ACC 577 - EB Chapter 4

In 2017, the IRC set the maximum annual benefits of defined benefits plans at what amount? (Defined Benefit Plans) A. $135,000 B. $215,000 C. $235,000 D. $250,000

$215,000

This type of defined contribution plan, also known as a CODA, permits only private sector or tax-exempt employers' employees to tax defer part of their compensation to the trust of a qualified plan. (401(k) Plans) A. Section 457 plan B. Section 403(b) annuities C. Saving incentive match plan D. 401(k) plan

401(k) plan

Using the ratio percentage test for tax benefit qualification, what does the percentage of non-highly compensated employees to highly compensated employees in the plan have to be? (Qualified vs. Nonqualified Plans) A. 30% B. 70% C. 60% D. 40%

70%

_____ provides non-key employees with a minimum benefit if it is a defined benefit plan or a minimum contribution if it is a defined contribution plan. (Qualified vs. Nonqualified Plans) A. The fractional rule B. An accumulated benefit obligation C. A top-heavy plan D. A fiduciary

A top-heavy plan

Which of the following is not an accrual criteria? (Defined Benefit Plans) A. Average benefit test B. 3% rule C. Fractional rule D. 113 1/3 rule

Average benefit test

Which of the following factors does not determine the accrual rate in defined contribution plans? (Defined Contribution Plans) A. Benefits equal balance in the account B. Company cannot set maximum age limits for discontinuing contributions C. Company's contribution cannot be reduced because of employee age D. Benefits exceed the balance in the account

Benefits exceed the balance in the account

This type of hybrid plan defines benefits for each employee by reference to the amount of the employee's hypothetical account balance. (Cash Balance Plans and Pension Equity Plans) A. Money purchase plan B. Target benefit plan C. Cash balance plan D. Pension equity plan

Cash balance plan

Which one of these is not a defined contribution plan? (Types of Defined Contribution Plans) A. Cash balance plan B. ESOPs C. SIMPLEs D. Profit sharing

Cash balance plan

Roth 401(k) plans differ from 401(k) plans in which two ways? (Roth 401(k) Plans) A. Employee contributions are not taxed at the individual's tax rate, upon retirement employee withdrawals are not taxed B. Employee contributions are taxed at the individual's tax rate, upon retirement employee withdrawals are not taxed C. Employee contributions are not taxed at the individual's tax rate, upon retirement employee withdrawals are taxed D. Employee contributions are taxed at the individual's tax rate, upon retirement employee withdrawals are taxed

Employee contributions are taxed at the individual's tax rate, upon retirement employee withdrawals are not taxed

Which of the following is a tax benefit associated with 401(k) plans? (401(k) Plans) A. Employees pay taxes on their contribution B. Employees do not pay taxes on their contributions C. Investment gains are taxed D. Employees cannot deduct their contributions from taxable income

Employees do not pay taxes on their contributions

The benefits distributed from profit sharing plans are usually allocated using one of these three ways. (Profit Sharing Plans) A. Lump sum payments, graduated payments, proportional payments based on their contributions to profits B. Equal payments, proportional payments based on salary, lump sum payments, graduated payments C. Equal payments, proportional payments based on salary, proportional payments based on their contributions to profits D. Equal payments based on contributions to profits, equal payments based on salary, lump sum payments

Equal payments, proportional payments based on salary, proportional payments based on their contributions to profits

A qualified preretirement survivor annuity (QPSA) is an annuity for the life of the participant, with a survivor annuity for the participant's spouse. True/False

False

A salary reduction agreement refers to the annual maximum allowable contribution to a participant's account in a defined contribution plan. True/False

False

Companies establish qualified plans for executive employees. True/False

False

Defined contribution plans guarantee particular benefit amounts to participating employees. True/False

False

Employees can participate in pension plans after they have reached the age of 25. True/False

False

In a nonleveraged ESOPs, the company borrows money from a financial institution to purchase company stock. True/False

False

In defined contribution plans, employees vest in gross employer contributions. True/False

False

Nearly 55% of workers employed in the private sector participated in some form of retirement plan in 2016. True/False

False

Only one event triggers a mandatory distribution: the participant reaches age 65 or the normal retirement age. True/False

False

Pension plans do not automatically fulfill the nondiscrimination requirement if they fall in safe harbors. True/False

False

Plan termination rules apply and procedures apply to all types of pension plans. True/False

False

Public Organizations may offer both 401(k) and 403(b) plans, but private tax-exempt organizations are prohibited from offering 401(k) plans. True/False

False

Savings Incentive Match Plans for Employees (SIMPLE) can be either leveraged or nonleveraged. True/False

False

The IRC Section 403(b) established the tax-deferred annuity program as a qualified contribution plan under ERISA guidelines. True/False

False

The IRS limit on maximum annual benefit is indexed for inflation in $7000 increments each year beginning after 2006. True/False

False

The Revenue Act of 1921 instituted retirement plans as a mandatory bargaining subject between unions and management. True/False

False

The average benefit test is a method for determining participation requirements. True/False

