FINA 4325 Module 1

Which of the following types of retirement plans allow integration with Social Security? I. Defined benefit pension plan II. Simplified employee pension (SEP) plan III. Savings incentive match plan for employees (SIMPLE) IV. Employee stock ownership plan (ESOP)

I and II SIMPLEs and ESOPs cannot be integrated with Social Security.

Joe has worked for XYZ Co. for 30 years and is a participant in his employer's traditional defined benefit pension plan. He is retiring this year. The plan formula provides a pension equal to the average of the participant's final three years of compensation. Joe's final three years of compensation were $200,000, $230,000, and $290,000. What will be the amount of Joe's pension under the plan in 2021?

$230,000 Applying the 2021 covered compensation limit of $290,000, Joe's final three years of compensation averages to $238,333. However, the maximum defined benefit pension payable from a traditional defined benefit pension plan is $230,000 (2021).

What is the penalty for a prohibited transaction? A)15% B)25% C)50% D)10%

A) 15%

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

A) No further contribution is required. Dr. Bennett does not have to make any further contributions because both non-key and key employees received the same percentage contribution.

Which of the following is CORRECT regarding IRS Form 5500? A)All of these statements are correct. B)A simplified version, Form 5500-EZ, is available for certain small employers. C)The IRS 5500 is known as the employer's annual return/report to the IRS of an employee benefit plan. D)Filing an IRS 5500 is an ERISA requirement.

A)All of these statements are correct.

Which of the following is an Employee Retirement Income Security Act of 1974 (ERISA) requirement that qualified plans must meet? A) Coverage B) Participation C) Vesting D) Reporting and disclosure

A,B,C and D All of these are ERISA requirements. In addition, there are fiduciary requirements under ERISA.

In a defined contribution plan, if the integration level is the Social Security taxable wage base for retirement, and the base contribution percentage is 7%, the excess contribution percentage can be as high as A)13.4%. B)12.7%. C)10.0%. D)15.3%.

B) 12.7%. The maximum permitted disparity, or the difference between the base contribution percentage and the excess contribution percentage, cannot exceed the lesser of the base contribution percentage or 5.7% (the Social Security tax rate attributable to OASDI). Therefore, 7% + 5.7% equals 12.7%. if it was lesser than 5.7 ex 5 it would be 5 times 5 so 10

Peter's employer maintains a qualified defined benefit pension plan. There are 100 eligible employees working for the company. What is the minimum number of employees the retirement plan must cover to satisfy the 50/40 test? A)50 B)40 C)70 D)90

B) 40 Under the 50/40 test, a defined benefit plan must cover the lesser of 50 employees or 40% of all eligible employees. In this case, the lesser of 50 employees or 40% of all eligible employees (100) is 40 employees. One way to remember the 50/40 test is the phrase people before percentages (50 people or 40%). Also, note that there are no qualifiers to the types of people. It is not 50 non-highly compensated people. It is just 50 humans who work for the employer.

RQZ Company employs 200 nonexcludible employees, 20 of whom are highly compensated. Sixteen of the 20 highly compensated and 125 of the non-highly compensated employees benefit from the RQZ qualified pension plan. The average benefits accrued for the highly compensated is 8%. The ratio test for the plan just listed is A)70.0%. B)86.8%. C)69.4%. D)80.0%.

B) 86.8%. The ratio test is 86.8%, calculated as follows: NHC coverage = 125 ÷ 180 = 69.44% HC coverage = 16 ÷ 20 = 80% 69.44% ÷ 80% = 86.8% (satisfies the ratio coverage test)

Which of the following would NOT be a permitted disparity for a defined benefit plan that uses Social Security integration? A)An excess benefit percentage of 40%, if the base percentage is 20% B)An excess benefit percentage of 60%, if the base percentage is 30% C)An excess benefit percentage of 10% if the base percentage is 5% D)An excess benefit percentage of 20%, if the base percentage is 15%

B) An excess benefit percentage of 60%, if the base percentage is 30% Base percentage + permitted disparity = excess benefit percentage. The permitted disparity is the base percentage, up to a maximum of 26.25% (0.75% per year for up to 35 years).

