Retirement Planning Exam 1 2020 Limits

Ralf, a 40-year-old nurse who earns $80,000 a year, saves 14% of his annual gross income. Assume that Ralf wants to maintain his exact pre-retirement lifestyle. Calculate Ralf 's wage replacement ratio using the top-down approach (round to the nearest %) and using pre-tax dollars. A)70%. B)78%. C)86%. D)92%.

78%. RationaleDollar ValuePercentage$80,000.00=100.00%Salary($11,200.00)=(14.00%)Less: Current savings ($6,120.00)=(7.65%)Less: Payroll taxes $62,680.00=78.35%Wage Replacement Ratio

Margaret, a 35-year-old client who earns $45,000 a year, pays 7.65% of her gross pay in Social Security payroll taxes, and saves 8% of her annual gross income. Assume that Margaret wants to maintain her exact pre-retirement lifestyle. Calculate Margaret's wage replacement ratio using the top-down approach (round to the nearest %) and using pre-tax dollars. A)70%. B)80%. C)84%. D)90%.

84%. RationaleDollar Value Percentage $45,000.00=100.00%Salary($3,600.00)=(8.00%)Less: Current savings ($3,442.50)=(7.65%)Less: Payroll taxes $37,957.50=84.35%Wage Replacement Ratio

Shelley saves $3,000 per year, for ten years, at the end of each year starting at age 26 and ending at age 35. She invests the funds in an account earning 10% annually. Shelley stops investing at age 35, but continues to earn 10% annually until she reaches the age of 65. In contrast, Kevin saves $3,000 per year at the end of the year between the ages of 36 and 65 inclusively and invests in a similar account to Shelley, earning 10% annually. What is the value of Shelley's and Kevin's separate accounts at age 65? A)Shelley $710,861 Kevin $387,212 B)Shelley $710,861 Kevin $493,482 C)Shelley $834,296 Kevin $387,212 D)Shelley $834,296 Kevin $493,482

Shelley $834,296 Kevin $493,482

Which of the following plans needs an actuary on an ongoing basis? a. Tandem plan. b. Cash balance plan. c. 412(e) plan. d. Target benefit plan.

b. Cash balance plan. The tandem plan consists of a money purchase pension plan and a profit sharing plan. The cash balance plan needs an actuary. The 412(e) plan is fully funded with insurance and does not need an actuary. The target benefit plan does not need an actuary after it is set up.

The ACP test includes which of the following contributions? Employer matching contributions. Employer profit-sharing contributions. Employee after-tax contributions.

b. 1 and 3

Which of the following people would be considered a highly-compensated employee for 2020? 1. Amy, a 2% owner whose salary last year was $165,000 (top 20% rule NOT elected). 2. Red, a 6% owner whose salary was $23,500 for the last five years (top 20% rule NOT elected). 3. Reese, an officer, who earned $115,000 last year and is the sixth highest paid employee of 96 employees (top 20% rule IS elected). 4. Hank, a 0.5% owner who earned $147,000 last year and is in the top 20% of paid employees (top 20% rule IS elected). a. 1 and 4. b. 1, 2, and 4. c. 1, 3, and 4. d. 1, 2, 3, and 4.

b. 1, 2, and 4. Amy and Hank are HC due to compensation being greater than $130,000. If Hank were not in the top 20% of paid employees, he wouldn't be considered a HC employee—even if his salary were >$130,000. Red is HC because he is a >5% owner. Reese is not highly compensated because she does not have compensation greater than $130,000—even though she is in the top 20% of paid employees (the rule is comp greater than $130k AND in the top 20%, if elected)

Drake has worked for GT for the last 20 years and been a participant in its defined benefit plan. In the last ten years, his salary has increased significantly. Over the last ten years, his compensation was $300,000, $145,000, $200,000, $400,000, $225,000, $240,000, $233,000, $210,000, $150,000, and $290,000, respectively. In 2020, what is the most that he could receive as a pension payment? Answers:a. $330,000. b. $288,333. c. $285,000. d. $230,000.

d. $230,000. The maximum distribution from a defined benefit plan in 2020 is $230,000

Jacob is a participant in JJ's defined benefit plan. Jacob is 37 years old and earns $160,000. He has 4 years of service for purposes of the plan and has worked at the firm for 5 years. The plan provides a benefit of 1.5% for each year of participation. The plan has the least generous vesting schedule possible. Almost 70 percent of the accrued benefits are attributable to the fifteen equal owners, who have all been working at the company for decades. If Jacob were to leave today, what percent of his salary (as defined by the plan) could he expect to receive at normal retirement? Answers:a. 3.6%. b. 4.8%. c. 6.0%. d. 6.4%

d. 6.4%.

Defined benefits plans and cash balance plans are both pension plans. However, they are significantly different plans. Which of the following statements is true? Answers:a. A cash balance pension plan benefits younger and older employees equally. b. Both plans have hypothetical accounts for each plan participant. c. Both plan use the same vesting schedules whether the plan is top heavy or not. d. Both plans can provide for lump-sum benefits upon termination and/or full retirement age.

d. Both plans can provide for lump-sum benefits upon termination and/or full retirement age.

Which of the following is a characteristic of pension plans that does not apply to profit sharing plans? Answers:a. Separate accounts. b. In-service withdrawals for select employees, plan permitting. c. Limited investment in life insurance. d. Mandatory funding.

d. Mandatory funding.

Kwame and Rosa, both age 40, have $80,000 of combined retirement assets. They both expect to retire at the age of 65 with a life expectancy of 100 years old. They expect to earn 10% on the assets within their retirement accounts before retirement and 8% during their retirement. If they did not make any additional contributions to their account and they receive a fixed monthly annuity benefit for life, what is the monthly benefit (annuity due) amount they will receive during retirement? A)$4,775.30. B)$4,984.20. C)$6,115.60. D)$6,156.37.

$6,115.60. RationalePV = $80,000.00N = 25i = 10FV = $866,776.48PV = $866,776.48N = 420 (12 x 35)i = 0.6667 (8/12)PMT AD = $6,115.60Note: Answer d is the ordinary annuity amount!

Steve and Roslyn are retiring together today and they wish to receive $40,000 of income (in the equivalent of today's dollars) at the beginning of each year from their portfolio. They assume inflation will be 4% and they expect to realize an after tax return of 8%. Based on life expectancies, they estimate their retirement period to be about 30 years. They want to know how much they should have in their fund today. A)$698,457.24. B)$728,299.37. C)$731,894.20. D)$813,529.88

$731,894.20. RationaleBEGIN ModeN = 30i = [(1.08 ÷ 1.04) - 1] x 100 = 3.8462PV = ?PMT = 40,000FV = 0<731,894.1954>

Bowie, age 52, has come to you for help in planning his retirement. He works for a bank, where he earns $60,000. Bowie would like to retire at age 62. He has consistently earned 8% on his investments and inflation has averaged 3%. Assuming he is expected to live until age 95 and he has a wage replacement ratio of 80%, how much must Bowie save at the end of each year, from now until retirement, to provide him with the necessary capital balance assuming he has a zero balance today? A)$67,163.98. B)$70,424.36. C)$72,537.10. D)$76,058.31.

$76,058.31.

Bowie, age 52, has come to you for help in planning his retirement. He works for a bank, where he earns $60,000. Bowie would like to retire at age 62. He has consistently earned 8% on his investments and inflation has averaged 3%. He is expected to live until age 95 and he has a wage replacement ratio of 80%. Bowie wants to determine the amount of money necessary to provide him with the necessary capital balance at retirement. How much more of a capital balance would he need at retirement if he were to use the capital preservation model instead of the straight annuity model assuming he has a zero balance today? A)$82,897.54. B)$86,921.67. C)$109,496.29. D)$230,545.40.

$86,921.67.RationaleNote: Numbers may be slightly off due to rounding. N = 33i = 8 PMT = $0 FV@95 = $1,101,823.40 PV@62 = $86,921.67

Jasmine is 53-years old and earns $115,000 annually as an employee of a marketing company (subject to FICA taxes of 7.65%). She saves 12% of her annual gross income for retirement. Jasmine will pay off her mortgage by the time she retires; her monthly payment is $1,950.21. She would like to assume the same level of Federal and State income taxes in retirement that she has today. Calculate Jasmine's wage replacement ratio using all available information provided to you—round to the nearest %. a. 60% b. 68% c. 80% d. 88%

A

Tyrone, age 25, expects to retire at age 60. He expects to live until age 90. He anticipates needing $45,000 per year in today's dollars during retirement. Tyrone can earn a 12% rate of return and he expects inflation to be 4%. How much must Tyrone save, at the beginning of each year, to meet his retirement goal? A)$3,980.76. B)$4,585.46. C)$4,879.29. D)$5,132.33.

B)$4,585.46.

Susie has the following expenditures during the current year: ExpenseAmount1. Health Care$8002. Savings$4,0003. Travel$5004. Gifts to Grandchildren$1,000 Which of these expenditures would you expect to decrease during Susie's retirement? A)2 only. B)1 and 3. C)2 and 4. D)1, 2, 3, and 4.

A) 2 only. Rationale Susie is likely to decrease her savings during retirement. She is likely to increase her health care expense since she will begin to age and need more medical attention. She is likely to increase her travel expense as she will have more free time available for travel. She is likely to increase the amounts she gives to her grandchildren since she will be in the distribution phase.

Thibodaux Company sponsors an integrated profit sharing plan with a base percent of 20%. Boudreaux, who is 60 years old, earns $330,000 per year. Assuming the plan uses the 2020 Social Security wage base as the integration level, how much more will Boudreaux receive because the plan is integrated over a plan that contributes a flat 20% of compensation? A)$0. B)$7,849. C)$8,396. D)$10,961.

A)$0. Rationale He would not get any benefit from integration if the base percent is 20% because 20% of $285,000 (2020 compensation limit) equals $57,000 (2020 annual additions limit).

