the policies, pays the premiums, and is the beneficiary under the policies. ABC has direct control over the cash values in the policies and can divert these funds to business use.

b. DEF Corporation makes a bonus available to its officers that can be taken as current income or deferred by leaving the funds in an irrevocable trust in which the officers are the beneficiaries.

c. GHI Corporation transfers assets to an irrevocable trust in which a key executive is the beneficiary. The trust is subject to the claims of the employer's creditors.

(2.17-2.20)

20. How does a rabbi trust work? (2.21-2.23)

 21. How does a secular trust work? (2.23-2.24)

22. List the ERISA requirements that apply to each of the following:

a. unfunded excess-benefit plans
b. unfunded top-hat plans
c. unfunded SERPs
d. funded excess-benefit plans
e. funded top-hat plans
f. funded SERPs

(2.24-2.25)

 23. List the reasons why life insurance is frequently used to fund nonqualified deferred-compensation plans. (2.26)

24. Discuss the procedures for installing and administering a nonqualified plan. (2.27)