The qualified retirement plan maintained by the ABC Corporation imposes a two-year waiting period before new employees may enter the plan. Which of the following statements is CORRECT? A)The plan is in violation of ERISA. B)The plan must provide 100% vesting to all employees immediately upon entry. C)The plan is a Section 401(k) plan. D)The plan may use the normal qualified plan vesting schedules.

B) The plan must provide 100% vesting to all employees immediately upon entry. Most types of qualified plans are allowed to increase the waiting period to two years of service, but plans adopting this rule must provide 100% vesting to all employees immediately upon entry. Section 401(k) plans cannot require a two-year waiting period.

Big Bucks Bank, as the plan trustee for the XYZ Corporation profit-sharing plan, has entered into a loan with the plan secured by the individual account balances of the plan participants. What has just occurred? A)A contribution to the plan consistent with the annual additions limit B)A financial obligation incurred in the ordinary course of business C)A prohibited transaction D)A disqualified loan

C) A prohibited transaction This is an example of a prohibited transaction under ERISA and the Internal Revenue Code. The lending of money between a qualified plan and a disqualified person, such as the plan trustee/bank here, is prohibited and subject to an initial 15% prohibited transaction penalty. If the transaction is not corrected, there is an additional 100% penalty for the amount of the prohibited transaction. Also, the party at interest is personally liable for the penalty if the plan assets are not sufficient to pay the penalty.

The Smith Corporation has a profit-sharing plan with a 401(k) provision. The company matches dollar-for-dollar up to 5%. Pedro makes $150,000 and defers 5% into the 401(k) for 2021. The Smith Corporation has had a banner year and is considering a large contribution to the profit-sharing plan. What is the most that could be contributed to Pedro's profit-sharing account this year? A)$19,500 B)$49,500 C)$43,000 D)$58,000

C) $43,000 The maximum allowed contribution for 2021 is $43,000. The section annual additions limit for 2021 is $58,000. However, Pedro has already contributed $7,500, and this amount has been matched. Thus, $15,000 has already gone toward the $58,000 annual additions limit for 2021.

In the ratio test used to determine whether a qualified plan is nondiscriminatory, what is the minimum percentage of nonhighly compensated employees who must be covered as compared to the percentage of covered highly compensated employees? A)51% B)60% C)70% D)75%

C) 70% A qualified plan will pass the ratio test if the percentage of nonhighly compensated employees covered under the plan is at least 70% of the percentage of highly compensated employees who are covered.

Which of these statements regarding Social Security plan integration is false? Because there is a disparity in the Social Security system, all retirement plans are allowed to integrate with Social Security. Only the excess method can be used by a defined benefit pension plan. Under the offset method of integration, a fixed or formula amount reduces the plan formula. The maximum increase in benefits for earnings above covered compensation level is 5.7% for a defined benefit pension plan. A)II and IV B)I and III C)I, II, and IV D)II and III

C) I, II, and IV

Which of the following is CORRECT about the permitted disparity (Social Security integration) rules for qualified plans? I. An integration level for a defined contribution plan that exceeds the current year's taxable wage base may be selected. II. The permitted disparity level in a defined benefit plan must be reduced for early retirement. III. It is no longer possible to have a defined benefit formula in which lower-paid employees receive no benefit. IV. The permitted disparity under a defined benefit plan, using covered compensation as the integration point, is the Social Security wage base averaged over a maximum of 35 service years.

C) II, III, and IV

Max is the finance director for Bland Foods, Inc. He is trying to implement a new qualified retirement plan for the company. There are numerous federal guidelines with which the company must comply. Which of the following federal agencies is tasked with supervising the creation of new, qualified retirement plans? A)FINRA B)PBGC C)IRS D)ERISA

C) IRS The Internal Revenue Service (IRS) carries out the task of supervising the creation of new, qualified retirement plans.

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

C) Section 403(b) plan The answer is a Section 403(b) plan is a tax-advantaged plan but not an ERISA-qualified retirement plan. While tax-advantaged plans are very similar to qualified plans, there are some minor differences.