False

Top-heavy provisions ensure minimum benefits for key employees. True/False

False

Under a defined benefit plan, the benefit is fixed by a formula and employer contributions remain the same from year to year. True/False

False

Unions generally secured high wages for their members through the earl 1960s when competition from foreign companies offered quality products at similar or lower prices. True/False

False

Wearaway occurs whenever benefits accrue at a substantially higher rate during the years close to an employee's eligibility to earn retirement benefits. True/False

False

Retirement benefits are generally distributed in one of these three ways. (Qualified vs. Nonqualified Plans) A. Backloading, collateral payments, offset approach B. Periodic payments, lumps sums collateral payments C. Annuities, lumps sums offset payments D. Lumps sums, annuities, periodic payments

Lumps sums, annuities, periodic payments

What is the 3% rule used to determine? A. Nondiscrimination in defined benefits plans. B. Nondiscrimination in defined contribution plans C. Tax benefit qualification for defined benefits plans D. Tax benefit qualification for defined contribution plans

Nondiscrimination in defined benefits plans.

There are three possible contribution sources for defined contribution plans. Which of the following is not one of those sources? A. Social Security Integration B. Employer contributions C. Forfeitures D. Employee contributions

Social Security Integration

Which of the following is not a hybrid plan? (Hybrid Plans) A. Money purchase B. Cash balance C. Stock option D. Target benefit

Stock option

This type of hybrid plan is based on income and years of service, uses individual accounts, passes the IRS's cross-testing rules and the total benefits are based on the investment performance of the plan's assets. A. Target Benefit Plan B. Money purchase plan C. Age-weighted profit sharing plan D. Cash balance plan

Target Benefit Plan

The 1331/3 % rule refers to what? A. The annual accrual rate for defined benefits plans B. The annual accrual rate for defined contribution plans C. The annual accrual rate for qualified benefit plans D. The annual accrual rate for qualified contribution plans

The annual accrual rate for defined benefits plans

Which of the following are characteristics of the flat benefit formula used in defined benefits plans? A. An employee's years of service are considered, is determined using a flat amount formula or a flat percentage formula, the benefit is based on a percentage of the employees final average wage or salary B. Is determined using a flat amount formula or a flat percentage formula an employee's years of service are considered, the benefit is based on a percentage of the employees final average wage or salary, is based on the employee's last 3-4 years of service C. Is based on the employee's last 3-4 years of service an employee's years of service are considered, The benefit is based on a percentage of the employees final average wage or salary, an employee's years of service are considered D. The benefits are based on a percentage of the employees final average wage or salary, are based on the employee's last 3-4 years of service and are determined using a flat amount formula or a flat percentage formula

The benefits are based on a percentage of the employees final average wage or salary, are based on the employee's last 3-4 years of service and are determined using a flat amount formula or a flat percentage formula

Savings incentive match plans for employees (SIMPLEs) have the following characteristics (Savings Incentive Match Plans for Employees (SIMPLEs)) A. The company has at least 100 employees, the employees' preceding year's compensation totaled at least $5000, the company has no other employer-sponsored retirement plan B. The company has fewer than 100 employees, the employees' preceding year's compensation totaled less than $5000, the company has no other employer-sponsored retirement plan C. The company has fewer than 100 employees, the employees' preceding year's compensation totaled less than $5000, the company offers other employer-sponsored retirement plans D. The company has fewer than 100 employees, the employees' preceding year's compensation totaled at least $5,000, the company has no other employer-sponsored retirement plan

The company has fewer than 100 employees, the employees' preceding year's compensation totaled at least $5,000, the company has no other employer-sponsored retirement plan

A top-heavy plan must also provide a special vesting schedule: 3-year 100% vest schedule, or a 6-year graded vesting schedule. True/False

True

According to the US Department of Treasury, qualified retirement plans must cover at least 50 employees or at least 40% of the employer's workforce. True/False

True

Accrual rules specify the rate participants can accumulate benefits. True/False

True

Capital-intensive businesses require highly capable employees who have the aptitude to learn how to use complex physical equipments such as casting machines and robotics. True/False

True

Cliff vesting schedules must grant employees 100% vesting after no more than three years from beginning participation in the retirement plan. True/False

True

Employers can take tax deductions on qualified plans. True/False

True

Forfeitures come from the accounts of employees who terminate their employment prior to earning vesting rights. (Defined Contribution Plans) True/False

True

In 2017, 44% of employees participated in defined contribution plans. True/False

True

Safe harbors refer to compliance guidelines in a law or regulation. True/False

True

Section 457 Plans are non qualified plans for government employees. True/False

True

Service industries such as retail and food service are not capital intensive, and most have the reputation of paying low wages and offering less generous benefits, including retirement plans. True/False

True

The 10th Circuit Court rules in Tomlinson et al. vs. El Paso Corporation that ERISA did not require the employer to provide notification of wearaway periods so long as employees were informed and forwarned of plan changes. True/False

True

The Internal Revenue Code and ERISA's Title I and Title II provisions set 13 minimum standards to determine whether retirement plans are qualified or nonqualified. True/False

