Chapter 17 341 Rabel

Small business owners have a number of retirement plans available to them. One type of plan is limited to employers with 100 or fewer eligible employees. Under this type of plan, small employers are exempt from most of the nondiscrimination and administrative rules that apply to qualified plans. Such plans are called

SIMPLE retirement plans.

Which of the following statements concerning defined contribution pension plans is (are) true?I. The contribution rate is fixed.II. The retirement benefit varies.

both I and II

Under a unit-benefit formula, benefits are a function of both

earnings and years of service.

Special vesting rules apply to qualified defined contribution plans with voluntary employee contributions and matching employer contributions. Which of the following statements is (are) true with respect to these vesting rules? Employer contributions must vest immediately. Graded vesting is permitted, and employer contributions must be 20 percent vested after 2 years, with an additional 20 percent vested in each of the next 4 years.

II only

Which of the following statements about Roth 401(k) plans is true?I. Contributions to a Roth 401(k) plan are made with before-tax dollars. II. Qualified distributions from a Roth 401(k) are received income-tax free.

II only

Which of the following statements about pension funding agencies and funding instruments is true?

A separate investment account is a group pension account with a life insurance company.

For a long-term employee who is covered by a defined benefit plan, the highest retirement income will be obtained if his/her retirement income is based on

final average pay.

A financial institution that provides for the accumulation or administration of the funds that will be used to pay pension benefits is called a

funding agency.

In the context of employee benefits, the term "discrimination" refers to benefit comparisons between

highly compensated employees and non-highly compensated employees.

Which of the following statements about retirement benefits under pension plans is true?

A unit-benefit formula considers both earnings and years of service.

Which of the following statements concerning defined-benefit pension plans is (are) true? I. The contribution rate by the employer varies depending on the amount needed to fund the desired benefit.II. The retirement benefit is not known in advance.

I only

Which of the following statements about the Saver's Credit is (are) true?I. The Saver's Credit is $5,000 regardless of an individual's contribution to a Roth IRA, 401(k) plan, SIMPLE IRA, or 403(b) plan.II. The Saver's Credit was implemented to encourage low- to moderate-income earners to save for retirement.

II only

Which of the following statements about the minimum vesting standards for a qualified defined benefit plan is (are) true? Under cliff vesting, an employee must be at least 50 percent vested after 5 years of service. Under graded vesting, an employee must be at least 20 percent vested after 3 years of service and 100 percent vested after 7 years.

II only

Which of the following statements about withdrawals from Section 401(k) plans is (are) true?I. The penalty tax does not apply to hardship withdrawals.II. Withdrawals may be made without penalty at age 59.5 or older.

II only

Which of the following statements concerning defined benefit and defined contribution pension plans is (are) true?I. The employer bears the investment risk with a defined contribution plan.II. Defined benefit plans favor workers who enter the plan at older ages.

II only

Which of the following statements is (are) true with respect to SIMPLE retirement plans? I. Only large employers can start a SIMPLE plan, provided the employer does not maintain another qualified plan.II. SIMPLE plans are exempt from most nondiscrimination and administrative rules that apply to qualified plans.

II only

Which of the following statements is (are) true with respect to profit-sharing plans?I. There is no limit on the amount that an employer can contribute annually to an employee's account under a profit sharing plan.II. Profit sharing plans offer greater funding flexibility for employers than under other qualified plans.

II only

Which of the following statements regarding minimum vesting standards for qualified defined benefit plans is (are) true?I. The vesting standards apply to both employer and employee retirement contributions. II. Employers may vest benefits more quickly than the minimum standards.

II only

hich of the following statements concerning vesting under qualified retirement plans is (are) true?I. The same vesting rules apply to defined benefit plans and defined contribution plans.II. Employer contributions to a defined contribution plan must vest faster than employer contributions to a defined benefit plan.

II only

Which of the following statements about SIMPLE retirement plans is true?

They are limited to employers with 100 or fewer eligible employees and who do not maintain another qualified plan.

What are the minimum age and service requirements that can be imposed on employees eligible to participate in a retirement plan?

age 21 and 1 year of service

ABC Company offers a qualified retirement plan. ABC selected a funding instrument with an insurer in which the insurer promised to pay a specified interest rate for a number of years on a lump sum deposit. This funding instrument is called a

guaranteed investment contract.

Lynn works for a state university. In addition to the university's regular retirement plan, Lynn participates in another retirement savings plan. She elected to have $5,000 of her salary withheld and contributed to a tax-sheltered annuity with an insurer. The type of plan that Lynn established is called a

403(b) plan.

Which of the following statements is true with regard to defined benefit and defined contribution pension plans?

With a defined benefit plan, the retirement benefit is known is advance but the contributions vary; with a defined contribution plan, the contribution rate is fixed but the retirement benefit varies.

All of the following statements about 403(b) plans are true EXCEPT

Matching employer contributions are not permitted under a 403(b) plan.

All the following statements concerning a Roth 401(k) plan are true EXCEPT

Qualified distributions at retirement are fully taxable.