Company A has a participant-directed retirement plan that offers six investment options ranging from conservative to risky. Sam, an employee, had his account invested in the riskiest option. When he suffered severe losses in the account, he sued the plan fiduciary. Which of the following statements regarding the fiduciary's liability to Sam is CORRECT? A)The fiduciary is responsible for only 20% of the loss suffered by Sam. B)The fiduciary is not responsible for the loss suffered by Sam but must replace the risky portfolio with a more conservative portfolio. C)The fiduciary is not responsible for the loss suffered by Sam because the investment options were sufficiently diverse and Sam chose the risky portfolio. D)The fiduciary is fully responsible for the loss to Sam because investing accounts in risky portfolios is not an appropriate choice for participants.

C) The fiduciary is not responsible for the loss suffered by Sam because the investment options were sufficiently diverse and Sam chose the risky portfolio. Investment options that cover the entire investment spectrum are appropriate. The participant chose the option and will benefit or suffer accordingly. However, the fiduciary must select quality investment choices.

The purpose of integrating a qualified retirement plan with Social Security is to A)reduce plan contributions for employees who are covered by Social Security. B)exclude employees from participating in the plan if their compensation exceeds the Social Security taxable wage base. C)allow a higher contribution rate for highly compensated employees than for nonhighly compensated employees. D)permit the use of longer vesting schedules.

C) allow a higher contribution rate for highly compensated employees than for nonhighly compensated employees. Social Security effectively discriminates against highly compensated employees because earnings over the taxable wage base are not counted for purposes of accruing benefits. Integrated plans are designed to help remedy this inequity by allowing a higher contribution rate for highly compensated employees.

Dorban Products, Inc., has an annual payroll of $800,000. John, the president, wishes to make the maximum contribution to the integrated profit-sharing plan this year. What is the amount? A)$120,000 B)25% of base compensation plus 30.7% of excess compensation totaling $245,600 C)$80,000 D)$200,000

D) $200,000 The maximum contribution is 25% of covered payroll, or $200,000.

Susan makes $400,000 working for Great Grapes, Inc. She defers 4% into the 401(k) and receives the 4% match. How much will go into her account in 2021? A)$16,000 B)$19,500 C)$32,000 D)$23,200

D) $23,200

What is the 2021 limit on covered compensation for retirement plan purposes? A)$230,000 B)$19,500 C)$58,000 D)$290,000

D) $290,000 For the purposes of determining qualified plan benefits and employer contributions, employee covered compensation is capped at a specified amount. For 2021, the cap on covered compensation is $290,000 annually.

What is the IRS form that also serves as a qualified plan's annual financial report? A)Form 1120 B)Form 1040 C)Form 5200 D)Form 5500

D) Form 5500 A plan's annual financial report is filed on Form 5500 and must be filed with the IRS within seven months after the close of each plan year. The report is designed to provide a complete disclosure of all financial information relevant to plan operation.

Which of these is false regarding defined contribution plans? A)The maximum allowable employee deferral amount for workers is $19,500 in 2021, not counting any catch ups. B)The employer contribution limit is 25% of the participating employees' payroll. C)The retirement benefit is not certain; investment risk is borne by the participant. D)Includible compensation is limited to the lesser of 100% of compensation or $230,000 in 2021.

D) Includible compensation is limited to the lesser of 100% of compensation or $230,000 in 2021. The maximum amount of includible compensation is $290,000, not $230,000. $230,00 is a maximum defined benefit test number in 2021.

An integrated defined benefit plan providing a 20% flat benefit could provide A)a permitted disparity no greater than 25.7%. B)a permitted disparity of 26.5% and excess benefit of 40%. C)an excess benefit of 26% and 40% permitted disparity. D)a permitted disparity of 20% and excess benefit of 40%.

D) a permitted disparity of 20% and excess benefit of 40%. A flat defined benefit plan could provide the lesser of the 20% base benefit percentage or 26.25%, and excess benefit of 20% + 20%.

The plan administrator A)is not responsible for the Summary Plan Description (SPD). B)of a small company (50 employees or less) must file a detailed annual report (IRS Form 5500) each year. C)must do all of these. D)must comply with the reporting and disclosure requirements under the Employee Retirement Income Security Act (ERISA).

