FHCE 4210 Exam 2

Pension plan services may be provided by: A) All of these. B) insurance companies. C) commercial banks. D) trust companies.

A

A qualified plan is: 1. A company-sponsored retirement plan whose benefits are guaranteed by Employee Retirement Income Security Act (ERISA). 2. A tax-efficient way to save for retirement. 3. Only applicable for firms with 50 or more employees. 4. Considered a plan that benefits highly compensated employees only. A) 2 only. B) 2, 3 and 4. C) 2 and 4. D) 1 and 3.

A ERISA does not guarantee plan benefits; the Pension Benefit Guaranty Corporation (PBGC) guarantees benefits in defined benefit pension plans. A qualified plan is a tax-efficient way to save for retirement. Qualified plans may be established for firms with as few as one employee. Qualified plans also benefit nonhighly-compensated employees.

Which of the following statements regarding a top-heavy plan is (are) CORRECT? 1. A top-heavy plan is one that provides more than 50% of its aggregate accrued benefits or account balances to key employees. 2. A top-heavy defined pension benefit plan must provide a minimum benefit accrual of 2% multiplied by the number of years of service (up to 20%). 3. For a top-heavy defined contribution plan, the employer must make a minimal contribution of 3% of annual covered compensation for each eligible non-key employee. If the contribution percentage for key employees is less than 3%, the contribution percentage to non-key employees can be equal to the key employees' percentage. 4. A top-heavy defined benefit pension plan must provide accelerated vesting. A) 2, 3 and 4. B) 1, 2 and 3. C) 1, 2, 3 and 4. D) 1, 2 and 4.

A Only statement 1 is incorrect. A top-heavy plan is one that provides more than 60% of its aggregate accrued benefits or account balances to key employees.

Which of the following statements regarding the Employee Retirement Income Security Act (ERISA) are CORRECT? 1. Its purpose is to protect the interests of employers and plan fiduciaries. 2. It is a federal law that governs the tax aspects of retirement plans and other employee benefits. 3. It established equitable standards and curtailed potential retirement plan abuse. 4. It is a federal law that sets legal guidelines for most private retirement, health, and welfare benefit plans. A) 3 and 4. B) 1 and 2. C) 1, 2, 3 and 4. D) 1, 2 and 3.

A Statements 3 and 4 are correct. The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law established to enforce equitable standards, deter retirement plan abuse, and set legal guidelines for most private retirement, health, and welfare benefit plans. Its purpose is to protect the interest of plan participants and benefits and govern the nontax aspects of retirement plans and other employee benefits. It sets the minimum standards for most private retirement, health, and welfare benefit plans.

For which of the following reasons might an employer consider choosing a nonqualified plan over a qualified plan? 1. Greater flexibility. 2. Can discriminate in favor of highly compensated employees. 3. Subject to fewer ERISA reporting and disclosure requirements. 4. Typically provides an immediate income tax deduction for the employer. A) 1, 2 and 3. B) 3 and 4. C) 1 and 2. D) 2, 3 and 4.

A. Nonqualified plans do not provide a tax deduction to the employer until the employee receives the benefit as income at some point in the future.

ERISA requires reporting and disclosure of defined benefit plan information to: 1. PBGC. 2. Plan participants. 3. Internal Revenue Service. 4. Department of Labor (DOL). A) 1 and 2. B) 1, 2, 3 and 4. C) 1, 2 and 3. D) 3 and 4.

B

Which of the following is a traditional defined benefit pension plan benefit formula? A) Flat percentage formula. B) All of these. C) Unit benefit formula. D) Flat amount formula.

B

Annual additions to qualified retirement plans include: 1. Interest and dividend income. 2. Forfeitures reallocated to plan participants. 3. Employee contributions. 4. Employer contributions. A) 1, 2 and 3. B) 2, 3 and 4. C) 1, 2, 3 and 4. D) 1 and 2.

B Only statement 1 is incorrect. Investment earnings, such as interest and dividends, are not included as annual additions.

Qualified retirement plans: 1. Must meet specific vesting requirements. 2. Have special tax advantages over nonqualified plans. 3. Must provide definitely determinable benefits. 4. Require an annual profit to allow funding for the plan. A) 2, 3 and 4. B) 1 and 2. C) 1, 2 and 3. D) 2 and 3.

C Qualified plans must meet specific vesting schedules. Qualified plans are preferred to nonqualified plans because of the special tax advantages enjoyed by qualified plans. Qualified retirement plans must offer definitely determinable benefits. An annual profit is not required for a qualified plan to be funded.

ERISA requirements for qualified plans include: A) coverage and vesting. B) reporting and disclosure. C) participation and fiduciary requirements. D) All of these.

D

Each of the following are requirements imposed by law on qualified retirement plans EXCEPT: A) employee communications. B) employee vesting. C) plan documentation. D) limited employee participation.

D

The maximum annual benefit under a defined benefit pension plan in 2018 is: A) $18,500. B) $55,000. C) $275,000. D) $220,000.

D

UNIT 1

UNIT 1

UNIT 2

UNIT 2

Accelerated vesting schedules include which of the following? 1. 3-year cliff. 2. 3-to-7-year graded. 3. 2-to-6-year graded. 4. 5-year cliff. A) 2 and 3. B) 1 and 2. C) 1, 2, 3 and 4. D) 1 and 3.

.D The accelerated vesting schedules are mandatory for top-heavy defined benefit plans and for all employer non-elective contributions and matching contributions in defined contribution plans.

Prohibited transactions are those that are not in the best interest of plan participants and include: 1. A loan between the plan and any party in interest. 2. The acquisition of employer securities or real property in excess of legal limits. 3. A transfer of plan assets to or use of plan assets for the benefit of a party in interest. 4. The sale, exchange, or lease of any property between the plan and a party in interest. A) 1, 2, 3 and 4. B) 1, 2 and 3. C) 3 and 4. D) 1 and 2.

A

Which of the following statements regarding a target benefit pension plan are CORRECT? 1. It requires actuarial assumptions. 2. The employee's final benefit is not guaranteed by the employer. 3. The maximum annual additions limit is the lesser of 100% of covered compensation or $55,000 (2018). 4. The maximum deductible contribution is 25% of total covered payroll. A) 1, 2, 3 and 4. B) 1 and 2. C) 1, 2, and 3. D) 3 and 4.

A

Which of the following is one of the differences between defined benefit pension plans and defined contribution plans? A) Investment risk is borne by the employer in a defined benefit pension plan, whereas the employee bears the risk in a defined contribution plan. B) A guaranteed retirement benefit is the goal of a defined contribution plan, while a guaranteed contribution is the focus of a defined benefit pension plan. C) A defined contribution plan has a benefit limit, whereas a defined benefit pension plan has a contribution limit. D) Accounts are commingled in a defined contribution plan, while a defined benefit pension plan maintains separate accounts for each participant.