Accent, Inc. sponsors a 25% money purchase pension plan for its eligible employees. Carlos earns $200,000, Kevin earns $60,000, Kelly earns $300,000, and Rick, who is ineligible, earns $27,000. What is Accent's required deductible contribution for the year? All employees are under age 50. A)$122,000. B)$136,250. C)$140,000. D)$146,750.

A)$122,000.

WHR, LLC sponsors a defined contribution plan. Vaughn, age 44, has compensation of $160,000 for the year. WHR has made a $25,000 profit sharing plan contribution on Vaughn's behalf and $5,000 of plan forfeitures were allocated to Vaughn's profit sharing plan during the year. How much can Vaughn defer into his CODA plan (401(k)) to maximize his annual contributions to the qualified plan for 2020? A)$19,500. B)$26,000. C)$27,000. D)$32,000.

A)$19,500.

BigCorp, LLC has a 401(k) plan that allows for hardship distributions. Sandra would like to return to school to get a Masters degree. She has $3,000 in her savings account to use, but would like to take a hardship distribution from her 401(k) plan for the maximum amount available. Sandra's program will take two years and cost $7,000 per year. Sandra's 401(k) account balance is $20,000. Sandra has never made any hardship distributions and her elective contributions to the plan total $10,000. How much can Sandra withdraw as a hardship distribution? A)$4,000. B)$7,000. C)$10,000. D)$20,000.

A)$4,000. Rationale A distribution for payment of up to the next 12 months of post-secondary education and room and board expenses is deemed to be on account of an immediate and heavy financial need. Sandra can take a distribution up to the immediate hardship expense less other assets available to pay the hardship expense ($7,000 for one year of tuition - $3,000 in savings).

Charles earns $400,000 per year at Home Cleaning Services, Inc. where he has been employed for the last ten years. Home Cleaning Services sponsors a defined benefit plan that provides its employees with a benefit equal to 1.5% per year of service of the employees final compensation. At the current time, what is Charles' retirement benefit payable from the defined benefit plan? A)$42,750. B)$60,000. C)$230,000. D)$285,000.

A)$42,750. Rationale Charles' current projected benefit from the defined benefit plan is $42,750. For the calculation of the benefit the employer cannot consider compensation in excess of $285,000 for 2020. 1.5% x 10 x $285,000 = $42,750.

Rick, who is age 45, is having a few leadership issues and must resign from his current position as CEO. He worked for A-Send, which sponsors a cash balance plan and a standard 401(k) plan. Each of the plans uses the longest permitted vesting schedule and neither plan is top heavy. He has a balance of $80,000 in the cash balance plan, has deferred $40,000 into the 401(k) plan and has employer matching contributions of $20,000. If he has been employed for two and a half years, but only participating in the plans for the last two years, how much does he keep if he resigns and terminates his employment today? A)$44,000. B)$60,000. C)$124,000. D)$140,000.

A)$44,000. Rationale Vesting is based on years of service with the employer. He keeps his entire deferral of $40,000. The cash balance plan uses a 3 year cliff, which means that he keeps none of the $80,000. The matching contributions will vest over a 2 to 6 graded schedule, which means that he keeps 20% of the $20,000, for a total of $44,000. Choice b is wrong because it assumes that cash balance plans use a 2 to 6 graded schedule.

A defined benefit pension plan has a funding formula equal to 1% x years of service x final salary. If Jim's final salary is $600,000 and Jim has earned 30 years of service, what is Jim's retirement benefit in 2020? A)$85,500. B)$180,000. C)$230,000. D)$285,000.

A)$85,500. Rationale 1% x 30 x $285,000 = $85,500.Recall that when calculating the benefit payable from a qualified plan, the compensation in excess of the covered compensation limit ($285,000 for 2020) is not considered

Which of the following is true regarding negative elections?1. A negative election is a device where the employee is deemed to have elected a specific deferral unless the employee specifically elects out of such election in writing.2. Negative elections are no longer approved by the IRS.3. Negative elections are only available for employees who enter the plan when it is first established and are not available for new employees. A)1 only. B)1 and 2. C)2 and 3. D)1, 2, and 3.

A)1 only. Rationale Negative elections are approved by the IRS and they are available for both current and future employees. Qualified automatic contribution arrangements use negative elections. However, not all plans that employ a negative election will qualify as a qualified automatic contribution arrangement.

Wanka Factory has 100 non-excludable employees, 10 of whom are highly compensated. Eight of the 10 highly compensated and 63 of the 90 non-highly compensated employees are covered under Wanka's qualified plan. The average accrued benefits for the highly compensated is 4% and the average accrued benefit for the non-highly compensated is 1.5%. Which of the following statements is true regarding coverage?1. The plan passes the ratio percentage test.2. The plan passes the average benefits test. A)1 only. B)2 only. C)Both 1 and 2. D)Neither 1 nor 2.

A)1 only. Rationale The ratio percentage test compares the % of nonhighly compensated to the % of highly compensated covered. The ratio must be greater than or equal to 70% for the plan to pass the ratio percentage test. The calculation for Wanka's qualified plan is as follows:NHC = 63 ÷ 90 = 70%HC = 8 ÷ 10 = 80%70% ÷ 80% = 87.5% (pass)Wanka's plan passes the ratio percentage test requirement of 70%.The average benefits test requires the average benefit of the non-highly compensated employees to be at least 70% of the average benefit of the highly compensated. Wanka's plan does not satisfy the average benefits test because the average benefit of the non-highly compensated compared to the average benefit of the highly compensated is less than 70% (1.5%/4% = 37.5%) (fail).

Tiffany, a self-employed dentist, currently earns $100,000 per year. Tiffany has always been a self proclaimed saver, and saves 25% per year of her Schedule C net income. Assume Tiffany paid $13,000 in Social Security taxes. Tiffany plans to pay off her home mortgage at retirement and live debt free. She currently spends $25,000 per year on her mortgage. What do you expect Tiffany's wage replacement ratio to be at retirement based on the above information? A)37.00%. B)59.70%. C)65.30%. D)84.70%.

A)37.00%. RationaleThe answer is calculated as follows: Dollar ValuePercentage Salary$100,000100.00%SalarySE Taxes($13,000)(13.00%)Self-employment taxesSavings($25,000)(25.00%)SavingsMortgage($25,000)(25.00%)Mortgage paid off $37,00037.00% 37,000 ÷ 100,000 = 37.00% WRR

Cheque Company has 100 eligible employees and sponsors a defined benefit pension plan. The company is unsure if they are meeting all of their testing requirements. How many employees (the minimum) must be covered by Cheque Company's defined benefit pension plan for the plan to conform with ERISA? A)40. B)50. C)70. D)100.

A)40. Rationale The 50/40 rule requires that defined-benefit plans cover the lesser of 50 employees or 40% of all eligible employees. In this example, 40% of 100, or 40 employees, would be the lesser of these two amounts.

Aztec Clay Distributor is a family owned business that is owned by Alice, Bill, Chad and Zion. Alice and Bill are over 50. Zion is not an employee, rather a silent or somewhat silent partner. Alice and Bill are married and Chad is their 25-year-old son who has a degree in Soil Science from Dhaka University in Bangladesh. Aztec sponsors a 401(k) plan. The employee census information is in the chart below. Assuming the company did not elect the exception to the definition of highly compensated employees, the average ADP of the highly compensated employees can be no greater than what percent? A)7.53%. B)8.32%. C)8.65%. D)11.98%.

A)7.53%. Rationale The non-highly compensated employees are Frank, Ginger, Haley, Irish and Jen. The ADP for the NHCEs equals 5.53% [[16% + 0% + 6.67% + 5% + 0%] ÷ 5]. Adding 2 percentage points equals 7.53%. Chad is HC since he is attributed ownership from his parents.

Skatium, the city's most popular roller skating rink, has a profit sharing plan for their employees. Skatium has the following employee information:EmployeeAgeLength of ServiceBrett6214 yearsGreer5714 yearsJennifer326 monthsDan222 yearsKaren192 yearsMike176 monthsCraig161 yearThe plan requires the standard eligibility and the least generous graduated vesting schedule available. The plan is not top-heavy. All of the following statements are correct except: A)Dan and Karen are 20 percent vested in their benefits. B)Brett and Greer became 100 percent vested when they had been employed for six years. C)Three of the seven people are eligible to participate in the plan. D)Craig is not eligible for the plan.

A)Dan and Karen are 20 percent vested in their benefits. Rationale The standard vesting schedule requires individuals to be 21 years of age and have one year of service before becoming eligible for the plan. Brett, Greer, and Dan are the only individuals that meet that criteria. The least generous vesting schedules are 3-year cliff and 2-to-6-year graduated vesting. The facts say they use the least generous graduated vesting. Therefore, Dan is 20% vested and Greer and Brett became 100% vested in the 6th year. Craig is not eligible because he is 16 years old. Karen is not vested because she is not eligible due to her age.

Which of the following entities is unable to establish a 401(k) plan? A)Government entity. B)LLC. C)Partnership. D)Tax-exempt entity.

A)Government entity. Rationale A government entity can no longer establish a 401(k) plan. The remaining entities may establish a 401(k) plan.

Andrew is a small business owner and wants to install a qualified plan that has specific requirements. Which of the following plans meets the following list of requirements?1. Qualified under IRC Section 401(a).2. Permits at least 25 percent of employer securities to be invested in the plan.3. Can use forfeitures to reduce plan contributions.4. Does not require a joint and survivor annuity distribution option. A)Profit sharing plan. B)403(b) plan. C)Money purchase plan. D)Cash balance plan.

A)Profit sharing plan.