D) must comply with the reporting and disclosure requirements under the Employee Retirement Income Security Act (ERISA). A trustee or insurance company may take over a significant number of the plan administrator's duties; however, the plan administrator is still responsible for plan compliance with IRS and DOL regulations. Small plans may not be required to file Form 5500 each year.

Qualified retirement plans have which of the following characteristics? I. They are subject to ERISA requirements. II. They offer tax-deferred earnings to employees. III. They can discriminate in favor of highly compensated employees. IV. They provide tax deduction for the employer only when the employee is income taxed on the money.

I and II Statements I and II 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 employees" 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.

Which of the following statements regarding prohibited transactions by a fiduciary or an individual associated with traditional IRA accounts are CORRECT? I. Generally, if an individual or the individual's beneficiary engages in a prohibited transaction with the individual's IRA account at any time during the year, it will not be treated as an IRA as of the first day of the year. II. If an individual borrows money against an IRA annuity contract, the individual must include in gross income the fair market value of the annuity contract as of the first day of the tax year. III. Selling property to an IRA by a fiduciary or an individual owner of the IRA is not prohibited. IV. A 50% penalty will be assessed against an IRA owner who borrows money against her IRA.

I and II Statements I and II correctly describe prohibited transactions. Statement III is incorrect. Selling property to an IRA by a fiduciary or an individual owner of the IRA is a prohibited transaction. Statement IV is incorrect. The individual may have to pay the 10% additional tax on premature distributions. Also, if a person uses an Individual Retirement Account (not an Individual Retirement Annuity) as collateral for a loan, then only the amount of the Individual Retirement Account collateralized will be considered distributed. While this is bad, it is not as bad as the treatment of of a collateralized Individual Retirement Annuity in which the entire collateralized account is deemed to be distributed.

Which of these are CORRECT statements about the top-heavy rules? I. An employer's minimum top-heavy contribution to a money purchase pension plan is the lesser of 3% of compensation per year for non-key employees or the highest contribution percentage made for a key employee if the highest contribution percentage is less than 3% of compensation. II. An employer's top-heavy contribution to a money purchase pension plan must always be at least 3% of compensation per year for each employee. III. For purposes of applying the 60% top-heavy test, benefits include any distributions made due to separation from service during the last year and any in-service distributions made during the last five years. IV. Any employee with annual earnings from the employer in excess of $290,000 is considered a key employee in 2021.

I and III

Which of the following statements regarding top-heavy plans is CORRECT? I. An accelerated vesting schedule is used when a defined benefit pension plan is top heavy. II.A qualified plan is considered top heavy if it provides more than 50% of its aggregate accrued benefits or account balances to key employees. III. Top-heavy defined benefit plans must provide a minimum benefit of 2% per year of service for up to 10 years (20%) for all non-key employees. IV. For a top-heavy plan, a key employee is an employee who owns more than 3% of the employer with compensation greater than $125,000 (2021).

I and III 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 the following: 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 $185,000 in 2021.

Gene wants to establish a qualified plan for his business to provide employees of the company with the ability to save for retirement. Which of the following plans is a qualified plan? I. Profit-sharing plan II. Simplified employee pension (SEP) plan III. SIMPLE IRA IV. SARSEP plan

I only Of the plans listed, only the profit-sharing plan is a qualified plan. The SIMPLE IRA and the SEP plan are tax-advantaged plans, and the Section 457 plan is a nonqualified plan.

What are the requirements and effect of an eligible investment advice arrangement under the Pension Protection Act? I. An eligible investment advice arrangement allows a plan fiduciary to give advice, including recommending her own proprietary funds without violating fiduciary rules. II. The investment advisor's fees must be neutral. III. An unbiased computer model certified by an independent expert to create a recommended portfolio for the client's consideration is used. IV. Investment advisors for IRAs may only use the unbiased computer model option when providing eligible investment advice.

I, II, and III Investment advisors for IRAs may only use the neutral fee option and not the computer model option when providing eligible investment advice.

In a defined contribution plan, if the integration level is less than the Social Security taxable wage base, what occurs? I. Larger contributions will be made on behalf of employees whose compensation is above the lower integration level. II. The plan's cost to the employer increases as the integration level is reduced. III. The permitted disparity between the maximum excess contribution percentage and the base contribution percentage is reduced. IV. Employer contributions must be adjusted to an integration level of $142,800 (2021) to achieve optimum integration.