A A defined benefit pension plan has a benefit limit, whereas a defined contribution plan has a contribution limit. Investment risk is borne by the employer in a defined benefit pension plan, whereas the employee bears the risk in a defined contribution plan. Accounts are commingled in a defined benefit pension plan and a defined contribution plan maintains separate accounts for each participant. A guaranteed retirement benefit is the goal of a defined benefit pension plan, while a guaranteed contribution is the focus of a defined contribution plan.

All of the following are characteristics of traditional defined benefit pension plans EXCEPT: A) employees assume the risk of poor investment results. B) they are complex to design and operate. C) the employer is required to make annual contributions. D) limited benefits are guaranteed by the Pension Benefit Guaranty Corporation (PBGC).

A A traditional defined benefit pension plan guarantees a specific benefit at retirement and limited benefits are guaranteed by the PBGC. The employer assumes the risk of poor investment results in the plan. If investment results are poor, the employer may have to supply additional funding to assure that the guaranteed benefits are available.

XYZ Corp has a defined benefit pension plan with no lump-sum distribution payout option. Which of the following defined benefit assumptions will impact this plan's funding, assuming they are each different from what was expected by XYZ Corp.? 1. Mortality rate of plan participants. 2. Employee turnover. 3. Inflation. 4. Expected rate of return on plan investments. 5. Changes in salary levels. A) All of these. B) 1, 2, 4 and 5. C) 2, 3, 4 and 5. D) 1, 3, 4 and 5.

A All of these assumptions will impact the funding of a defined benefit pension plan, depending on whether they are positive or negative regarding expectations. Inflation ultimately affects labor, administrative, and actuarial costs.

Which of the following qualified plan reporting and disclosure documents is considered the "annual report" for the plan and must be filed annually with the IRS? A) Form 5500 B) Summary annual report (SAR) C) Summary of Material Modification (SMM) D) Summary Plan Description (SPD)

A An annual report (Form 5500 series) must be filed with the IRS annually by the end of the seventh month after the plan year ends. The Form 5500 is also required to be filed with the Department of Labor.

Dr. Bennet has established a profit-sharing plan for himself and his employees which is top heavy. He has made a 1% of compensation contribution to all non-key employee participants' accounts this plan year and a 5% contribution to his account. Which of the following statements is CORRECT? A) He must contribute an additional 2% to each non-key employee participant's account. B) No further contribution is required for the year. C) He must add another 0.25% to non-key employee accounts. D) He must add another 1.25% to non-key employee accounts.

A Because the plan is top-heavy and Dr. Bennett contributed more than 3% to his own account, he must make a total minimum contribution of 3% to each non-key participant's account. If he would have contributed 3% or less to his account he would have to make that same percentage contribution to all non-key employees as well.

The Employee Retirement Income Security Act of 1974 (ERISA) contains provisions related to which of the following? 1. It prohibits discrimination in favor of key employees. 2. It prohibits inadequate funding of defined benefit plans. 3. It prohibits any vesting schedules. 4. It prohibits plans which allow participants to bear the investment risk in a plan. A) 1 and 2. B) 1, 2 and 3. C) 2, 3 and 4. D) 2 and 4.

A Choices 1 and 2 are correct. ERISA does not prohibit vesting schedules. ERISA does not prohibit plans in which participants bear investment risk.

Which of the following events would increase the employer's annual contribution to a traditional defined benefit pension plan using a percentage of salary for each year of service formula? 1. Forfeitures are lower than expected. 2. Salary increases are higher than expected. 3. Investment returns are less than expected. 4. Benefits are cost of living adjusted as expected. A) 1, 2 and 3. B) 1, 2, 3 and 4. C) 2, 3 and 4. D) 3 and 4.

A Defined benefit pension plan contributions would increase because of the events in statements 1, 2, and 3. Statement 4 is incorrect because the benefits were inflation adjusted as expected. The issue is an outcome that is different from the employer's expectations.

Which of the following is a characteristic of defined benefit pension plans? A) Defined benefit pension plans are complex in operation and design. B) Participants who terminate employment prior to their normal retirement date may receive significant benefits from the plan. C) Actuarial and Pension Benefit Guaranty Corporation (PBGC) requirements result in lower installation and administration costs than for defined contribution plans. D) The employer's contribution is flexible.

A Defined benefit pension plans are complex in operation and design. The employer is subject to a recurring annual mandatory funding obligation, regardless of profit or loss. Participants who terminate employment prior to the normal retirement date may receive little benefit from the plan. Due to actuarial and PBGC requirements, defined benefit pension plans result in higher installation and administration costs than defined contribution plans.

A traditional defined benefit pension plan would probably be most appropriate for which of the following companies? A) An established company with stable cash flows, a predominately older workforce, and key executives age 50 or older. B) A small company wanting a plan that is simple to administer and allows flexible contributions each year. C) A company wanting a plan that will minimize the amount of tax-deferred savings for older, well-paid employees. D) A small start-up company with a young work force and young key executives.

A Defined benefit pension plans are suitable for companies with stable cash flows because annual contributions are mandatory. These plans also tend to maximize the amount of tax-deferred savings for older, well-paid employees, but they are not simple to administer nor are they inexpensive to maintain.

A defined benefit pension plan established by a professional service employer is not required to be covered by the Pension Benefit Guaranty Corporation (PBGC) if the employer has: A) 25 or fewer employees. B) 50 or fewer employees. C) 50 or more employees. D) 26 or more employees.

A Defined benefit pension plans established by certain professional service employers (i.e., architect, attorneys, engineers, physicians, etc.) with 25 or fewer employees do not have to be covered by the PBGC.

In 2018, Benjamin, age 45, worked for both RST Company and XYZ Enterprises, which are not part of a controlled group. Both companies maintain a profit-sharing plan. He earned $200,000 from RST Company and $250,000 from XYZ Enterprises in 2018. Benjamin also receives $5,000 per month in investment income. Forfeitures allocated to Benjamin under the XYZ Company plan were $4,000 for the year. What are the total additional employer contributions that can be made on behalf of Benjamin in 2018? A) $106,000. B) $51,000. C) $18,500. D) $55,000.

A For 2018, the maximum that RST can contribute for Benjamin is $55,000. XYZ can also contribute a maximum additional amount of $51,000 ($55,000 maximum − $4,000 forfeiture). Because the 2 companies are not part of a controlled group, each company can contribute the maximum annual additions limit. The total additional amount is $106,000. Investment income is irrelevant when determining the maximum amount of employer contributions.

When non-vested or partially-vested participants in a qualified defined benefit pension plan terminate employment with the sponsoring employer, how must the plan handle the unvested portion of their benefits? A) Use them to reduce future employer contributions. B) Reallocate them among the remaining plan participants. C) Pay them in cash to the sponsoring employer. D) Pay them in cash to the terminated employees.

A In a defined benefit pension plan, forfeitures may be used only to reduce future employer contributions.

Which of the following statements regarding money purchase pension plans is CORRECT? A) These plans typically favor younger employees. B) Funding costs are unknown each year. C) Employer contributions are flexible. D) Allow a maximum of 25% of employer stock.

A Money purchase plans favor younger employees. Money purchase pension plans have known funding costs, mandatory annual contributions, and limit the amount of company stock to a maximum of 10%.