Which of the following is not true regarding profit sharing plans? A)The plan is established and maintained by the individual employee. B)Allows employees to derive benefit from profits of the company. C)Profit sharing plans cannot discriminate in favor of officers and shareholders. D)Profit sharing plans provide a definite predetermined formula for allocating the contributions made to the plan among the participants and for distributing the funds accumulated under the plan

A)The plan is established and maintained by the individual employee. Rationale Answer a is not true regarding profit sharing plans. A profit sharing plan is established and maintained by the employer. The remaining options are true statements.

Which of the following statements regarding the plan sponsor of a money purchase pension plan is correct? A)The plan sponsor is required to make an annual contribution to the plan. B)The excess earnings of a money purchase pension plan are returned to the plan sponsor. C)The plan sponsor generally bears the investment risk of the plan assets. D)A plan sponsor with fluctuating cash flows would adopt a money purchase pension plan.

A)The plan sponsor is required to make an annual contribution to the plan.

Larry is 58 and wants to retire by age 65. He expects that he will live to age 95. He currently has a salary of $140,000 and expects that he will need about 72% of that amount annually at the beginning of each year if he were retired. He can earn 9 percent in his portfolio while he is working. However, he expects that he will only earn 7 percent in his portfolio during retirement because he will adjust his asset allocation so that his portfolio is more conservative. He expects inflation to continue at 3 percent. Larry currently has $800,000 invested for his retirement. His Social Security benefit in today's dollars is $24,000 per year, assuming a retirement of age 65. He just calculated what he needs to save at the end of each year and it is more than he can afford (assume he does not wish to leave a financial legacy). Which of the following is his best alternative to achieve his retirement goals? Answers:a. Modify his portfolio during retirement to achieve an 8% rate of return instead of a 7% rate of return. b. Delay his retirement by 2 years. c. Reduce his expected needs by $10,000 in today's dollars. d. None of the above will help him achieve his goals.

B

Using the same information as in #3, how much does Colin need to save annually at the end of each year to meet his retirement lifestyle needs (use your exact calculation from #3 for this question)? a. $7,000 b. $8,394 c. $15,492 d. $27,506 Answers:a. $7,000 b. $8,394 c. $15,492 d. $27,506

B

Using the same information as in #3, how much total investment capital would Colin need to support his retirement lifestyle and leave a financial legacy if he wanted to have the same amount of investment capital remaining at his death as he will have at retirement (round to the nearest $100,000)? Answers:a. $2.6 million b. $2.7 million c. $2.9 million d. $3.2 million

C

Milton, age 38, earns $170,000 per year. His employer, Dumaine Consulting, sponsors a qualified profit sharing 401(k) plan and allocates all plan forfeitures to remaining participants. If in the current year, Dumaine Consulting makes a 20% contribution to all employees and allocates $4,000 of forfeitures to Milton's profit sharing plan account, what is the maximum Milton can defer to the 401(k) plan in 2020? A)$0. B)$19,000. C)$19,500. D)$26,000.

B)$19,000.

Using the same information as in #3, how much total investment capital would Colin need to support his retirement lifestyle and leave a financial legacy if he wanted to have the same amount of investment capital remaining at his death with an equal purchasing power as he will have at retirement (round to the nearest $100,000)? Answers:a. $2.6 million b. $2.7 million c. $2.9 million d. $3.2 million

D

ABC Company has three employees: Ann, Brenda, and Curtis. Their compensation is $50,000, $150,000, and $200,000 respectively. ABC is considering establishing a straight 10% profit sharing plan or an integrated profit sharing plan using a 10% contribution for base compensation and 15.7% for excess compensation. Which of the following statements are correct? A)If the integrated plan is selected, then the total contribution for all employees is $62,800. B)The effect of the integrated plan results in an increase in Brenda's contribution of $701. C)If the integrated plan is selected, the base contribution for all employees is $57,000. D)If the integrated plan is selected, Curtis' total contribution is $31,400.

B) The effect of the integrated plan results in an increase in Brenda's contribution of $701.

Sheehan works for Andy Company and is a superior sales guy. His total compensation this year is $600,000. Andy sponsors an integrated profit sharing plan with a base percentage of 5.5% and a maximum excess percentage. It uses the current wage base as the integration level. How much will the company contribute for Sheehan for 2020? A)$15,675. B)$23,777. C)$31,350. D)$57,000.

B)$23,777. Rationale The excess percentage is 11% (twice the base percentage). Therefore, Sheehan receives 5.5% from zero to the wage base of $137,700 (2020) and 11% on income above the wage base up to the covered compensation limit of $285,000 (2020). [[$285,000 - $137,700] x 11% + $137,700 x 5.5%]. $16,203 + $7,574 = $23,777.

Sew What, the best seamstress shop in town, sponsors a 401(k) plan. The plan provides a dollar-for-dollar match for employee contributions up to six percent and has immediate vesting for all contribution s. For ADP purposes, the company has not made the top 20 percent election for the determination of who is highly compensated. The company has the following employee information: EmployeeOwnershipCompensationElectiveDeferralDeferralPercentage Lois93%$201,000$14,000 6.97% Frank 5%$150,000$14,000 9.33% Karen 2%$140,000$12,600 9.00% Jeannette -$40,000$4,000 10.00% Joyce -$30,000- 0.00% Ronnie -$30,000$1,800 6.00% Kali -$30,000- 0.00% Which of the following statements is correct? A)Karen is not highly compensated. B)The plan passes the ADP test if Joyce and Kali were not eligible. C)Joyce and Kali are not considered when calculating the ADP test because they do not contribute. D)The top heavy rules require Sew What to make a 3% contribution for Jeanette, Joyce, Ronnie, and Kali.

B) The plan passes the ADP test if Joyce and Kali were not eligible. Rationale Lois, Frank and Karen are highly compensated employees. Lois is the only one that meets the ownership test of greater than five percent. Lois, Frank, and Karen meet the earnings test for being highly compensated. The plan fails the ADP test. The NHC average ADP is 4% [(10% + 0% + 6% + 0%) ÷ 4] while the HC ADP is 8.43% [(6.97% + 9.33% +9.00%) ÷ 3]. Thus using the test, 2 is added to the NHC ADP of 4% requiring the HC ADP be at or below 6%. Since the HC ADP is 8.43%, the plan fails the ADP test. If Joyce and Kali were not eligible, then the NHC ADP equals 8% and the HC ADP must be at or below 10%, so the plan meets the ADP test. Choice c is not correct and choice d is not correct as there is no indication that the plan is top heavy. In addition, top heavy applies to key employees, not highly-compensated employees.

Robin is planning for her retirement. She is currently 37 years old and plans to retire at age 62 and live until age 97. Robin currently earns $100,000 per year and anticipates needing 80% of her income during retirement. She anticipates Social Security will provide her with $15,000 per year at age 62, leaving her with required savings to provide $65,000 ($100,000 x 0.80 - $15,000) annually during retirement. She believes she can earn 11% on her investments and inflation will be 2% per year. How much must Robin save at the end of each year, if she wants to make her last savings payment at age 62 to meet her retirement goal? A)$10,846.78. B)$10,899.37. C)$11,861.07. D)$13,414.60.

B)$10,899.37.

Knowledge Star is a 30-year-old company that has grown significantly in terms of revenue and product offerings. They sponsor a pension plan that provides a benefit of 2% times years of participation times the average of the final three years of salary less an offset. The offset equals 1% times years of service times income below the covered compensation limit of $40,000 (assumed). Roberto has worked with Knowledge Star for the last 30 years and earned $90,000 two years ago, $110,000 last year, and $130,000 this year. If he is retiring this year, how much should heexpect to receive as a pension benefit? A)$45,000. B)$54,000. C)$66,000. D)$78,000.

B)$54,000. RationaleAverage Salary: $110,000 Benefit ($110,000 x 2% x 30 yrs.)$66,000Less Offset ($40,000 x 1% x 30 yrs.) ($12,000)Actual Benefit$54,000

Which of the following people would be considered a highly compensated employee for 2020?1. Kim, a 1% owner whose salary last year was $150,000.2. Rita, a 6% owner whose salary was $42,000 last year.3. Robin, an officer, who earned $105,000 last year and is the 29th highest paid employee of 96 employees.4. Helen, who earned $132,000 last year and is in the top 20% of paid employees. A)1 and 4. B)1, 2, and 4. C)1, 3, and 4. D)1, 2, 3, and 4.

B)1, 2, and 4. Rationale Kim and Helen are HC due to compensation being greater than $130,000. Rita is HC because she is a >5% owner. Robin is not highly compensated because she does not have compensation greater than $130,000.

Which of the following vesting schedules may a top-heavy qualified cash balance plan use? A)1 to 4 year graduated. B)35% after 1 year, 70% after 2 years, and 100% after 3 years. C)2 to 6 year graduated. D)4 year cliff.

B)35% after 1 year, 70% after 2 years, and 100% after 3 years. Rationale As a result of the PPA 2006, cash balance plans must vest at least as fast as a three year cliff vesting schedule.The only choice that is possible is the one in choice b

Ashley is a participant in her law firm's defined benefit plan. Ashley, who is an aggressive attorney, is 44 years old and earns $150,000. She has four years of service for purposes of the plan and has worked at the firm for four years. The plan provides a benefit of 1% for the first three years of service and a benefit of 1.5% for all additional years of service. The plan has the least generous vesting schedule possible. Almost eighty percent of the accrued benefits are attributable to the two equal owners, Martin and Bob, who have been working at the company for decades. If Ashley were to leave, what percent of her salary (as defined by the plan) could she expect to receive at normal retirement? A)3.6%. B)4.8%. C)5.5%. D)6.4%.

B)4.8%. Rationale This plan is top heavy as Martin and Bob are key employees who have accrued benefits in excess of 60%. Therefore, vesting will shift and there is a minimum benefit that must be provided to non-key employees. Her benefit will be 2% times YOS (8%) times the vesting percentage (60%). Remember, the vesting for a defined benefit plan shifts (from 3 to 7 vesting to 2 to 6 vesting) if the plan is top heavy

Which of the following statements regarding defined benefit plans is true? A)A defined benefit plan can allocate forfeitures to other plan participants. B)A defined benefit plan can use forfeitures to reduce future plan costs. C)A defined benefit plan cannot give credit for prior service. D)Each participant of a defined benefit plan has an individual account.