I, II, and III Only Statement IV is incorrect. An integration level below the Social Security taxable wage base allows larger contributions for higher-paid workers and costs the employer more money. Optimum integration is generally just above the compensation level of the highest-paid nonowner employee.

Annual additions to qualified retirement plans include which of these? I. Employer contributions II. Employee contributions III. Interest and dividend income IV. Forfeitures reallocated to plan participants

I, II, and IV Only Statement III is incorrect. Investment earnings, such as interest and dividends, are not included as annual additions.

Which of the following is NOT required to be distributed to qualified plan participants on an annual basis? I. Summary Plan Description (SPD) II. Form 5500 III. Summary Annual Report (SAR) IV. Summary of Material Modification (SMM)

I, II, and IV Only a 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. An 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. An SMM, explaining any substantive changes that occurred to the SPD within the past year, must be issued as needed.

Which of the following is CORRECT about the permitted disparity (Social Security integration) rules for defined benefit plans? I. A plan that provides a benefit for wages up to the integration level, plus a higher benefit for wages that exceed the integration level, is an integrated defined benefit excess plan. II. A plan that provides that an employee's benefit otherwise computed under the plan formula is reduced by a fixed amount or formula amount in relationship with the person's Social Security benefit is an integrated defined benefit offset plan. III. Covered compensation is the average of the participant's compensation not in excess of the taxable wage base for the three-consecutive-year period ending with or within the plan year. IV. The base benefit percentage is determined by calculating the benefits provided by the plan based on compensation below the integration level, and expressing these benefits as a percentage of compensation below the integration level.

I, II, and IV Statements I, II, and IV are correct statements about the definition of integrated defined benefit excess plans, the definition of integrated defined benefit offset plans, and how to determine the base benefit percentage. Option III is incorrect because covered compensation means the average Social Security taxable wage base over the last 35 years.

Which of the following are agencies that administer and ensure compliance with the federal laws that apply to qualified retirement plans? I. Department of Labor (DOL) II. Employee Retirement Income Security Agency (ERISA) III. Internal Revenue Service (IRS) IV. Pension Benefit Guaranty Corporation (PBGC)

I, III, and IV Under the reporting and disclosure requirements of the Employee Retirement Income Security Act of 1974 (ERISA), annual reports and summary plan descriptions are filed with the IRS (which provides copies to the DOL). An annual premium payment form is filed with the PBGC.

Which of the following are minimum coverage tests for qualified retirement plans? I. Active participation test II. Average benefits percentage test III. Ratio test IV. Maximum compensation test

II and III The two minimum coverage tests for qualified retirement plans are the average benefits percentage test and the ratio test. 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 these statements regarding top-heavy plans is CORRECT? I. An accelerated vesting schedule is used when a defined benefit pension plan is top heavy. II. A qualified plan is considered top heavy if it provides more than 75% of its aggregate accrued benefits or account balances to key employees. III. Top-heavy defined benefit plans must provide a minimum benefit of 2% per year of service for up to 10 years (20%) for all non-key employees. IV. For a top-heavy plan, a key employee is an employee who owns more than 3% of the employer with compensation greater than $140,000 (2021).

II and IV 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 the following: 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 $185,000 in 2021.

Which of the following persons is a party-in-interest for a qualified plan? I. An officer of the pension plan II. The sponsor company III. Bill, who owns 60% of XYZ, the corporate sponsor IV. Mary, a CFP® professional, the investment adviser to the plan

II, III and IV All of those listed are parties in interest. The rule for statement III is ownership of 50% or more of the corporate sponsor.

Which of the following statements regarding a top-heavy plan is CORRECT? I. A top-heavy plan is one that provides more than 40% of its aggregate accrued benefits or account balances to key employees. II. 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%). III. 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. IV. A top-heavy defined benefit pension plan must provide accelerated vesting.

II, III, and IV Only Statement I is incorrect. A top-heavy plan is one that provides more than 60% of its aggregate accrued benefits or account balances to key employees.