Cheryl is an executive with Chandler Corporation where she has been employed for the past 24 years. Her current salary is $280,000. Chandler's defined benefit plan provides participants with 25 years of service an 85% of salary annual retirement benefit. Assuming Cheryl's salary remains at $280,000, what will be the amount of her annual retirement benefit? A) $220,000. B) $233,750. C) $280,000. D) $275,000.

A On the basis of years of service and salary, Cheryl would be entitled to a retirement benefit of $233,750 using only the first $275,000 of employee compensation; however, the defined benefit pension plan benefit limit for 2018 is $220,000.

In which of the following qualified plans is the investment risk generally borne by the employer? 1. Target benefit pension plans. 2. Money purchase pension plans. 3. Defined benefit pension plans. 4. Profit-sharing plans. A) 3 only. B) 1 and 2. C) 1, 3 and 4. D) 1 and 3.

A Only in defined benefit pension plans is the investment risk borne by the employer. Target benefit pension plans, profit-sharing plans, and money purchase pension plans are types of defined contribution plans in which the participant maintains an individual account and bears the investment risk.

Joe, age 46, has owned his company for 18 years and wishes to retire at age 70. All of Joe's employees are older than he is and have an average length of service with the company of 8 years. Joe would like to adopt a qualified retirement plan that would favor him and reward employees who have rendered long service. Joe has selected a traditional defined benefit pension plan with a unit benefit formula. Which of the following statements regarding Joe's traditional defined benefit pension plan is (are) CORRECT? 1. Increased profitability would increase both Joe's and his employees' pension contributions. 2. A unit benefit formula allows for higher levels of integration than other defined benefit plans. 3. A unit benefit formula rewards older employees hired in their 50s or 60s. 4. A traditional defined benefit pension plan will maximize Joe's benefits and reward long-term employees based on length of service. A) 4 only. B) 2 and 3. C) 1, 2 and 4. D) 1 and 3.

A Statement 1 is incorrect. Contributions to defined benefit pension plans are not dependent on the profitability of a company. Statement 2 is incorrect, because a unit benefit formula plan will not allow higher integration levels. Statement 3 is incorrect because a unit benefit formula favors workers with longevity. Employees hired in their 50s or 60s will not have significant years of service in the formula at retirement.

Which of the following statements regarding the Pension Benefit Guaranty Corporation (PBGC) are CORRECT? 1. It insures defined contribution plans. 2. It was created under ERISA. 3. It insures traditional defined benefit pension plans and cash balance pension plans. 4. It insures plan participants against the loss of benefits due to pension plan termination. A) 2, 3 and 4. B) 3 and 4. C) 1, 2 and 3. D) 1 and 2.

A Statement 1 is incorrect. The PBGC does not insure defined contribution plans. The PBGC was created under ERISA and insures defined benefit pension plans, including cash balance pension plans, against the loss of benefits due to pension plan termination.

Which of the following statements regarding the characteristics of a defined benefit pension plan is (are) CORRECT? i. The law specifies the maximum allowable benefit payable from the plan is equal to the lesser of 100% of the average of the highest 3 years of compensation for the participant or $220,000 (2018) annually and the plan assigns the risk of preretirement inflation, investment performance, and adequacy of retirement income to the employee. ii. The plan is more costly to administer than defined contribution plans and it specifies the final benefit an employee receives. A)II only. B) I only. C) Neither I nor II. D) Both I and II.

A Statement I is incorrect because defined benefit pension plans assign the risk of preretirement inflation, investment performance, and adequacy of retirement income to the employer.

Apollo Company sponsors a money purchase pension plan that provides a base contribution of 12.3%. Assuming the integration level equals the Social Security taxable wage base, what is the maximum excess percentage? A) 18.0%. B) 25.0%. C) 5.7%. D) 12.3%.

A The excess percentage contribution cannot exceed the lesser of 2 times the base level, or the base percentage plus 5.7%. Therefore, the maximum excess percentage equals 18% (12.3% + 5.7%).

If a defined benefit pension plan has been designed using 3-to-7-year graded vesting, which of the following are minimum participation requirements for the plan? 1. 21 years of age or older. 2. 25 years of age or older. 3. Has completed 1 year of service. 4. Has completed 3 years of service. A) 1 and 3. B) 2 and 4. C) 1 and 4. D) 1 only.

A The minimum participation requirements of any qualified retirement plan are (statement 1) age 21, and (statement 3) completion of 1 year of service (21-and-1 rule). Statements 2 and 4 are incorrect. This is the normal requirement for plan eligibility. If an employer retirement plan requires 2 years of service to be eligible for the plan, then 100% immediate vesting is required.

Which of the following characteristics regarding traditional defined benefit pension plans is CORRECT? A) Benefits older employees. B) Individual accounts are maintained. C) The annual contribution per participant is limited by the annual additions limit. D) Gives the employer the ability to make discretionary contributions.

A Traditional defined benefit pension plan accounts are commingled. The annual contribution is mandatory, not discretionary, and is based on certain variables each year. The annual contribution is not limited by the annual additions limit. The annual funding amount is greater for employees who are older at plan-entry age. This makes defined benefit pension plans attractive to professionals and closely held business owners who may be the older employees in the plan.

Which of the following are included in the annual additions limit for defined contribution plans? 1. Investment gain. 2. Employee elective deferral contributions. 3. Employer contributions. 4. Forfeitures from terminated non-vested participant accounts if reallocated to the remaining participants in the plan. A) 2, 3 and 4. B) 2 and 3. C) 1, 2, 3 and 4. D) 1, 2 and 3.

A. Only statement 1 is incorrect. Investment gain is not considered in the calculation of annual additions.

Which of the following statements regarding aggregation rules contained in the Internal Revenue Code is (are) CORRECT? i. Leased employee rules are aggregation rules that pertain to the leasing of individuals on a long-term, full-time basis and treating such individuals as employees for purposes of the coverage requirements. ii. Affiliated service group rules are aggregation rules that address situations in which related businesses work together to provide goods and services to the public. A) II only. B) Both I and II. C) I only. D) Neither I nor II.

B

Ross, age 75, works for Financial Strategies, Inc. The company has a long-established retirement plan. The plan has never required an actuary or PBGC insurance, but the employer is required to make annual mandatory contributions to each employee's account. What type of retirement plan was established by Financial Strategies? A) Traditional defined benefit pension plan. B) Money purchase pension plan. C) Target benefit pension plan. D) Cash balance pension plan.

B A money purchase pension plan requires annual mandatory employer contributions to each employee's account, does not require an actuary, and does not require PBGC insurance. The other choices are incorrect: --A cash balance pension plan requires an actuary and PBGC insurance. --A target benefit pension plan requires an actuary at inception. --A traditional defined benefit pension plan requires the services of an actuary annually and PBGC insurance.

The employer contribution allowed by a money purchase plan is usually a very positive characteristic from an employer's tax planning perspective. Why would an employer NOT want to install this type of plan? A) The employer must bear the investment risk for the plan. B) The contribution percentage is fixed and mandatory. C) Tax benefits typically fluctuate from year to year in this type of plan. D) It is difficult to communicate the plan to employees.