B)A defined benefit plan can use forfeitures to reduce future plan costs. Rationale A defined benefit plan must use forfeitures to reduce future plan costs. Statement a is incorrect because a defined benefit plan cannot allocate forfeitures to other plan participants. Statement c is incorrect because a defined benefit plan can give credit for prior service. Statement d is incorrect because a participant in a defined benefit plan does not have an individual account.

Dole Electronics, a C Corporation, has 4 employees. The company sponsors a profit sharing plan and contributed 10% of employee compensation for the current year to the plan. The company has the following employee information. There is no state income tax and federal withholding is 15% of gross pay. EmployeeGross SalaryProfit SharingContributionAndy$50,000$5,000Candy$40,000$4,000Mandy$30,000$3,000Sandy$20,000$2,000 Which of the following statements is true? A)Dole Electronics will not be able to take a deduction for the contribution to the profit sharing plan. B)After payroll taxes and withholding, Andy will only receive $38,675 in take home salary. C)Dole electronics will pay FICA payroll taxes of $11,781. D)Candy must include the $4,000 contribution to the profit sharing plan made on her behalf in her gross income for the current year.

B)After payroll taxes and withholding, Andy will only receive $38,675 in take home salary.

Which of the following statements regarding EGTRRA 2001 is false? A)EGTRRA 2001 increased the employer's deductible contribution limit for profit sharing plans to 25 percent of employer compensation. B)After the enactment of EGTRRA 2001, money purchase pension plans adoptions have increased. C)Many Tandem Plans were terminated and/or converted after the enactment of EGTRRA 2001. D)Prior to EGTRRA 2001, an employer could deduct contributions to a money purchase pension plan up to 25 percent of employer covered compensation.

B)After the enactment of EGTRRA 2001, money purchase pension plans adoptions have increased.

Andi, the 100 percent owner of Andi's Day Care, a C-corporation, would like to establish a profit sharing plan. Andi's Day Care's tax year ends July 31 to coincide with the school year. What is the latest day Andi can establish and contribute to the plan? A)Andi must establish and contribute to the plan by December 31 of the year in which she would like to establish the plan. B)Andi must establish the plan and make the contribution by April 15 of the following year assuming she filed the appropriate extensions. C)Andi must establish the plan by July 31 of the year in which she would like to establish the plan and contribute by December 31. D)Andi must establish the plan by December 31 of the year in which she would like to establish the plan and contribute to the plan by April 15 of the following year.

B)Andi must establish the plan and make the contribution by April 15 of the following year assuming she filed the appropriate extensions. Rationale Andi must establish the plan and make the contribution to the plan by the due date of the tax return, including extensions. The tax return for a C-corporation operating on a fiscal year ending July 31 is due November 15th of the same year, but can be extended for 6 months, to April 15 of the following year, assuming she filed all of the appropriate extensions.

Cathy and her twin sister Carley, both age 25, each believe they have the superior savings plan. Cathy saved $5,000 at the end of each year for ten years then let her money grow for 30 years. Carley on the other hand waited 10 years then began saving $5,000 at the end of each year for 30 years. They both earned 9% on their investment and are 65 years old today and ready to retire. Which of the following statements is correct? A)Both strategies are equal as they have equal account balances at age 65. B)Cathy's strategy is better because she has a greater account balance at age 65. C)Carley's strategy is better because she has a greater account balance at age 65. D)Neither strategy is better because Carley has a greater account balance but Cathy contributed less.

B)Cathy's strategy is better because she has a greater account balance at age 65

All of the following are advantages of a 401(k) plan except: A)Employees are permitted to shelter current income from taxation in a 401(k) plan. B)Employers can sponsor 401(k) safe harbor plans without committing to annual contributions and without creating a deferred liability. C)Earnings grow tax-deferred until distributed. D)Employers can establish 401(k) plans with minimal expense.

B)Employers can sponsor 401(k) safe harbor plans without committing to annual contributions and without creating a deferred liability. Rationale Answer b is false, and thus not an advantage of 401(k) safe harbor plans. Employers are generally required under the safe harbor rules to make either a matching contribution or a contribution to all employee's eligible for the plan whether they contribute or not.

Mikael opened a fabulous restaurant ten years ago. The food is so exceptional that the restaurant has become one of the top spots in the city. Mikael, age 55, is the sole owner with compensation of $285,000. Mikael's son Jamel, age 28, is the master chef with compensation of $150,000. Jamel has been with the restaurant full time since he turned 18. Mikael also employs 15 other individuals whose ages range between 25 and 35 and have compensation on average of $40,000 per year. Mikael wants to establish a profit sharing plan. Which of the following statements is true? A)If Mikael selected the standard allocation method and the plan contributes 10 percent per individual, the plan will contribute $57,000 to Mikael's account. B)If Mikael selected the permitted disparity method and the plan contributes 10 percent per individual, the contribution the company makes for Mikael will be increased. C)Considering the needs and wants of Mikael and Jamel, an age-based profit sharing plan is the best plan for both of them. D)A new comparability plan is the least expensive, simplest way to meet both Mikael and Jamel's retirement needs.

B)If Mikael selected the permitted disparity method and the plan contributes 10 percent per individual, the contribution the company makes for Mikael will be increased.

Which of the following is not a characteristic of pension plans? A)Mandatory funding. B)In-service withdrawals for employees under the age of 62. C)Limited investment in life insurance. D)A limit of 10 percent investment in the employer's securities

B)In-service withdrawals for employees under the age of 62. Rationale A pension plan requires mandatory funding, limits the investment of plan assets in life insurance, and limits the investment of plan assets in employer's securities. A pension plan may not allow in-service withdrawals for employees under the age of 62.

C)Coverage testing can include leased employees as part of the calculation. Years ofService(Option A)(Option B)(Option C)(Option D) 15%10%00 210%20%00 315%45%020% 420%65%100%40% 560%100%100%60% 6100%100%100%80% 7100%100%100% A)Option A. B)Option B. C)Option C. D)Option D.

B)Option B.

Tyler's Bike Shop has a 401(k) plan that offers an employer match of dollar-for-dollar up to four percent of employee compensation. Although the plan provides for the least generous graduated vesting schedule available, it does allow employees to enter the plan on their hire date. The employee census is as follows: EmployeeEmployeeAgeCoveredCompensationEmployeeDeferralYears inPlan Tyler 57$150,00010%10Tanya23$100,000 Not yet participating Timmy37$80,00020%10Tom31$76,0004%5 Tyler established the plan ten years ago to benefit him and his only employee, his son Timmy. Since then Tyler hired his other son, Tom, and his new wife Tanya. Tyler wanted to establish the 401(k) plan to encourage his children to save for their future. He also wanted a vesting schedule to ensure that they would learn the responsibility of sticking to their employment commitments. The family has come to you for recommendations to help them maximize their plan contributions. Since both of his sons have shown commitment over the past years, Tyler is willing to make some alterations to the plan in order to increase the retirement savings for all of them. Which of the following would not be one of your recommendations?

B)Tanya should enter the plan and contribute 20 percent of her salary. Rationale Yes, Tanya should enter the plan, but she would not be able to contribute 20%. Remember that the limit for a 401(k) contribution is $19,500 for 2020. Thus to reach the limit, Tanya may only contribute 19.5%. Tyler and Tom should both increase their contributions. Tyler can increase his contribution because he is below the maximum of $19,500 and because of the $6,500 catch-up contribution allowed for his age. Tom is far from making the maximum contribution and should thus increase his contribution. The least generous graduated vesting schedule for matching contributions is 2-to-6-years. Thus, Tom is not 100% vested in the employee match and should stay an additional year. Tyler could increase the contribution for all of them by adding a profit sharing contribution to the plan. This would allow them to reach the annual additions limit of $57,000 for 2020. As you recall, the profit sharing plan contribution will allow the company to make an additional contribution to increase the employee balances.

Danny would like to determine his financial needs during retirement. All of the following are expenditures he might eliminate in his retirement needs calculation except: A)The $200 per month he spends on drying cleaning for his work suits. B)The $1,500 mortgage payment he makes that is scheduled to end five years into retirement. C)The FICA taxes he pays each year. D)The $2,000 per month he puts into savings.

B)The $1,500 mortgage payment he makes that is scheduled to end five years into retirement.

Of the following statements regarding target benefit pension plans, which is true? A)A target benefit pension plan is a money purchase pension plan with a funding formula that considers age and salary. B)The plan sponsor of a target benefit pension plan does not guarantee that the participant will receive an amount, expected to be the "target benefit" amount, at his retirement. C)Plan participants of a target benefit pension plan do not have separate accounts. D)The plan sponsor guarantees an earnings rate for the contributions made to target benefit pension plans

B)The plan sponsor of a target benefit pension plan does not guarantee that the participant will receive an amount, expected to be the "target benefit" amount, at his retirement.

Which of the following expenditures will most likely increase during retirement? A)Clothing costs. B)Travel. C)FICA. D)Savings.

B)Travel.

Which of the following are risks to financial independence? Answers:a. A shortened work life expectancy. b. An extended retirement life expectancy. c. Inadequate investment rate of return. d. All of the above

D

Tidewater Company has 1,000 eligible employees and sponsors a defined benefit pension plan. The company is unsure if they are meeting all of their testing requirements. How many employees (the minimum) must be covered by Tidewater's defined benefit pension plan for the plan to conform with ERISA under the 50/40 rule? a. 40 b. 50 c. 400 d. 500

B. 50 Response Feedback: The correct answer is b. The 50/40 rule requires that defined-benefit plans cover the lesser of 50 employees or 40% of all eligible employees. In this example, 50 employees is less than 40% of 1000, or 400 employees.