Beta Corporation has 1,000 employees eligible to participate in the firm's pension plan, and 100 of these employees are considered highly compensated. All of the highly compensated employees are covered by the plan. What is the minimum number of the 900 non-highly compensated employees who must be covered by the plan in order for the plan to satisfy the ratio percentage test?

630

Which of the following statements about Section 401(k) plans is true?

Elective salary deferrals to these plans are free of federal income taxation until the funds are actually withdrawn.

Which of the following statements about the tax implications of qualified pension plans is true?

Employer contributions are deductible up to certain limits as an ordinary business expense.

Which of the following statements about retirement ages in defined benefit pension plans is (are) true? The normal retirement age in most plans is 65. For a defined benefit plan, the early retirement age is the earliest age an employee can retire with full, unreduced benefits.

I only

Which of the following statements about tax-deferred retirement plans in the U.S. is true? Women, on average, receive lower employment-based retirement income than men. One way to hedge against inflation is to invest lump-sum pension distributions in fixed- income investments.

I only

Which of the following statements about the protection provided by the Pension Benefit Guaranty Corporation is (are) true?I. Only defined benefit plans are insured.II. Only benefits that are not yet vested are guaranteed.

I only

Which statement is true with regard to problems and issues with tax-deferred retirement plans in the United States?

Inadequate participation in employer-sponsored retirement plans can create economic insecurity for retired employees.

All of the following are potential disadvantages to employees covered by a defined contribution pension plan EXCEPT

The contribution rate by the employer is uncertain.

Which of the following distributions from a qualified retirement plan would be exempt from the 10 percent penalty tax if the distribution occurred before the covered employee was age 59.5? I. A distribution made to an employee with a qualifying disability.II. A distribution made to a beneficiary or to the employee estate's after the employee's death.

both I and II

Which of the following statements is (are) true with respect to vesting under a qualified defined benefit retirement plan? Vesting helps to reduce labor turnover. An employee who terminates employment after four years of service has no vested retirement benefit under cliff vesting.

both I and II

JKL Company just converted its traditional defined-benefit plan to another type of plan. Under the plan, benefits are defined in terms of a hypothetical account balance, with retirement benefits dependent upon the value of the participant's account at retirement. Each year, employees receive an interest rate credit and a pay credit which is a specified percentage of compensation. This type of plan is called a

cash-balance plan.

Winslow Corporation has many long-term employees. The company has never had a pension plan. Recently, a new management team was hired. The new president said he would like to start a pension plan through which he could reward the long-term service provided by many employees. Which of the following types of plans should Winslow Corporation adopt?

defined benefit plan

ACME Company is considering starting a retirement plan for its employees. One option ACME is considering is a profit-sharing plan. All of the following are advantages of this type of retirement plan EXCEPT

he 10 percent penalty tax does not apply to distributions prior to age 59.5.

As Social Security slants benefits in favor of lower-paid workers, the Internal Revenue Code permits employers to adjust pension contributions so that the overall contributions (pension plus Social Security) are nondiscriminatory. This adjustment permits employers to increase pension contributions for highly-compensated employees. Adjusting contributions to consider Social Security contributions is called

integration.

Early distributions from qualified retirement plans are assessed a 10 percent penalty. However, there are some exceptions to this rule. All of the following distributions are exempt from the penalty tax EXCEPT

lump-sum distributions made directly to the employee at any age when he or she changes employers.

Which of the following statements about trust fund plans is (are) true?I. The trustee typically purchases annuities for retiring employees.II. The trustee guarantees the adequacy of the fund to pay the promised benefits.

neither I nor II

Which of the following statements is (are) true regarding cash-balance pension plans? Cash balance plans are defined contribution plans. Under a cash balance plan, the employer creates an investment account for each employee into which the employer makes actual contributions and allocates investment gains and losses.

neither I nor II

Which of the following is a common investment mistake that many retirement plan participants make?

panicking when stock prices fall and selling at low prices

Under a 401(k) plan, what is compared to determine if the plan unfairly discriminates in favor of highly compensated employees?

the average percentage of salary deferred by the highly compensated is compared to the average percentage of salary deferred by other eligible employees

Vesting refers to

the employee's right to the employer's contributions or benefits attributable to the contributions if employment terminates prior to retirement.

Rita went to work for a manufacturing company. The company offers a defined-benefit pension plan. The retirement benefit is equal to 1.5 percent multiplied by years of service with the company, and the result is multiplied by average salary in the three highest consecutive years of paid employment with the company. The benefit formula used at Rita's company is a

unit-benefit formula.

encourage low- to moderate-income workers to save for retirement, a tax credit called the Saver's Credit is available. Which statement about tax credits and tax deductions is true?

Tax credits reduce taxes owed on a dollar-for-dollar basis.

RST Company offers a qualified retirement plan. Each employee contributes 4 percent of his or her pretax income to the plan, and RST matches the employee's contribution. An employee's benefit at retirement is determined by his or her account balance at the time of retirement. What type of retirement plan does RST offer?

defined contribution plan

Under one type of retirement plan for small businesses, the employer contributes to an IRA established for each eligible employee. Under this type of plan, the contribution limits are significantly higher than they are for traditional IRAs and Roth IRAs. This type of plan, which requires little paperwork, is called a

simplified employee pension (SEP) plan.