B A money purchase plan allows a high contribution from employers; however, there is no flexibility in years when profits and/or cash flows are minimal. The contribution must be made, or the plan's tax-qualified status could be withdrawn. A money purchase pension plan maintains individual participant accounts, so the employees bear the investment risk, not the employer. Money purchase pension plans are considered fairly easy to communicate to employees. As long as the plan maintains its tax-qualified status, the tax benefits are known year to year.

Which of the following retirement plans permit the deferral of taxable income for an individual's retirement? 1. Traditional IRA. 2. Roth IRA. 3. SIMPLE 401(k). 4. Deferred compensation plan. A) 1, 3 and 4. B) 1, 2, 3 and 4. C) 2 and 3. D) 1 and 3.

B All of the mentioned plans will provide for deferral of taxable income, but in different ways. Traditional IRAs, SIMPLE 401(k)s and deferred compensation plans defer income tax on both the contribution and the earnings until withdrawal. A Roth IRA defers income taxes on the earnings each year. Also, if a distribution of Roth earnings does not meet the requirements of a "qualified distribution," the withdrawn earnings will be subject to income tax and the early distribution penalty rules.

Who of the following is a fiduciary for the XYZ Qualified Pension Plan? 1. Joe, the administrator for XYZ's pension plan. 2. Bill, the investment manager for XYZ's pension plan. 3. Mary, a CFP® professional, and the paid investment adviser of the XYZ Qualified Pension Plan. 4. Ralph, the XYZ owner who selected Joe, Bill, and Mary. A) 2 and 3. B) 1, 2, 3 and 4. C) 1, 2 and 4. D) 1, 2 and 3.

B All of these people are fiduciaries, including an individual who selects the fiduciaries responsible for operating and administering the plan.

Which of the following types of plans generally require(s) coverage and eligibility requirements of at least age 21 and 1 year of service? 1. Defined benefit pension plan. 2. Money purchase pension plan. 3. Profit-sharing plan. 4. Target benefit pension plan. A) 1 only. B) 1, 2, 3 and 4. C) 1, 2 and 4. D) 2 and 4.

B All of these plans listed above are qualified plans and require the same minimum eligibility and coverage requirements because they are all qualified plans. These plans can also impose a 2-year waiting period, if upon entering, there is 100% full and immediate vesting for the participant of employer contributions. A Section 401(k) plan is not allowed to have a two year waiting period.

Which of the following plans allow the excess method of permitted disparity? 1. Money purchase pension plans. 2. Defined benefit pension plans. 3. Employee stock ownership plan (ESOP). 4. Simplified employee pension (SEP). A) 1, 2 and 3. B) 1, 2 and 4. C) 2, 3 and 4. D) 1, 3 and 4.

B All plans are allowed to integrate with Social Security except ESOPs, SIMPLEs, and SARSEPs. The excess method is allowed for all plans allowing integration, whereas the offset method is only allowed for defined benefit pension plans.

Which of the following statements regarding top-heavy plans are CORRECT? 1. An accelerated vesting schedule is used when a defined benefit pension plan is top heavy. 2. A qualified plan is considered top heavy if it provides more than 50% of its aggregate accrued benefits or account balances to key employees. 3. Top-heavy defined benefit plans must provide a minimum benefit of 2% per year of service for up to ten years (20%) for all non-key employees. 4. For a top-heavy plan, a key employee is an employee who owns more than 3% of the employer with compensation greater than $120,000 (2018). A) 2 and 3. B) 1 and 3. C) 2 and 4. D) 1 and 2.

B An accelerated vesting schedule is used when a defined pension benefit plan is top heavy. A defined contribution plan always requires an accelerated vesting schedule. A qualified plan is considered top heavy if it provides more than 60% of its aggregate accrued benefits or account balances to key employees. A key employee is an employee who at any time during the plan year is: greater than a 5% owner; a greater than 1% owner with compensation greater than $150,000 (not indexed); or an officer of the employer with compensation greater than $175,000 in 2018.

A money purchase pension plan is a defined contribution plan in which: A) the final retirement benefit amount is guaranteed. B) the employer typically contributes a fixed percentage of participant compensation each year. C) the employer must contribute 25% of participant compensation each year. D) the employer receives no tax deduction for the contribution.

B In a money purchase pension plan, the employer typically contributes a fixed percentage of each participant's compensation. The employer does receive a tax deduction for the amount of contribution to the plan. No guaranteed retirement benefit is provided in a defined contribution plan. The contribution is defined, not the benefit. Only defined benefit pension plans provide guaranteed retirement benefits.

For Employee Retirement Income Security Act (ERISA) or IRC purposes, all qualified plans are required to: 1. Meet minimum participation and coverage requirements. 2. Contain provisions for top-heavy plan modifications. 3. Provide for qualified joint and survivor annuity (QJSA) benefits. 4. Meet minimum vesting standards. A) 1, 2 and 3. B) 1,2 and 4. C) 2 and 3. D) 2, 3 and 4.

B Only statement 3 is incorrect. Qualified pension plans must provide QJSA benefits, but qualified profit-sharing plans are typically not required to provide QJSA benefits.

Which of the following statements regarding nondiscrimination rules is (are) CORRECT? 1. All qualified plans and Section 403(b) plans must be designed to satisfy the rule that a plan cannot discriminate in favor of highly compensated employees. 2. The requirements are only satisfied when both the contributions and the benefits are nondiscriminatory. 3. Stock bonus plans are subject to the same nondiscrimination requirements as traditional profit-sharing plans. 4. Because of the ADP nondiscrimination tests, a Section 401(k) plan can be relatively costly and complex to administer. A) 1 and 2. B) 1, 3 and 4. C) 1, 2, 3 and 4. D) 2 and 3.

B Statement 2 is incorrect because the requirements are satisfied if either the contributions or the benefits are nondiscriminatory.

Which of the following statements regarding cash balance pension plans is (are) CORRECT? i. The selection of a cash balance pension plan is generally motivated by two factors: wanting a benefit design that which employees can more easily understand, and implementing a cost-savings measure when compared to a traditional defined benefit pension plan. ii. The cash balance pension plan is not subject to minimum funding requirements. A) Neither I nor II. B) I only. C) II only. D) Both I and II.

B Statement II is incorrect because a cash balance pension plan is subject to minimum funding requirements.

Which of the following plan contributions must be immediately (100%) vested to the participant? 1. Employer contributions to a defined benefit plan. 2. Employer contributions in a terminated qualified plan. 3. Employee contributions to a defined contribution plan. 4. Employer contributions on behalf of an employee eligible due to the 21-and-1 rule. A) 3 and 4. B) 2 and 3. C) 1 and 2. D) 1, 2, 3 and 4.

B Statements 2 and 3 are correct. Employer contributions must be 100% vested immediately in the case of terminated plans and employees required to meet the 2 years of service eligibility requirement. Employee contributions are always 100% vested.

