The Law of Corporations and Other Business Organizations

Chapter Review Answers

1. How can an employer be certain that an
employee benefit plan will be considered
a qualified plan by the IRS?

The employer can closely follow all requirements
of the Internal Revenue
Code. In addition, the employer can
submit the plan to the IRS for review
and to obtain a favorable determination
letter.

2. When is an employee’s contribution to a
plan considered to be fully vested?

Immediately—the employee’s right in
his or her accrued benefit derived
from the employee’s own contributions
is nonforfeitable.

3. What are integrated plans?

Integrated plans are retirement plans
that are integrated with the employer’s
contribution to Social Security on behalf
of the participant.

4. What unique benefit does an ESOP offer
to the employer?

The employer may use an ESOP to
raise cash through an ESOP loan.

5. If Andrews Electronics wants to adopt an
employee benefit plan that will pay its
employees a specific amount upon their
retirement, what type of plan would the
company most likely want to adopt?

A defined benefit pension plan

6. The owners of Gabrielle Foods, Inc.
would like to adopt an employee benefit
plan that would encourage their employees
to save money for retirement. They
are willing to pay up to a certain amount
per employee, per year, provided that the
employee invests an equal amount of his
or her pretax income. What type of plan
might the owners of Gabrielle Foods, Inc.
adopt?

A 401(k) savings plan

7. What is employment “at will”?

It is employment whereby the employee
is hired by an employer for an
agreed-upon compensation, and the
employee may be dismissed at the employer’s
discretion, with or without
cause.

8. May an employee’s actions be restricted
even after termination of employment?

Yes, as long as those restrictions are
reasonable.

9. Why were covenants not to compete void
under the common law of England?

They were considered an agreement in
restraint of a person’s right to exercise
his or her trade or calling, and thus
void as against public policy.

What is the modern view toward covenants
not to compete?

Anticompetitive covenants supported
by consideration are generally enforceable
if they are reasonable and
consistent with the public interest. The
test of “reasonableness” is usually
passed if the covenant covers a limited
time period and a limited geographical
area.

10. If an employment agreement remains silent
on the issue, is the employer necessarily
entitled to all inventions of the employee
while the employee is working for
the employer?

No, unless inventions are assigned to
the employer by the employee, or some
special circumstances exist, the employer
generally has no right to the
employee’s inventions.