True

The Pension Benefit Guarantee Corporation recognizes three types of plan terminations: distress terminations, involuntary terminations, and standard terminations. True/False

True

The Revenue Act of 1921 led to the increase in discretionary benefits such as pensions. (Origins of Employer-Sponsored Retirement Benefits) True/False

True

The major distinction between the unit and flat defined benefit formulas is the use of the employee's years of service. True/False

True

The present value of benefits bases on a designated date is known as accumulated benefits obligation. True/False

True

Using the unit benefit formula, the annual benefits are based on age, years of service, and final average wages or salary. True/False

True

Usually, cash balance plans are less costly to employers than a defined benefit plans. True/False

True

To qualify as a nondiscriminating defined contribution plan, it must meet which two safe harbors? A. Base contribution formula or collateral contribution formula B. Fixed first-dollar-of-profits formula or graduated first-dollar-of-profits formula C. Uniform allocation formula or uniform points allocation formula D. Profitability threshold formula or the backloading formula

Uniform allocation formula or uniform points allocation formula

Under a defined contribution plan, ERISA requires that a fiduciary be named. List the responsibilities of the fiduciary.

• Fiduciary responsibilities include: o Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them o Carrying out their duties prudently o Following the plan documents (unless inconsistent with ERISA) o Diversifying plan investments o Paying only reasonable plan expenses • The duty to act prudently is a central responsibility under ERISA • Prudence focuses on the process for making fiduciary decisions

Employers establish qualified plans when all of the ERISA minimum standards are met. Failure to meet at least one minimum standard results in a plan becoming disqualified. List as many ERISA minimum standards as you can remember and explain the main advantage of offering qualified plans.

• The Internal Revenue Code and ERISA's Title I and Title II provision set 13 minimum standards to determine whether retirement plans are qualified or nonqualified. • Possible standards students may list include: o Participation requirements o Coverage requirements o Vesting rules o Accrual rules o Nondiscrimination rules: Testing o Top-heavy provisions o Minimum funding standards o Social Security integration o Contribution and benefit limits o Plan distribution rules o Qualified survivor annuities o Qualified domestic relations orders o Plan termination rules and procedures • Qualified plans provide both employees and employers with immediate tax benefits • In most cases, monetary contributions to qualified plans reduce the amount of an employee's or company's annual earnings that are subject to taxation

Define vesting and explain what employees are vesting in when in a defined benefit plans or in a defined contribution plans. Briefly explain the difference between cliff vesting and the six-year graduated vesting schedule.

• Vesting refers to an employee's nonforfeitable rights to retirement plan benefits • In defined benefit plans, employees vest in a specific annual amount, as defined under the terms of the plan, each year after retirement • In defined contribution plans, employees vest in net employer contributions • Net employer contributions equal gross employer contributions plus investment gains or minus investment losses • Cliff vesting schedules must grant employees 100% vesting after no more than three years from beginning participation in the retirement plan • The six-year graduated schedule allows workers to become 20% vesting after two years and to vest at a rate of 20% each year thereafter until they are 100% vested after six years from beginning participation in the retirement plan

Briefly discuss the origins and trends in retirement plans in the US.

● According to Employee Benefit Research Institute, first pension plan was established in 1759 for widows and children of Presbyterian ministers ● In 1875 the American Express Company established a formal pension plan ● Till WWII pension plans adopted primarily in railroad, banking and public utility industries ● The most significant growth occurred after favorable tax treatment was established through passage of the Revenue Act of 1921 and the Revenue Act of 1928 government imposed wage increase controls in the 1940s led companies to adopt discretionary employee benefits such as pension plans ● According to the US Bureau of Labor Statistics, 55% of workers employed in private sector participated in at least one company sponsored plan in 1992-1993 ● This has declined to 49% in 2016 ● In 2016, 44% participated in defined contribution plans and only 15% participated in defined benefit plans, indicating a shift in retirement plan participation. ● Two explanations for these trends in retirement plan: • Shift in labor force toward different occupation and industries - decline in full-time, union workers and workers in goods-producing companies • Defined benefit plans are costly to employers compared to defined contribution plans

Discuss the controversies related with cash balance retirement plans

● Age-related treatment ● Are believed to also favor workers who switch employers periodically ● These plans do NOT define benefits as a percentage of final or career average pay or as a flat-dollar amount per years of service (like in defined benefits plans) ● Award annual pay-related credits that appreciate each year based on a specified interest rate ● According to a U.S. General Accounting Office • Cash balance plans provide favorable treatment to younger workers • GAO compared the rates of retirement benefit accrual in defined benefit plans and cash balance plans and concluded that cash balance plan accrual favors younger employees ● Retirement benefits accrue at a decreasing rate in cash balance plans in contrast to an increasing rate in defined benefits plans ● Converting from defined benefits plans to cash balance plans may result in older workers receiving smaller benefits ● Cash balance plans tend to produce the lowest annuity at retirement for the employee who was oldest at conversion