RPA 1 - Final Exam 100 Questions

Variable annuities (equity provisions) are alleged to have what advantages?

- Employees have some assurance that their retirement income will coincide with the gneeral level of economic activity - from the employer's standpoint, the cost of variable annuities can be predicted - variable annuities may eliminate or reduce the need for other pension benefit liberalizations - variable annuities may be very popular with employees particularly in a rising market

Distributions from a traditional IRA

- Excess accumulation in an IRA is subject to an excise tax of 50%. - Lump-sum distributions from an IRA do not qualify for long-term capital gains treatment. - Distributions from an IRA used to pay medical expenses exceeding a stipulated percentage of adjusted gross income are free of the 10% penalty tax on early withdrawals - traditional IRA died before the entire interest is distributed, the required distribution to the beneficiary depends upon whether distributions to the IRA owner had already been required to start by the date he or she died.

All of the following are key provisions enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001

- Increased contribution, benefit deduction limits for all types of retirement savings vehicles - created qualified Roth contribution programs - increased contribution limit amounts for retirement plan participants aged 50 and older- Eased rules for rollover distributions among various types of plans

A 401(k) plan whose investment choices only consist of mutual fund offerings could potentially incur all of the following types of expenses

- Recurring administrative costs - Investment and management fees - Communication expenses - Distribution or marketing expense

Characteristics of profit-sharing plans

- THey can be structured with either a discretionary formula or a predetermined formula for employer contribtuions - They can allow employee contributions - The can be used with a 401k provision - Their employer contributions can reach 25% of employee compensation

All of the following are characteristics of savings incentive match plans for employees (SIMPLE plans)

- The may be established as either IRAs or 401ks - employers may make matching contributions to SIMPLE plans - employers may make nonelective contributions to SIMPLE plans - they may be established by employed with 100 or fewer employees with a specified minimum level of compensation

Characteristics of a money purchase plan

- ability of participants to make investment decisions regarding their accounts - lump sum distribution in the event of the employee's death - in-service withdrawals not permitted - loans available form the plan

Requirements for a statutory stock comp plan to qualify as an incentive stock plan (ISO)

- duration of an option cannot exceed ten years - option price must equal or exceed the value of the stock when the option was granted - an employee cannot dispose of the stock within two years from the granting of the option or within one year of the transfer of the stock to him or her - option must be nontransferable except by will or inheritance at death

Broad categories of defined benefit formulas

- flat amount formulas - flat amount per year of service formulas - percentage of earnings per year of service formulas - flat percentage of earnings forumulas

Design features in an executive retirement plan typically is consistent with broad-based qualified retirement plans maintained by the plan sponsor

- form and manner in which benefits are distributed - right to make and change beneficiary designations - right to amend or terminate plan - state law that will govern plan interpretation

IRAS and other similar savings plans

- generally IRA assets cannot be invested in life insurance contracts - an individual retirement savings plan can be established with the purchase of an annuity contract - self-directed IRA arrangement is permissible - IRA investments in collectibles such as antiques, works or art, stamps and coins are prohibited

Active-service withdrawals from qualified profit sharing plans

- participants may withdraw a portion of their vested benefit while actively employed - may restrict the right to withdraw to employee contributions - tax law permits the withrawal of funds upon the happening of an event such as a hardship - IRS allows withdrawal of funds from a profit sharing plan upon the completion of five years of plan participation

Strategies an employer may use to minimize or eliminate the possiblity that a plan will fail under the ADP and/or ACP tests

- place a limit on the maximum amounts that may be deferred on contributed by employees - allow the employer to adjust prospective deferrals or after-tax contributions either upward or downward if the plan is in danger of failing to meet the tests. - set plan contributions according to specified safe harbors - Require mandatory minimum deferrals or contributions from all participating employees.

Requirements of SIMPLE plan

- plan must be in writing - plan must specifiy requirements of EE participation - EE must be fully vested in his or her account balance at all times - Plan loans are not permitted

A CODA may be part of what type of plans

- pre-ERIS money purchase plan - stock bonus plan - rural electric cooperative plan - profit sharing plan

Events that permit qualified distributions (of limited amounts in some cases) from a Roth IRA that has held contributions for a specified minimum period

- taxpayer has attained age 59 1/2 - taxpayer is disabled -taxpayer has died and payment is made to a beneficiary or to the individual's estate - taxpayer has first-time home buyer expenses

Requirements to achieve tax advantages for 403b

- the contributions paid in any year must not exceed the limits under Section 415, the annual limit on salary reduction contributions, or the maximum amount permitted under the nondiscrimination requirements. - The participant's rights under the contract must be nonforfeitable. - The annuity contract must be purchased by the employer, or the employer must make a deposit to a custodial account that will purchase mutual fund shares. - For plans involving employer contributions, certain applicable nondiscrimination requirements must be met.