Which of the following statements regarding the favoring of older or younger employees by various types of qualified plans with regard to plan contributions is (are) CORRECT? 1. Traditional defined benefit pension plans favor older employees. 2. Target benefit pension plans typically favor younger employees. 3. Money purchase pension plans favor younger employees. 4. Cash balance pension plans favor older employees. A) 2 and 4. B) 1 and 3. C) 1, 3 and 4. D) 1 only.

B Statements 2 and 4 are incorrect. Target benefit pension plans typically favor older employees. Money purchase pension plans favor younger employees because they have more years of contributions and growth. The retirement benefits with a cash balance pension plan may be inadequate for older plan entrants.

In which of the following ways are target benefit pension plans similar to money purchase pension plans? 1. Pension Benefit Guaranty Corporation (PBGC) insurance is required. 2. The actual dollar retirement benefit is guaranteed. 3. The employee bears the investment risk. 4. Each employee has an individual account. A) 1, 2 and 3. B) 3 and 4. C) 1, 2, 3 and 4. D) 1 and 2.

B Statements 3 and 4 are correct. PBGC insurance is not available for target benefit or money purchase pension plans. Also, the actual dollar retirement benefit is not guaranteed in either of these plans.

Your client has a retirement plan with separate participant accounts and 40% of covered compensation as a projected retirement benefit. Which of the following type of plans does your client most likely have? A) Traditional defined benefit pension plan. B) Target benefit pension plan. C) Money purchase pension plan. D) Cash balance pension plan.

B This is most likely a target benefit pension plan because of the individual account (DC) and projected (targeted) retirement benefit.

Which of the following statements regarding money purchase pension plans is (are) CORRECT? 1. The plan sponsor's costs are predictable, and the plan is easily administered. 2. The plan participant can easily understand the plan's simple design, and contributions are based on the participant's salary for each year of his career, rather than on salary at retirement. 3. Annual additions to each employee's account are limited to the lesser of 100% of compensation or $55,000 (2018). 4. Generally, employer securities held by the plan cannot exceed 25% of the FMV of the plan assets at the times the securities are purchased. A) 1, 2, 3 and 4. B) 3 and 4. C) 1, 2 and 3. D) 1 and 2.

C

Which of the following is NOT an example of a qualified retirement plan? A) Thrift plan. B) Section 401(k) plan. C) Section 403(b) plan. D) Employee stock ownership plan (ESOP).

C A Section 403(b) plan is a tax-advantaged plan but not a qualified retirement plan. While tax advantaged plans are very similar to qualified plans, there are some minor differences. For example, a tax advantaged plan is not allowed to have NUA treatment. NUA is covered later in the course. They are also not allowed to offer 10-year forward averaging or special pre-1974 capital gains treatment. Tax advantaged plans also have less restrictive nondiscrimination rules. Otherwise they are very similar to qualified plans.

Which of the following is (are) a type(s) of defined contribution pension plan(s)? A) Stock bonus plan. B) Employee stock ownership plan (ESOP). C) Target benefit pension plan and money purchase pension plan. D) Cash balance pension plan.

C A stock bonus plan and an ESOP are types of defined contribution profit-sharing plans. A cash balance plan is a type of defined benefit pension plan. Target benefit and money purchase pension plans are types of defined contribution pension plans.

Which of the following persons could be classified as a highly compensated employee for 2018? Assume no special elections were made by the employer-sponsor for their retirement plans. 1. John, a 1% owner, who earned $150,000 in the previous year. 2. Bill, a 6% owner, who earned $28,000 in the previous year. 3. Mary, an officer who earned $125,000 in the previous year, and who is the 25th highest paid employee of 100 employees. 4. Maria, who earned $70,000 in the previous year, and is in the top 20% of paid employees. 5. Anna, who earned $84,000 in the previous year, and is in the top 20% of paid employees. A) 1, 2, 3, 4 and 5. B) 2, 3, 4 and 5. C) 1, 2 and 3. D) 1, 2 and 4.

C Employees 1, 2 and 3 are highly compensated. For 2018, an HCE is anyone who was a 5% owner (a 5% owner is defined in the Tax Code as anyone who has a greater than 5% ownership in the company) at any time during 2017 or 2018 or anyone who received in excess of $120,000 in compensation during the previous year (2017) or, if elected by the employer, is in the top 20% of employees based upon compensation and such compensation was greater than $120,000. Because the law includes a look-back provision, employees who earned more than $120,000 in 2017 are generally considered HCEs for 2018 plan year testing.

Non-qualified plan requirements include: A) the deferred benefit must not be subject to the company's general creditors. B) a requirement for constructive receipt by the employee. C) the employer's promise to pay the employee at some predetermined point in the future. D) that the employer receives an immediate tax deduction for the cost of the benefit.

C In a non-qualified plan, the employer promises to pay the employee at some predetermined time in the future. In order for the benefit to be tax deferred to the employee, there must be a substantial risk of forfeiture, such as being subject to the employer's general creditors, otherwise the employee will be considered to have constructive receipt and, therefore, taxable income. The employer cannot receive a tax deduction until the employee includes the compensation in his taxable income.

Which of the following statements most accurately describes the funding of a noncontributory pension plan? A) The employer and employee each contributes 50% of the funds. B) The employees contribute all of the funds. C) The employer contributes all of the funds. D) The employer contributes 90% of the funds, and each employee contributes 10%.

C In a noncontributory pension plan, the employer makes all the contributions to the plan.

Which of the following is the easiest type of retirement plan for an employer to adopt? A) A Pension Benefit Guaranty Corporation (PBGC) plan. B) An individually designed plan. C) A prototype plan. D) A custom plan.

C Master and prototype plans are easier to use than individually designed plans or custom plans because they are standardized plans approved as qualified in concept by the IRS. The PBGC is the governmental body that insures pension benefits; it is not a type of plan.

Pension Benefit Guaranty Corporation (PBGC) insurance coverage is required for which of the following plans? 1. Traditional defined benefit pension plan. 2. Target benefit pension plan. 3. Money purchase pension plan. 4. Profit-sharing plan. A) 2 only. B) 1 and 2. C) 1 only. D) 1, 2 and 3.

C Money purchase pension plans, profit-sharing plans, and target benefit pension plans do not require PBGC insurance because they are forms of defined contribution plans. Only defined benefit pension plans (traditional defined benefit plans and cash balance plans) require the payment of PBGC insurance premiums.

Which of the following qualified plans typically require the use of the 3 highest consecutive years' earnings for purposes of determining the maximum benefit that is promised? 1. Money purchase pension plan. 2. Stock bonus plan. 3. Profit-sharing plan. 4. Traditional defined benefit pension plan. A) 1 and 2. B) 1, 2 and 4. C) 4 only. D) 1, 3 and 4.

C Only the traditional defined benefit pension plan typically requires the use of the 3 highest consecutive years of earnings to derive the maximum benefit.

A target benefit pension plan provides: 1. Lower contributions for younger employees. 2. Lower contributions for lower-paid employees. 3. Lower contribution levels for older plan participants. 4. Lower contribution levels for higher-paid participants. A) 1, 2 and 3. B) 1, 2, 3 and 4. C) 1 and 2. D) 3 and 4.