Colin is 40 years old and wants to retire in 27 years. His family has a history of living well into their 90s. Therefore, he estimates that he will live to age 95. He currently has a salary of $150,000 and expects that he will need about 85% of that amount annually at the beginning of each year if he were retired. He can earn 8.5% from his portfolio and expects inflation to continue at 3%. Some years ago, he worked for the government and expects to receive an annuity from his pension plan that will pay him $20,000 in today's dollars per year beginning at age 67. The annuity includes a cost of living adjustment equal to inflation. Colin currently has $200,000 invested for his retirement. His Social Security benefit in today's dollars is $30,000 per year at his normal age retirement of age 67. Approximately how much does he need to accumulate in his investment portfolio by age 67 to meet his retirement income needs, assuming he does not wish to leave a financial legacy for his heirs (round to the nearest $100,000)? Answers:a. $1.2 million b. $2.5 million c. $2.6 million d. $3.3 million

C

Which of the following cash outflows will most likely decrease during retirement? a. leisure activities b. health care costs c. vacation and travel costs d. retirement savings

D

Which of the following actuarial assumptions is not used by the actuary who determines the mandatory funding range for a defined benefit plan? A)Mortality. B)Turnover. C)Divorce rate. D)Disability rate.

C) Divorce Rate Rationale An actuary who determines the mandatory funding range for a defined benefit plan may consider mortality, turnover, disability, salaries, retirement ages, and interest rates. A divorce has no effect on the funding requirements of a defined benefit plan. D)

Robin is planning for her retirement. She is currently 37 years old and plans to retire at age 62 and live until age 97. Robin currently earns $100,000 per year and anticipates needing 80% of her income during retirement. She anticipates Social Security will provide her with $15,000 per year at age 62, leaving her with required savings to provide $65,000 ($100,000 x 0.80 - $15,000) annually during retirement. She believes she can earn 11% on her investments and inflation will be 2% per year. Robin would like to preserve her capital so that the capital balance required at age 62 is maintained until age 97. How much must Robin save at the end of each year, if she wants to make her last savings payment at age 62 to meet her retirement goal and maintain her capital balance? A)$2,379.57. B)$10,899.37. C)$11,181.92. D)$11,280.51.

C)$11,181.92.

Robin is planning for her retirement. She is currently 37 years old and plans to retire at age 62 and live until age 97. Robin currently earns $100,000 per year and anticipates needing 80% of her income during retirement. She anticipates Social Security will provide her with $15,000 per year at age 62, leaving her with required savings to provide $65,000 ($100,000 x 0.80 - $15,000) annually during retirement. She believes she can earn 11% on her investments and inflation will be 2% per year. Robin would like to preserve the purchasing power of her capital balance during retirement. How much must Robin save at the end of each year, if she wants to make her last savings payment at age 62 to meet her retirement goal and maintain the purchasing power of her retirement savings until age 97? A)$4,758.88. B)$10,899.37. C)$11,464.44. D)$11,565.52.

C)$11,464.44.

If a participant's accrued benefit from a qualified defined benefit pension plan is $2,000 per month, what is the maximum life insurance death benefit coverage that the plan can provide based on the 100 to 1 ratio test? A)$0. B)$2,400. C)$200,000. D)$240,000.

C)$200,000. Rationale A qualified pension plan is limited in the amount of term life insurance it is able to purchase with plan assets. The plan must pass either one of two tests, the 25 percent test or the 100 to 1 ratio test. Under the 100 to 1 ratio test. Under the 100 to 1 ratio test, the plan can purchase $200,000 ($2,000 x 100) of term life insurance death benefit coverage.

Aztec clay distributor is a family owned business that is owned by Alice, Bill, Chad and Zion. Zion is not an employee, rather a silent or somewhat silent partner. Alice and Bill are married and Chad is their 25-year-old son who has a degree in Soil Science from Dhaka University in Bangladesh. The employee census information is in the chart below. What is the most that could be contributed to a profit sharing plan and deducted by Aztec if they set up a profit sharing plan (ignoring any issues with salary deferrals)? A)$184,000. B)$254,000. C)$263,750. D)$275,000.

C)$263,750.

Aztec Clay Distributor is a family owned business that is owned by Alice, Bill, Chad and Zion. Alice and Bill are over 50. Zion is not an employee, rather a silent or somewhat silent partner. Alice and Bill are married and Chad is their 25-year-old son who has a degree in Soil Science from Dhaka University in Bangladesh. Aztec sponsors a 401(k) plan. The employee census information is in the chart below If Aztec established a profit-sharing plan, what is the most that Aztec could contribute for 2020 to the profit-sharing plan? A)$225,000 B)$275,000. C)$282,500. D)$297,500

C)$282,500. Rationale Aztec can contribute 25% of covered compensation. The total covered compensation is $1.19 million less the $45,000 of compensation for Alice and the $15,000 of compensation for Bill that is above the 2020 limit of $285,000 or $1,130,000. The contribution equals $282,500. $1,190,000 (45,000) (15,000) $1,130,000 x 25% $282,500

SK owns SK Ltd, which is a professional firm with five employees that sponsors both a defined benefit plan and a profit sharing plan with a cash or deferred arrangement. The covered compensation for SK Ltd is $600,000. Salary deferrals total $30,000. If the required funding for the defined benefit plan is $120,000, then how much can be contributed to the profit-sharing plan? A)$0. B)$30,000. C)$36,000. D)$150,000.

C)$36,000. Rationale Salary deferrals are not taken into consideration for the multi-plan limits. Since the plan is not subject to PBGC (professional firm with less than 25 employees), the combined limits will apply unless the defined contribution does not exceed 6%. The funding for the defined contribution plan is the greater of the remaining 25 percent limit after taking into consideration the defined benefit funding or six percent. Therefore, $36,000 can be contributed to the defined contribution plan since it is greater than $30,000 (25 percent of $600,000 less $120,000).

Contributing $1,500 to his retirement fund at the end of each year beginning at age 18 through age 50, with an average annual return of 12%, how much does Juan have in his retirement account at this time to use toward a possible early retirement? A)$346,766.42. B)$399,987.65. C)$457,271.58. D)$541,890.55.

C)$457,271.58. RationaleN = 50 - 18 = 32i = 12PV = 0PMT = <1,500>FV = ?<457,271.5789>

Steve has a qualified plan with an account balance of $2,000,000. In which of the following circumstances would a third party be able to alienate the assets within Steve's qualified plan?1. A QDRO in favor of a former spouse.2. A federal tax levy.3. Creditors in a personal bankruptcy. A)3 only. B)1 and 3. C)1 and 2. D)1, 2, and 3.

C)1 and 2.

Which of the following statements is false? A)To be more conservative in planning for an individual's retirement, extend the individual's life expectancy. B)A Monte Carlo Analysis uses a random number generator to provide the advisor with an array of possible outcomes utilizing the same fact pattern. C)A sensitivity analysis helps the advisor determine the single most effective factor in a retirement plan. D)The capital preservation model assumes that at life expectancy the client will have exactly the same account balance as he did at retirement.

C)A sensitivity analysis helps the advisor determine the single most effective factor in a retirement plan. Rationale No one factor is the most important factor in a retirement plan. Sensitivity analysis gives the planner an understanding of how each factor affects the overall retirement plan.

Nex sponsors a DB(k) plan that provides benefits for all employees. Nex adopted the plan four years ago. Kleen, who is age 55 and earns $100,000, has been employed for the last ten years with Nex. Which of the following statements is correct regarding Kleen's benefits under Nex's DB(k) plan? A)Kleen will be limited on his deferral to the 401(k) plan because of the required contribution to the DB part of the plan. B)If the DB(k) plan provides for a cash balance option, then Kleen should be receiving pay credits of 6% per year. C)All benefits provided under the DB(k) plan will be 100 percent vested for Kleen. D)Because this plan is a proto-type DB (k) plan, Nex will not have to file a Form 5500.

C)All benefits provided under the DB(k) plan will be 100 percent vested for Kleen. Rationale Option a is not correct. He could defer up to the annual limit. Option b is not correct. Since Kleen is over age 50, he would be receiving pay credits of 8% per year. Option d is not correct because DB(k) plans must file a single Form 5500.

Which of the following statements regarding target benefit pension plans is true? A)A target benefit pension plan cannot allocate plan forfeitures to remaining plan participant accounts. B)Target benefit pension plans may not be established after 2001. C)Assuming equal salaries, a target benefit pension plan would allocate a higher percentage of its current contributions to an older employee. D)A target benefit pension plan may always exclude any participant who has not attained the age of 26 and completed one year of service.

C)Assuming equal salaries, a target benefit pension plan would allocate a higher percentage of its current contributions to an older employee.

Qualified plans have many benefits to the employee and the employer. However they must satisfy many tests and comply with many limits to maintain their qualified status. Which of the following is correct regarding coverage tests? A)Profit sharing plans must satisfy only the three coverage tests. B)Defined benefit plans must satisfy any two of the four coverage tests. C)Coverage testing can include leased employees as part of the calculation. D)Employees who do not meet the eligibility requirements are still included in the determination of at least one of the coverage tests.

C)Coverage testing can include leased employees as part of the calculation.

Barry's Graphic Arts Studio sponsors a qualified profit sharing plan. The plan requires employees to complete one year of service and be 21 years old before entering the plan. The plan has two entrance dates per year, January 1st and July 1st. Assuming that today is December 15, 2021 and the Studio has the following employee information, which of the following statements is correct? EmployeeAgeStart DateBarry351/1/2020 Del348/1/2020 Karen246/1/2021 Jenn185/1/2020 A)Two people have entered the plan. B)The qualified plan must provide participants with 100% vesting upon entering the plan because of the eligibility requirements of the plan. C)Del has not yet entered the plan. D)Jenn entered the plan on July 1, 2021.

C)Del has not yet entered the plan. Rationale Del is not yet in the plan. He met the age and service requirement in August but must wait until the January entrance date to enter the plan. Only one person has entered the plan, Barry. Jenn has not met the age requirement; therefore, she is not eligible for the plan. Karen has not met the service requirement. The plan has the standard vesting, which does not have a 100% vesting requirement.

Which of the following is not an example of a qualified retirement plan? A)ESOP. B)Age-based profit sharing plan. C)ESPP. D)401(k) plan.

C)ESPP. Rationale An ESPP, Employee Stock Purchase Plan, is not a qualified retirement plan. The ESPP will be discussed in detail in Chapter 14. All of the other plans listed are qualified retirement plans.

Bobby is the owner of Ideal Mechanics, Inc. He would like to establish a qualified pension plan and would like most of the plan's current contributions to be allocated to his account. He does not want to permit loans and he does not want Ideal to bear the investment risk of the plan's assets. Bobby is 47 and earns $300,000 per year. His employees are 25, 29, and 32 and they each earn $25,000 per year. Which of the following qualified pension plans would you recommend that Bobby establish? A)Defined benefit pension plan. B)Cash balance pension plan. C)Money purchase pension plan. D)Defined benefit pension plan using permitted disparity.

C)Money purchase pension plan. Rationale Because Bobby does not want Ideal to bear the investment risk of the plan assets, the money purchase pension plan is the only option listed that would fulfill his requirements.

Which of the following statements is true? A)Profit sharing plans may not offer in-service withdrawals. B)Pension and profit sharing plans are both subject to mandatory funding requirements. C)Profit sharing plans allow annual employer contributions up to 25 percent of the employee's covered compensation. D)The legal promise of a profit sharing plan is to pay a pension at retirement.

C)Profit sharing plans allow annual employer contributions up to 25 percent of the employee's covered compensation. Rationale Answer c is the only true statement. Profit sharing plans allow annual contributions of up to 25 percent of covered compensation. Answer a is false because profit sharing plans can allow in-service withdrawals. Answer b is false because while pension plans are subject to mandatory funding standards, profit sharing plans are not. Answer d is false because the legal promise of a profit sharing plan is the deferral of compensation and the legal promise of a pension plan is to a pay a pension at retirement.

Urban LLC sponsors a profit-sharing plan that requires employees to complete one year of service and be 21 years old before entering the plan. The plan follows all allowable exclusions permitted under the IRC. Which of the following employees could be excluded from the plan? 1. Jack, age 20, who works in administration and has been with the company for 32 months. 2. John works as the lead foreman in the company factory. Jack is 39 and has been with the company for 12 years and is covered under a collective bargaining agreement. a. 1 only b. 2 only c. 1 and 2 d. Neither Jack nor John can be excluded

C. 1 and 2 Each of these employees can be excluded from the plan: Jack does not meet the age requirement. John is excluded because he is covered under a collective bargaining agreement.

Which of the following is an example of a qualified retirement plan? a. IRA b. 457 plan c. ESOP d. SEP IRA

C:An IRA and a SEP IRA are tax advantaged plans and are not qualified. A 457 plan is a non-qualified plan. An ESOP is the only qualified plan in this list.

Jordan is 55 and wants to retire in 12 years. His family has a history of living well into their 90s. Therefore, he estimates that he will live to age 97. He currently has a salary of $100,000 and expects that he will need about 82% of that amount annually at the beginning of each year if he were retired. He can earn 9 percent in his portfolio and expects inflation to continue at 3 percent. Jordan currently has $325,000 invested for his retirement. His Social Security benefit in today's dollars is $30,000 per year at normal age retirement of age 67. How much does he need to save each year at year end to meet his retirement goals (assume he does not wish to leave a financial legacy)? Answers:a. $6,245 b. $7,659 c. $8,432 d. $9,252 e. $54,639

D

Parker is 50 and wants to retire in 15 years. His family has a history of living well into their 90s. Therefore, he estimates that he will live to age 95. He currently has a salary of $120,000 and expects that he will need about 65% of that amount annually at the beginning of each year if he were retired. He can earn 9 percent in his portfolio while he is working. However, he expects that he will only earn 7 percent in his portfolio during retirement. He expects inflation to continue at 3 percent. Parker currently has $350,000 invested for his retirement. His Social Security benefit in today's dollars is $30,000 per year at normal age retirement of age 67. His Social Security benefit will be reduced by 6 2/3 percent for each year he begins collecting before full age retirement. How much does he need to save at the end of each year to meet his retirement goals (assume he does not wish to leave a financial legacy)? Answers:a. $2,465 b. $2,987 c. $4,975 d. $6,855

D

Acme Inc., is establishing a retirement plan and they want a plan that includes a Roth account. Which of the following statements is correct about Roth accounts?

D. Roth accounts permit access for taxpayers who may otherwise not be able to contribute to a Roth IRA.

Bowie, age 52, has come to you for help in planning his retirement. He works for a bank, where he earns $60,000. Bowie would like to retire at age 62. He has consistently earned 8% on his investments and inflation has averaged 3%. Assuming he is expected to live until age 95 and he has a wage replacement ratio of 80%, how much will Bowie need to have accumulated as of the day he retires to adequately provide for his retirement lifestyle? A)$726,217.09. B)$784,314.45. C)$1,050,813.28. D)$1,101,823.40.

D)$1,101,823.40.

Bowie, age 52, has come to you for help in planning his retirement. He works for a bank, where he earns $60,000. Bowie would like to retire at age 62. He has consistently earned 8% on his investments and inflation has averaged 3%. He is expected to live until age 95 and he has a wage replacement ratio of 80%. Bowie wants to determine the amount of money necessary to provide him with the necessary capital balance at retirement. How much more of a capital balance would he need at retirement if he were to use the purchasing power preservation model instead of the straight annuity model assuming he has a zero balance today? A)$82,897.54. B)$86,921.69. C)$109,496.29. D)$230,545.41.

D)$230,545.41. RationaleNote: Numbers may be slightly off due to rounding.N = 33i = 3PMT = $0PV@62 = $1,101,823.40FV@95 = $2,922,405.03N = 33i = 8PMT = $0FV@95 = $2,922,405.03PV@62 = $230,545.41

Charlie would like to retire in 11 years at the age of 66. He would like to have sufficient retirement assets to allow him to withdraw 90% of his current income, less Social Security, at the beginning of each year. He expects to receive $24,000 per year from Social Security in today's dollars. Charlie is conservative and assumes that he will only earn 9% on his investments, that inflation will be 4% per year and that he will live to be 106 years old. If Charlie currently earns $150,000, how much does he need at retirement? A)$1,955,893. B)$2,049,927. C)$3,011,008. D)$3,155,768.

D)$3,155,768.

Billy's company sponsors a 401(k) profit sharing plan with no employer match, but the company did make noncontributory employer contributions because the plan was top-heavy. Billy quit today after six years with the company and has come to you to determine how much of his retirement balance he can take with him. The plan uses the least generous graduated vesting schedule available.What is Billy's vested account balance? EmployerEmployeeContributions$2,000$2,000Earnings$600$600 A)$2,600. B)$4,160. C)$4,680. D)$5,200.

D)$5,200.

Mouse Emporium sponsors a single-employer defined benefit pension plan that is covered by the PBGC and a qualified profit sharing plan. Mouse's annual covered compensation is $2,000,000 and the actuary has determined that a $600,000 contribution must be made to the defined benefit plan for the year. If Mouse would like to contribute the maximum to their defined contribution plan, how much could Mouse contribute to the defined contribution plan in 2020? A)$0. B)$57,000. C)$120,000. D)$500,000.

D)$500,000. Rationale Because Mouse's defined benefit plan is covered by PBGC, it is not taken into account for the overall contributionlimitation for the defined contribution plan as a result of PPA 2006. Therefore, Mouse's can contribute $600,000 to its defined benefit plan and still contribute 25% of its covered compensation (or $500,000) to its defined contribution plan.

Oliver began employment with Arrow on January 1, Year 1, at the age of 57. Arrow sponsors a 401(k) plan, as well as a noncontributory defined benefit plan that provides for a straight life annuity beginning at age 65, based on the average of a participant's high 3 years of consecutive compensation and uses the calendar year for the plan year. Oliver becomes a participant in Arrow's plan on January 1, Year 2, and works through December 31, Year 8, when Oliver is age 65. Oliver begins to receive benefits under the plan in Year 9. Oliver's average compensation for the period of his high-3 years of consecutive compensation is $90,000. What is the most that could be paid to Oliver from the defined benefit plan? A)$280,000. B)$225,000. C)$90,000. D)$72,000.

D)$72,000. Rationale Since Oliver only had eight years of service, the maximum distribution of $90,000 is reduced for period of service less than ten years: (8 / 10) x $90,000 = $72,000

Roy and Barbara are near retirement. They have a joint life expectancy of 25 years in retirement. Barbara anticipates their annual income in retirement will need to increase each year at the rate of inflation, which they assume is 4%. Based on the assumption that their first year retirement need, beginning on the first day of retirement, for annual income will be $85,000, of which they have $37,500 available from other sources, and an annual after-tax rate of return of 6.5%, calculate the total amount that needs to be in place when Roy and Barbara begin their retirement. A)$743,590.43. B)$859,906.74. C)$892,478.21. D)$906,131.31.

D)$906,131.31. RationaleBEGIN ModeN = 25i = [(1.065 ÷ 1.04) - 1] x 100 = 2.4038PV = ?PMT = 85,000 - 37,500 = 47,500FV = 0<906,131.3080>

Organic Inc. sponsors a qualified plan that requires employees to complete one year of service and be 21 years old before entering the plan. The plan also excludes all commissioned sales people and all other allowable exclusions allowed under the code. Which of the following employees could be excluded?1. Sarah, age 32, who has been a secretary for the company for 11 months.2. Andy, age 20, who works in accounting and has been with the company for 23 months.3. Erin, a commissioned sales clerk, who works in the Atlanta office. Erin is 25 years old and has been with the company for 4 years.4. George, age 29, who works in the factory. George has been with the company for 9 years and is covered under a collective bargaining agreement. A)1 only. B)1 and 3. C)1, 2, and 4. D)1, 2, 3, and 4.