C Statements 1 and 2 are correct. A target benefit pension plan provides lower contributions for younger, lower-paid employees and higher contribution levels (as a percentage of compensation) for older, higher-paid plan entrants.

Qualified retirement plans: 1. Are subject to ERISA requirements. 2. Offer tax deferred earnings to employees. 3. Can discriminate in favor of highly compensated employees. 4. Provide a deferred tax deduction for employer funding. A) 1, 2 and 3. B) 1, 2, 3 and 4. C) 1 and 2. D) 3 and 4.

C Statements 1 and 2 are correct. Qualified retirement plans are subject to ERISA requirements and provide tax deferral on investment earnings for employees. While qualified plans in general can provide different levels of benefits to different classes of employees, qualified plans cannot "discriminate in favor of highly compensated employee" in the sense that there is a legal limit to the amount of the difference. As long as the difference is inside the legal limits, the plan is not "discriminatory" (by definition). Qualified retirement plans provide an immediate tax deduction on employer contributions.

Tax implications of cash balance pension plans include: 1. Employer contributions on behalf of employees grow tax deferred. 2. Employer contributions to the plan are deductible when made. 3. Annual retirement benefits are limited to $275,000 (2018). 4. There are no penalties for distributions prior to age 59½. A) 3 and 4. B) 1, 2 and 3. C) 1 and 2. D) 1, 2, 3 and 4.

C Statements 1 and 2 are correct. Section 415(b) limits the benefits provided under the plan are limited to the lesser of $220,000 (2018) or 100% of the participant's highest consecutive three-year average compensation. Distributions from the plan must follow the rules for qualified plan distributions and may be subject to penalty for early distribution.

Which of the following vesting schedules meets the minimum standard for vesting employer-matching contributions to a qualified plan? 1. 5-year cliff. 2. 2-to-6-year graded. 3. 3-year cliff. 4. 3-to-7-year graded. A) 2, 3 and 4. B) 1 and 3. C) 2 and 3. D) 1, 2 and 3.

C Statements 2 and 3 are correct. Employer matching contributions can only occur in defined contribution plans which allow for only the two accelerated vesting schedules. Under a 3-year cliff vesting schedule, no vesting occurs until after 3 years of service with the employer, after which the participant is 100% vested. Under a 2-to-6-year graded vesting schedule, 20% vesting accrues after 2 years and then another 20% vesting each year thereafter resulting in 100% vesting after 6 years.

Scott is the fiduciary of the BSB retirement plan. The entity responsible for monitoring his actions as a fiduciary is: A) SPD. B) PBGC. C) DOL. D) ERISA.

C The Department of Labor (DOL) governs the actions of plan fiduciaries and ensures compliance with the ERISA plan reporting and disclosure requirements.

The Department of Labor (DOL) issues: A) approval of plan documents in the summary plan description. B) private-letter rulings. C) rulings including Prohibited Transaction Exemptions (PTEs). D) guaranty insurance.

C The Department of Labor issues advisory opinions and rulings (including Prohibited Transaction Exemptions) similar to private-letter rulings which are issued by the IRS. The DOL does not issue guaranty insurance. The summary plan description is required by the DOL. The DOL does not approve plan documents. The IRS approves plan documents

Which of the following statements regarding when employees' participation in a qualified retirement plan should begin is NOT correct? A) Entry dates can delay participation up to 6 months after the age and service requirements are met. B) The typical maximum age and service requirements are age 21 and 1 year of service (commonly referred to as the 21-and-one rule). C) An exception to the 21-and-one rule is the 3-year/100% rule that allows up to a 3-year service requirement if the employee is immediately 100% vested in employer contributions upon becoming a participant. D) Any employee who is not excluded from the plan based upon employment classification must become a participant no later than the first entry date after the employee meets the age and service requirements of the plan.

C The exception to the 21-and-one rule is the 2-year/100% rule (not 3 years) that allows up to a 2-year service requirement if the employee is immediately 100% vested in employer contributions upon becoming a participant.

Which of the following are minimum coverage tests for qualified retirement plans? 1. Nondiscrimination test. 2. Average benefits percentage test. 3. Ratio test. 4. Maximum compensation test. A) 1, 2 and 3. B) 2, 3 and 4. C) 2 and 3. D) 1 and 2.

C The two minimum coverage tests for qualified retirement plans are the average benefits percentage test and the ratio test. In order to be qualified, a retirement plan must meet at least one of these tests if the plan does not meet the percentage (safe harbor) test.

Which of the following facts and assumptions are used by an actuary to determine the employer contributions to a defined benefit pension plan? 1. Each participant's age, expected compensation, and length of service. 2. Plan expected investment results. 3. Plan expected administrative expenses. 4. The benefit formula specified in the plan. A) 3 and 4. B) 1 and 3. C) 1, 2 and 3. D) 1, 2, 3 and 4.

D

Which of the following statements regarding the Employee Retirement Income Security Act (ERISA) is (are) CORRECT? A) ERISA was enacted to protect the retirement interests of all plan participants, to establish equitable standards, and curtail perceived abuses. B) ERISA requires reporting and disclosure of information about retirement plans to the Internal Revenue Service, the Department of Labor, the Pension Benefit Guaranty Corporation, and plan participants. C) ERISA forbids discrimination in favor of highly compensated employees, restrictive vesting schedules that keep longtime participants from receiving benefits, and inadequate plan funding, which leads to bankrupt plans. D) All of these.

D

Which of the following retirement plans can be integrated with Social Security? 1. Profit-sharing plan. 2. SEP. 3. Money purchase pension plan. 4. Defined benefit pension plan. A) 4 only. B) 2 and 3. C) 1, 3 and 4. D) 1, 2, 3 and 4.

D All of these plans may be integrated with Social Security. ESOPs, SIMPLEs, and SARSEPs are not permitted to use integration. Also, employee elective deferrals and employer matching contributions cannot be integrated.

To avoid the coverage requirements in a qualified retirement plan, some employers may try to segregate their management employees from the rank-and-file employees by creating a related or subsidiary corporation. To close this loophole, which of the following aggregation rules found in the Internal Revenue Code (IRC) must employers adhere to? A) Controlled group rules. B) Affiliated service group rules. C) Leased employee rules. D) All of these.

D All three sets of rules have been written to eliminate most situations where employees were artificially separated so that a qualified plan would cover only some of the employees.

Which of the following types of qualified retirement plans do NOT allow integration with Social Security? 1. Traditional defined benefit pension plan. 2. Money purchase pension plan. 3. Profit-sharing plan. 4. ESOP. A) 2 and 4. B) 1, 2, 3 and 4. C) 2, 3 and 4. D) 4 only.

D An ESOP may not be integrated with Social Security.

Which of the following is an advantage of fully insured (Section 412(e)(3)) plans? A) Participant loans are available. B) Flexible investment return. C) Employer funding is flexible. D) Benefits from the plan are guaranteed by the insurance company with the employer transferring all investment risk to the third party.

D Benefits from the plan are guaranteed by the insurance company with the employer transferring all investment risk to the third party. The investment return is derived solely from the fixed, guaranteed cash value rates in the insurance or annuity policies. Participant loans are not available and annual plan funding is mandatory, not discretionary.

David Co. implemented a traditional defined benefit plan several years ago. In accordance with the plan document, the employer must contribute an annual amount that will provide the employees with a specified benefit at retirement. Which of the following events would be expected to decrease the employer's annual contribution to a traditional defined benefit pension plan using a percentage for each year of service benefit formula? 1. Forfeitures are higher than anticipated. 2. Inflation is higher than expected. 3. The investment returns of the plan are greater than expected. 4. Benefits are cost of living adjusted. A) 1, 2 and 3. B) 1, 2, 3 and 4. C) 2, 3 and 4. D) 1 and 3.

D Defined benefit pension plan contributions decrease because of the events described in statements 1 and 3. Statements 2 and 4 are incorrect. Inflation would likely cause salaries and plan expenses to increase, thereby causing contributions to increase. Likewise, benefits that are adjusted for the cost of living would result in greater employer contributions, not less.

Regarding qualified plans, employers: A) None of these. B) usually do not secure a favorable advance determination. C) cannot take deductions until they receive a favorable IRS determination letter. D) may secure a favorable advance determination letter from the IRS in order to ensure that the plan meets the requirements of a qualified plan.

D Due to the potential risk of disallowed deductions, employers usually secure a favorable IRS determination letter, which ensures that the plan is qualified according to IRS regulations. However, employers can operate a plan without an IRS determination letter, if they so choose.

Which of the following non-highly compensated employee(s) is(are) considered "covered" this year by an employer-sponsored retirement plan for purposes of satisfying the nondiscrimination coverage tests? 1. An employee who is eligible to participate in the company's Section 401(k) plan but has never participated in making elective deferrals. 2. An employee who has participated in his employer's profit-sharing plan for 10 years but the employer has announced there will be no contribution to the plan this year, but forfeitures are reallocated to remaining participants. 3. An employee who just satisfied the employer's traditional defined benefit plan eligibility requirements and entered the plan 6 months ago. 4. An employee who satisfies the employer's traditional defined benefit plan eligibility requirements in October of this year and will enter the plan on January 1st of next year. A) 2 only B) 3 only C) 1,2,3, and 4 D) 1, 2, and 3

D For purposes of the coverage tests, covered means an employee is benefiting under the plan. However, under a Section 401(k) retirement plan, an employee is considered covered as long as he is eligible to defer part of his compensation; he does not have to actually make contributions. Therefore, the employee in Statement 1 is covered. Notice that the employer is not penalized under the coverage test if a worker is not taking advantage of the opportunity. However, this worker will hurt the ADP and ACP tests for how much the HCEs can contribute. The employee in Statement 2 is covered because even though no contribution is made this year, forfeitures are reallocated to the remaining participants. The employee in Statement 3 is covered because she entered the plan 6 months ago and will have begun to accrue a benefit in the defined benefit plan. The employee in Statement 4 is not considered covered because he has not yet entered the plan to accrue a benefit this year.

Which of the following statements concerning qualified retirement plans is (are) CORRECT? i. Cash balance pension plans, money purchase pension plans, employee stock ownership plans (ESOPs), and Section 403(b) plans are all examples of qualified retirement plans. ii. Target benefit pension plans, defined benefit pension plans, profit-sharing plans, and Section 457 plans are all examples of qualified retirement plans. A) Both I and II. B) I only. C) II only. D) Neither I nor II.

D Neither statement i nor ii is correct. Section 403(b) plans and Section 457 plans are not qualified plans.

Which of the following defined contribution plans require mandatory contributions? 1. Profit-sharing plan. 2. Target benefit pension plan. 3. Money purchase pension plan. 4. Section 401(k) plan without a match. A) 1 and 2. B) 2, 3 and 4. C) 1, 2 and 3. D) 2 and 3.

D Of the listed plans, profit-sharing plans and Section 401(k) plans without a match do not have mandatory contributions. Instead the contributions must be substantial and recurring. The word "pension" in the name of a retirement plan means the annual contributions are mandatory. One way to remember the mandatory annual contribution plans is "Be my cash target." B - benefit in defined benefit plan. M - money purchase plans. Cash - cash balance plans. Target - target benefit plans. All other plans allow for flexible employer contributions.

Which of the following is NOT required to be distributed to qualified plan participants on an annual basis? 1. A summary plan description (SPD) 2. Form 5500 3. A summary annual report (SAR) 4. A summary of material modification (SMM) A) 3 and 4 B) 1 and 2 C) 4 only D) 1,2 and 4

D Only a summary annual report (SAR), summarizing the basic information included in the Form 5500 series, must be provided to plan participants each year within nine months of the end of the plan year. A summary plan description (SPD) must be provided automatically to all plan participants within 120 days after the plan is established or 90 days after a new participant enters an existing plan, not annually. Form 5500 must be filed with the IRS and DOL annually but is not required to be provided annually to plan participants; however, participants have a right to see the full Form 5500 if needed and requested. A summary of material modification (SMM), explaining any substantive changes that occurred to the SPD within the past year must be issued as needed.

All of the following are responsibilities of the Pension Benefit Guaranty Corporation (PBGC) EXCEPT: A) to require a plan be involuntarily terminated to help cut PBGC losses if a plan is not funded according to legal standards, or if the plan is unable to meet its benefit payments. B) to investigate anyone who has violated or is about to violate any of the plan termination insurance provisions. C) to insure participants in and beneficiaries of employee benefit plans against the loss of benefits arising from complete or partial termination of the plan. D) to provide insurance coverage for all qualified pension plans.

D PBGC coverage extends only to defined benefit pension plans, and not to defined contribution plans.

In a Section 401(k) plan, which of the following must be considered in complying with the maximum annual additions limit? 1. Employee after-tax contributions. 2. Catch-up contributions for an employee age 50 or older. 3. Dividends paid on employer stock held in a Section 401(k) plan. 4. Employer qualified non-elective contributions. 5. Employer qualified matching contributions. A) 1, 2 and 5. B) 1 and 2. C) 3 and 4. D) 1, 4 and 5.

D Statement 1 is correct. Employee after-tax contributions are counted against the annual additions limit. Statement 2 is incorrect. Catch-up contributions for an employee age 50 or older are not counted against the annual additions limit. Note that catch-up contributions are also not taken into account for purposes of ADP testing or plan limits. Statement 3 is incorrect. Earnings on plan investments are not taken into account when computing the maximum annual additions limit. Statements 4 and 5 are correct.

In which of the following retirement plans can forfeitures be reallocated to increase account balances of plan participants? 1. Defined benefit pension plans. 2. Profit-sharing plans. 3. Money purchase pension plans. 4. SEP plans. A) 2, 3 and 4. B) 1 and 3. C) 1, 2, 3 and 4. D) 2 and 3

D Statement 1 is incorrect because defined benefit pension plan forfeitures must be used to reduce plan costs and are not reallocated among remaining plan participants. Statement 4 is incorrect because SEP plans require 100% immediate vesting and therefore cannot ever have a forfeiture to reallocate.