D)1, 2, 3, and 4. Rationale Each of these employees can be excluded from the plan. Sarah does not meet the service requirement. Andy does not meet the age requirement. Erin can be excluded because she is a commissioned salesperson. George is excluded because he is covered under a collective bargaining agreement.

Which of the following pension plans would allocate a higher percentage of the plans' current costs to a certain class or group of eligible employees?1. Defined benefit pension plan.2. Target benefit pension plan.3. Money purchase pension plan with permitted disparity. A)1 only. B)1 and 2. C)2 and 3. D)1, 2, and 3.

D)1, 2, and 3.

Which of the following vesting schedules may a top-heavy profit sharing plan not use? A)1 to 4 year graduated. B)35% after 1 year, 70% after 2 years, and 100% after 3 years. C)2 to 6 year graduated. D)4 year cliff.

D)4 year cliff. Rationale The vesting schedule must be at least as generous as the statutory 3-year cliff or 2-to-6-year graduated schedule. The only choice that is not possible is a 4 year cliff, since 3 year cliff is the standard for a DC plan. Top heavy is irrelevant with DC plans after PPA 2006.

JJ is a Marine, who served our country for the last 25 years. He has $250,000 in his U.S. Government Thrift Savings Plan. Which of the following plans is JJ's Thrift Plan most similar to? A)Defined benefit plan. B)Cash balance plan. C)Profit sharing plan. D)401(k) plan.

D)401(k) plan. Rationale The US Government Thrift Savings Plan is very similar to a 401(k) plan. It allows for the same employee deferral limits and maximum contribution limits as a 401(k) plan. The other choices are not correct.

Which of the following statements is true? A)A cash balance pension plan usually benefits older employees the most. B)A defined benefit plan promises a contribution to a hypothetical account each year for a plan participant. C)Cash balance pension plan participants under age 62 may take a withdrawal from the plan during employment with the plan sponsor. D)A cash balance pension plan does not have individual separate accounts for each participant.

D)A cash balance pension plan does not have individual separate accounts for each participant.

Aztec clay distributor is a family owned business that is owned by Alice, Bill, Chad and Zion. Zion is not an employee, rather a silent or somewhat silent partner. Alice and Bill are married and Chad is their 25-year-old son who has a degree in Soil Science from Dhaka University in Bangladesh. The employee census information is in the chart below. EmployeeOwnershipSalaryDeferral Plan BalanceStatusAlice30%$330,000$20,000$400,000OfficerBill3%$210,000$20,000$600,000 Chad4%$80,000$10,000$150,000 Dave0%$180,000$15,000$150,000 OfficerErin0%$140,000 $15,000$100,000 Frank0%$50,000$8,000$50,000 Ginger0%$40,000$0$10,000 Haley0%$30,000$2,000$30,000 Irish0%$20,000$1,000 $10,000 Jen0%$20,000$0$5,000 $1,100,000$91,000$1,505,000 Who are the highly compensated employees, assuming Aztec does not use the exception as part ofthe definition of highly compensated employee? A)Alice and Bill. B)Alice, Bill, Dave, and Erin. C)Alice, Bill, Chad, and Dave. D)Alice, Bill, Chad, Dave, and Erin.

D)Alice, Bill, Chad, Dave, and Erin.

Which one of the following statements is true for a defined benefit plan? A)A defined benefit plan generally favors older age entrants. B)The maximum retirement benefit payable from a defined benefit plan is the lesser of 100 percent of the participant's compensation or $230,000 for 2020. C)A defined benefit plan with 100 employees is required to pay PBGC insurance premiums. D)All of the above are true.

D)All of the above are true.

Which factors may affect an individual's retirement plan?1. Work life expectancy.2. Retirement life expectancy.3. Savings rate.4. Investment returns.5. Inflation. A)1 and 2. B)1, 2, and 3. C)1, 2, 3, and 4. D)All of the above.

D)All of the above. Rationale All of the factors listed may affect an individual's retirement plan - either positively or negatively. Reduced work life expectancy may provide an insufficient savings period while an increased retirement life expectancy increases capital needs. A low savings rate or poor investment returns may create an inability to meet capital requirements. Increased inflation rates will reduce purchasing power.

Ansley's Art Gallery has a profit sharing plan. The plan requires employees to be employed two years before they can enter the plan. The plan has two entrance dates per year, January and July 1st. Assume today is December 1, 2022 and the Gallery has the following employee information. EmployeeAgeStart DateAnsley421/1/2020Ginny375/1/2020Max318/12/2020Alex296/4/2021 Which of the following statements is true? A)As of today, three individuals have entered the plan. B)Ginny entered the plan on 5/1/2021. C)Alex will enter the plan on 1/1/2023. D)As of today, three individuals are eligible for the plan.

D)As of today, three individuals are eligible for the plan.

Which of the following statements is true regarding CODAs? A)A 401(k) plan must be established in such a way that employers are required to contribute to the plan permitting only employee contributions to the plan. B)A CODA is allowed with a profit-sharing plan, stock bonus plan, and a cash balance pension plan. C)Contributions can only be made after-tax. D)CODAs are employee self-reliant plans.

D)CODAs are employee self-reliant plans. Rationale 401(k) plans are not required to have employer contributions; however, they often do have matching or profit-sharing contributions. 401(k) plans can be established so that only the employees contribute to the plan. A CODA is not allowed with a cash balance pension plan (other than the special DB(k) plan). Contributions can be made pre- and post-tax.

Which of the following is not a common defined benefit plan funding formula? A)Flat amount formula. B)Flat percentage formula. C)Unit credit formula. D)Excludible amount formula.

D)Excludible amount formula. Rationale Statements a, b, and c are common defined benefit plan funding formulas. The formula depicted in statement d does not exist.

Kathi's Cheerleading Uniforms has 4 employees. The company has a profit sharing plan that has made contributions every year. The plan is designed to maximize the contribution to Kathi and has reached Kathi's 415(c) limit each year. The company made a 20 percent contribution yesterday on behalf of all employees. The employee census and account balances are as follows: Today, after a huge blow up, Kathi fired Carroll. Which of the following statements regarding forfeitures is correct (assume the plan meets all necessary testing requirements)? A)If the plan document permitted allocation of forfeitures based on compensation, then Kathi would receive $5,138 of Carroll's unvested plan balance. B)If the plan document permitted reduction of plan contributions for forfeitures, Carroll's $8,000 balance could be used to offset future plan contributions. C)Since Kathi fired Carroll, Carroll becomes 100 percent vested in her plan assets and there is no forfeiture of plan assets. D)Given the company census and plan information, the appropriate plan choice for forfeitures is to use them to reduce future plan contributions.

D)Given the company census and plan information, the appropriate plan choice for forfeitures is to use them to reduce future plan contributions. Rationale The most appropriate plan choice would be to use plan forfeitures (in the amount of $6,400) to reduce plan contributions. The facts state that the plan is designed to maximize the benefits to Kathi. Allocating the contributions would not maximize the benefit to Kathi because Kathi has already maximized her contribution to the plan ($285,000 x 20% = $57,000). The plan could not allocate any of the forfeitures to Kathi (thus answer a is incorrect).

SJ, Inc. covered the following employees under a qualified plan.1. Joan, a 9% owner and employee with compensation of $30,000.2. Lind, a commissioned salesperson with compensation of $160,000 last year (the highest paid employee).3. Reilly, the chief operating officer, who had compensation of $137,000 last year but was not in the top 20% of paid employees.4. Garner, the president, who was in the top 20% of paid employees with compensation of $195,000.Assuming the company made the 20% election when determining who is highly compensated, which of the following statements is correct? A)Exactly three people are key employees. B)Exactly two people are highly compensated. C)Lind is a key employee but is not highly compensated. D)Reilly is neither highly compensated nor a key employee.

D)Reilly is neither highly compensated nor a key employee

Which of the following statements is true regarding the anti-cutback rule, as it is referred to? A)The anti-cutback rule prohibits the plan sponsor from making changes to the plan that are retroactive to the beginning of the year. B)The anti-cutback rule prohibits the plan sponsor from freezing the benefits under the plan. C)The anti-cutback rule prohibits the plan sponsor from terminating the plan. D)The anti-cutback rule prohibits the plan sponsor from amending the plan such that prior accrued benefits are reduced.

D)The anti-cutback rule prohibits the plan sponsor from amending the plan such that prior accrued benefits are reduced. Rationale Statements a, b, and c are false. Plan sponsors can make changes that are retroactive to the beginning of the year, can terminate plans, and can freeze benefits. However, they cannot reduce previously earned benefits

Rex, age 47, an employee at Water Waste, is considering contributing to a 401(k) plan during 2020. Which of the following statements are true? A)Rex can make a $26,000 elective deferral contribution to a 401(k) plan for 2020. B)If Rex does make an elective deferral contribution, the amount is not currently subject to income or payroll taxes. C)Rex can contribute $19,500 to a 401(k) plan and an additional $19,500 to a 401(k) Roth account in the current year. D)Water Waste must deposit Rex's elective deferral contribution to the plan as soon as reasonably possible.

D)Water Waste must deposit Rex's elective deferral contribution to the plan as soon as reasonably possible. Rationale Rex can only make a $19,500 contribution for 2020. He would only be able to contribute $26,000 if he were age 50 or over. Employee deferrals are subject to payroll tax but not income tax. Rex cannot exceed the maximum deferral contribution amount of $19,500 by contributing to both a 401(k) and a 401(k) Roth account.

Axe company sponsors a 401(k) profit sharing plan. Jack quit today after six years working for Axe and has come to you to determine how much of his retirement balance he can take with him. The plan uses the required 2 to 6 year graduated vesting schedule; all employer and employee contributions are outlined below. What is Jack's vested account balance if he has been a plan participant for 57 months? EMPLOYER EMPLOYEE CONTRIBUTIONS $9,000 $12,000 EARNINGS $4,000 $5,000 a. $17,000 b. $24,800 c. $27,400 d. $30,000

D. $30,000 Response Feedback: The correct answer is d. Jack is entitled to 100% of his contributions and the earnings on those contributions. The employer contributions will follow the 2 to 6 year graduated vesting schedule for a 401(k)plan. At six years of service, Jack would be 100% vested in the employer contributions and the earnings on the employer contributions. Thus, Jack's vested account balance is $30,000.

The Actual Deferral Percentage (ADP) test is one of the tests that some qualified plans must comply with. Which of the following plans must generally comply with the ADP test? 1. Profit-sharing plans 2. Safe harbor 401(k) plans.

D. Neither 1 nor 2.

Emily, Jack, and Colin are owners in their family business—Water Solutions, LLC. Emily and Jack are married and Colin is their 25-year-old son. The employee census information is in the chart below. What is the most that could be contributed to a profit sharing plan and deducted by Water Solutions, LLC if they established a profit sharing plan (ignoring any issues with salary deferrals)? Employee Ownership Salary Deferral Plan Balance Status Emily 30 $330,000 $20,000 $400,000 Officer Jack 3 $210,000 $20,000 $600,000 Colin 4 $80,000 $10,000 $150,000 Dave 0 $180,000 $15,000 $150,000 Officer Erin 0 $140,000 $15,000 $100,000 Frank 0 $50,000 $8,000 $50,000 Ginger 0 $40,000 $0 $10,000 Haley 0 $30,000 $2,000 $30,000 Irish 0 $20,000 $1,000 $10,000 Jen 0 $20,000 $0 $5,000 $1,100,000 $91,000 $1,505,000 :a. $263,750 b. $268,750 c. $275,000 d. $376,250

a. $263,750

Acme Inc. has 200 total employees, 150 of which are non-excludable employees. Ten employees are highly compensated. Seven of the 10 highly compensated and 100 of the 140 non-highly compensated employees are covered under Acme's qualified plan. The average accrued benefits for the highly compensated is 3% and the average accrued benefit for the non-highly compensated is 1.5%. Which of the following statements is true regarding coverage? 1. The plan passes the ratio percentage test. 2. The plan passes the average benefits test. a. 1 only b. 2 only c. Both 1 and 2 d. Neither 1 nor 2

a. 1 only

ABC Inc. sponsors a defined contribution plan. Seth, age 39, has compensation of $150,000 for the year. ABC has made a $20,000 profit sharing plan contribution for Seth and $5,000 of plan forfeitures were allocated to Seth's profit sharing plan during the year. How much can Seth defer into his 401(k) (CODA plan) for 2020? a. $19,500 b. $26,000 c. $32,000 d. $44,500

a. $19,500 Response Feedback: The correct answer is a. The annual additions limit permits $57,000 (2020) of contributions to be made on Seth's behalf to qualified plans for the year. The employee elective deferral limit is $19,500 for 2020 and is included in the $57,000 calculation. In this problem, Seth received a total contribution of $25,000 on his behalf into the plan; his deferral limit is not limited because of these calculations and Seth can defer the maximum, or $19,500, to the plan for 2020. Seth is not age 50 or over so the catch-up contribution does not apply.

Jake has worked for GT for the last 20 years and been a participant in its defined benefit plan. In the last ten years, his salary has increased significantly. Over the last ten years, his compensation was $290,000, $100,000, $120,000, $100,000, $240,000, $200,000, $160,000, $180,000, $150,000, and $210,000. In 2020, what is the most that he could receive as a pension payment? a. $200,000. b. $230,000. c. $246,667. d. $285,000.

a. $200,000 The maximum distribution from a defined benefit plan in 2020 is the lesser of $230,000 or the average of the three highest consecutive years of compensation. The average of the three highest consecutive years of compensation equals $200,000

Dustin, who is 48 years old, works for Pinnacle Inc., with a salary of $300,000, a car allowance, and a very nice expense account. Pinnacle is a Fortune 1,000 company that sponsors a defined benefit plan that pays 2 percent times years of participation times the average of the three final years of compensation. In addition, Pinnacle sponsors a 401(k) / profit sharing plan and contributes 18% of employees salary to the profit sharing plan. There is no additional match. If the ADP of the NHCEs is 3%, what is the maximum that Dustin can defer this year (2020)?

a. $5,700

Which of the following statements is correct regarding the qualified automatic contribution arrangement (QACA)? 1. The QACA can be used to avoid ADP testing. 2. The required employer contribution (or match) is the same as required for a safe harbor plan.

a. 1 only

QP, LLC sponsors a defined contribution plan. Joe, age 52, has compensation of $325,000 for the year. QP has made a 17% profit sharing plan contribution on Joe's behalf. There were no forfeitures allocated to participants. How much can Joe defer into his 401(k) (CODA plan) to maximize his annual contributions to the qualified plan for 2020? a. $8,550 b. $15,050 c. $19,500 d. $26,000

b. $15,050

Qualified plans must satisfy many tests to maintain qualified status. Which of the following is correct regarding coverage tests? :a. Defined benefit plans must pass any two of the four coverage tests. b. Coverage testing includes employees covered under a collective bargaining agreement as part of the calculation. c. Stock bonus plans must satisfy one of three coverage tests only. d. Employees who do not meet the eligibility requirements are still included in the determination of at least one of the coverage tests

c. Stock bonus plans must satisfy one of three coverage tests only. Answers

Which of the following is the most common defined benefit plan funding formula for large companies? a. Flat amount formula. b. Flat percentage formula. c. Unit credit formula. d. Excludable amount formula.

c. Unit credit formula.

Sheehan works for Andy Company and is a superior sales guy. His total compensation this year is $400,000. Andy sponsors an integrated profit sharing plan with a base percentage of 5% and a maximum excess percentage. It uses the current wage base as the integration level. What is the excess percentage that will be applied Sheehan's compensation above the integration level?

c. 10%

Parker is a highly skilled sales person at Byberry, which is a 30-year-old company that has grown significantly in terms of revenue and product offerings. It sponsors a pension plan that provides a benefit of 2% times the years of participation times the average of the final three years of salary. Parker has worked for Byberry for the last 30 years and earned $200,000 two years ago, $150,000 last year, and $250,000 this year. If he is retiring this year, how much should he expect to receive as a pension benefit? Answers:a. $200,000. b. $185,000. c. $160,000. d. $120,000.

d. $120,000. The correct answer is d.The average salary over the last three years is $200,000. The benefit equals 60 percent of $200,000 or $120,000.

Marleen is a 52-year-old participant in the XYZ cash balance plan. She has been a participant in the plan for the last twenty years. XYZ, which has over 10,000 employees, is having financial difficulty and Marleen is concerned about the security of her pension. Which of the following is correct? Answers:a. The cash balance plan assets may include up to 25% of XYZ stock. b. The cash balance plan formula cannot be lowered in the future for current participants, but could be changed for new participants c. The cash balance plan and its benefits are fully protected by the PBGC. d. Termination of the plan may affect vesting for some employees, but Marleen's vesting will not be impacted.

d. Termination of the plan may affect vesting for some employees, but Marleen's vesting will not be impacted.

Seth, who is about 55 years old, runs a local Po-Boy shop in New Orleans. He has several high school kids who work for him part time. Seth's mom, Robin, helps make the best meatballs in the universe and works there full time. Which of the following plans makes the most sense for Seth if he earns about $120,000 and does not want to spend too much on a retirement plan?

d. 401(k) / profit sharing plan

Jack and Jill own a successful engineering company, which sponsors a 401(k) plan that requires standard eligibility. Sam, Tom and Pat are the only other employees, who are between the ages of 25 and 29 and have been with the company for a couple of years. Jack and Jill each have salaries of $200,000, while their employees have salaries ranging between $28,000 and $30,000. Jack and Jill both defer $10,000 each. Sam, who is Jack and Jill's son, earns $30,000 and defers $6,000 into the 401(k) plan. Tom, who makes $28,000, defers $2,800, while Pat does not defer anything into the 401(k) plan. Which of the following statements is correct?

d. If the company hired a new employee, it would not increase the amount that Jack and Jill can defer during the first year of the employee's employment.

Reese earns $140,000. She defers $10,000 into her 401(k) traditional account and $5,000 into her 401(k) Roth account. Which of the following statements is/are true? Only $130,000 of earnings is subject to FICA. Her W-2 wages subject to Federal income tax equals $125,000.

d. Neither 1 nor 2.

Jacques, who is age 45, has just resigned from his current job. He worked for Ace, which sponsors a cash balance plan and a standard 401(k) plan. Each of the plans uses the longest permitted vesting schedule and both plans are top heavy. He has a balance of $40,000 in the cash balance plan, has deferred $20,000 into the 401(k) plan and has employer matching contributions of $10,000. If he has been employed for three years, but only participating in the plans for the last two years, how much does he keep if he leaves today?

d. $64,000

Alfred has worked for CJD, a large manufacturer, for the last 20 years and is a participant in CJD's defined benefit plan. Alfred is concerned about the company's financial difficulties and is worried that management at CJD might modify his future benefits and cause his expected benefits at retirement to be reduced. Which of the following laws is designed to prevent that from occurring? Answers: a. Coverage b. Non-discrimination c. Anti-cutback d. There are no laws that prevent an employer from modifying future benefits, even in a defined benefit plan.

d. There are no laws that prevent an employer from modifying future benefits, even in a defined benefit plan.