Which of the following individuals is (are) highly compensated employee(s) of XYZ Corporation for qualified plan purposes for 2018? Assume the highly compensated election was made by the corporation. 1. Bill, who owns 10% of XYZ and is an employee. 2. Mary, the president, whose compensation was $125,000 last year and who was in the top 20% of paid employees. 3. Ralph, an employee salesman, who made $130,000 last year and was the top-paid employee in XYZ this year. 4. Joe, who made $121,000 last year as the XYZ Corporation legal counsel (not in the top 20%). A) 2 and 3. B) 1 and 2. C) 2, 3 and 4. D) 1, 2 and 3.

D Statement 4 is not correct if the election regarding highly compensated employees was made by the employer: --A greater than 5% owner (this year or the preceding year). --Compensation >$120,000 (2018) and in the top 20% of compensation, if elected. Note: The two tests for who is an HCE are independent of each other. In other words, if a person is a more than 5% owner, he or she is an HCE regardless of the compensation test.

Which of the following statements regarding qualified retirement plans is (are) CORRECT? i. Money purchase pension plans, employee stock ownership plans (ESOP), target benefit pension plans and stock bonus plans are all examples of qualified retirement plans. ii. Top-hat plans and cash balance pension plans are examples of qualified retirement plans. A) II only. B) Both I and II. C) Neither I nor II. D) I only

D Statement II is incorrect because top-hat plans are nonqualified retirement plans. A cash balance pension plan, however, is an example of a qualified plan

Which of the following statements regarding qualified retirement plans is (are) CORRECT? i. Money purchase pension plans, employee stock ownership plans (ESOP), target benefit pension plans and stock bonus plans are all examples of qualified retirement plans. ii. Top-hat plans and cash balance pension plans are examples of qualified retirement plans. A) II only. B) Both I and II. C) Neither I nor II. D) I only.

D Statement II is incorrect because top-hat plans are nonqualified retirement plans. A cash balance pension plan, however, is an example of a qualified plan.

Which of the following statements regarding the coverage rules for qualified plans is(are) CORRECT? i. A retirement plan can cover any portion of the workforce, as long as it satisfies 1 of the 3 coverage tests under Section 410(b). ii. The coverage tests for qualified plans include: the percentage test, the ratio test, and the average contribution percentage test. A) II only. B) Both I and II. C) Neither I nor II. D) I only

D Statement II should list the third coverage test as the average benefit percentage test, not the average contribution percentage test.

In a money purchase pension plan, forfeitures: 1. Revert back to the plan. 2. May be used to reduce future employer contributions. 3. Can be reallocated among the remaining plan participants. 4. Do not count against remaining participants' annual additions limits. A) 3 and 4. B) 1, 2, 3 and 4. C) 1 and 2. D) 1, 2 and 3.

D Statements 1, 2 and 3 are correct. Forfeitures count against the remaining participants' annual additions limits.

Which of the following are disadvantages to the participant in cash balance pension plans? 1. The employer bears the investment risk. 2. The investment return is guaranteed to the participant. 3. Retirement benefits may be inadequate for older plan participants. 4. The participant is not credited with actual returns for years in which the actual return exceeds the guaranteed return. A) 1 and 2. B) 1, 2, 3 and 4. C) 1, 2 and 3. D) 3 and 4

D Statements 3 and 4 are correct. Disadvantages to the participant in a cash balance pension plan include the fact that retirement benefits may be inadequate for older plan participants, and the participant is not credited with actual returns when the return exceeds the guarantee.

Nonqualified plans: 1. Provide the same tax advantages as a qualified plan. 2. Are less flexible than qualified plans. 3. May defer taxes on compensation to employees. 4. Are often used to supplement qualified retirement benefits to key employees. A) 1, 2 and 3. B) 1 and 2. C) 2, 3 and 4. D) 3 and 4.

D Statements 3 and 4 are correct. Nonqualified plans do not provide the same tax advantages as qualified plans and are more flexible than qualified plans. Because compensation to employees is deferred, the income taxes on that compensation are deferred, as well. Nonqualified plans are generally provided only to key employees.

The maximum amount of compensation that can be used in calculating retirement benefits in 2018 is: A) $220,000. B) $150,000. C) $55,000. D) $275,000.

D The maximum amount of compensation earned by an employee in 2018 that can be used in calculating retirement benefits is $275,000. The maximum annual benefit under a defined benefit plan is $220,000 in 2018.

For 2018, the maximum annual contribution under a money purchase pension plan on behalf of a participant is the lesser of 100% of the employee's covered compensation or: A) $220,000. B) $275,000. C) $18,500. D) $55,000.

D The maximum annual contribution for a money purchase pension plan on behalf of a participant is subject to the annual additions limit, which is the lesser of 100% of the participant's covered compensation or $55,000 (2018).

The ratio test requires that: A) the percentage of non-highly compensated employees covered by the plan must be at least 50% of the percentage of highly compensated employees covered by the plan. B) 50% of all non-highly compensated employees must be covered by the plan. C) 70% of all non-highly compensated employees must be covered by the plan. D) the percentage of non-highly compensated employees covered by the plan must be at least 70% of the percentage of highly compensated employees covered by the plan.

D The ratio test requires that the percentage of non-highly compensated employees covered by the plan must be at least 70% of the percentage of highly compensated employees covered by the plan

Which of the following statements regarding prohibited transactions is NOT correct? A) One category of prohibited transactions bars a fiduciary from causing the plan to engage in a transaction if the fiduciary knows or should know that such a transaction constitutes a direct or indirect involvement between the plan and the parties in interest. B) One category of prohibited transactions involves the investment in the sponsoring employer's stock or real property above certain limits. C) One category of prohibited transactions involves self-dealing. D) The lending of money or other extension of credit between the plan and a party in interest is not a prohibited transaction.

D The sale, exchange, lending, or leasing of any property between the plan and a party in interest is a prohibited transaction.

Each of the following is a characteristic of a defined benefit pension plan EXCEPT: A) the plan specifies the benefit an employee receives. B) the plan has less predictable costs than defined contribution plans. C) the law specifies the maximum allowable benefit payable from the plan is equal to the lesser of 100% of salary or $220,000 (2018) per year. D) the plan assigns the risk of preretirement inflation, investment performance, and adequacy of retirement income to the employee.

D This is characteristic of a defined contribution plan. Defined benefit pension plans assign the risk of preretirement inflation, investment performance, and adequacy of retirement income to the employer.

Which of the following is a characteristic of a target benefit pension plan? A) Has no limit on employee contributions. B) Allows the employee to select the amount of monthly benefit at retirement. C) Requires greater employee contributions for older employees. D) Allows higher contribution levels for older plan participants.

D Under such a defined contribution plan, the employer selects the target benefit. The employer contributes more for older employees. The fixed contribution formula is based on an initial actuarial determination of contributions required to meet a specific targeted benefit level.