Under which of the following circumstances would it be prudent for an individual receiving restrictive stock to make the selection to pay taxes owed in the year the stock is received rather than in the year it is vested? - If the current value of the stock is low and there is an expectation of reasonable growth in the value of the stock. - If the individual expects to remain with the employer at least through the current tax year. - If the employer is expected to make the vesting provisions more restrictive.

1

Which of the following rules apply to qualified nonelective contributions under a 401(k) plan? - The contribution must be fully vested at all times. - The contribution must be made available to the employee through a loan provision. = The contribution consists of money an employee is deemed to have received and taken as income

1

Which of the following statements concerning top-heavy plans is (are) correct? - A defined contribution plan is top-heavy if the aggregate of accounts for key employees exceeds 60% of the aggregate of accounts for all covered employees. - A top-heavy plan must provide for full and immediate vesting for all nonkey employees. - The minimum contribution percentage for a nonkey employee under a top-heavy defined contribution plan must be equal to the percentage contributed for key employees minus the employer Federal Insurance Contributions Act (FICA) taxes paid for such nonkey employees.

1

In order for a computer model to be used to provide personally tailored investment advice to 401(k) plan participants, which of the following conditions must be met? -The model must be certified by an independent investment expert. -The model must meet specified audit requirements. -The model must be provided free of charge or at a de minimus fee to plan participants.

1 & 2

In special cases, an amount above the annual 402(g) limit may be contributed by employees (even those under age 50) to a 403(b) plan under a salary reduction agreement. Which of the following statements regarding these special cases is (are) correct? - In these cases the employee must have a minimum of 15 years of service with the organization. - In no event may the employee contribute more than an additional $3,000 above the 402(g) limit in a single year. - An eligible employee can contribute a maximum of $5,000 in additional aggregate contributions.

1 & 2

Which of the following is (are) correct statements regarding the tax treatment of incentive stock options (ISOs) for the specified party? - The bargain element upon exercise of an ISO is an adjustment item for individual alternative minimum tax (AMT) purposes. - The participant of an ISO plan is taxed only when he or she sells the stock purchased under the plan. - The employer gets a corporate tax deduction at the granting of the option.

1 & 2

Which of the following legal entities can establish a Keogh plan? - A sole proprietor - A partnership - A common-law employee

1 & 2

Which of the following statements is (are) correct for individual retirement accounts (IRAs)? - Tax filing status and level of income affect contribution amounts. - Contributions can be made on a deductible and non-deductible basis. - Their provisions have remained unchanged since the accounts were created by the Employee Retirement Income Security Act.

1 & 2

Which of the following Internal Revenue Code Sections' provisions control nonstatutory employee stock compensation plans? - Section 61 - Section 72(p) - Section 83

1 & 3

Which of the following are factors that should be considered in defining compensation for executive retirement arrangements? - The elements of pay to be included. - The look-back period over which compensation will be indexed for inflation protection. - The period of time (if any) over which compensation will be averaged

1 & 3

Which of the following statements regarding Section 457 plans is (are) correct? - They can be offered on a discriminatory basis. - They must be offered to at least five employees of the organization. - They are not required to satisfy minimum coverage requirements.

1 & 3

Under a percentage of earnings per year of service formula, the typical range for the percentage of earnings credited is:

1% to 1.25%

Provided it is allowable under the contract, which of the following actions could be taken by the owner of a 403(b) annuity? - Elect a reduced paid-up annuity. - Exchange the contract for a reduced annuity with an earlier maturity date. - Surrender the contract in order to transfer the proceeds to another issuer if certain conditions are met.

1, 2, & 3

Reasons for deferring current income through a deferred compensation agreement include which of the following? - Extending an executive's income beyond normal working years into retirement - Spreading bonuses over a wider span of years - Tying an executive to the employer by stipulating conditions for the receipt of deferred amounts

1, 2, & 3

Which of the following 401(k) plan features are core elements of design likely to determine plan success? - Whether an employer will provide a plan contribution - The level of the employer contribution - The menu of investment options offered through the plan

1, 2, & 3

Which of the following is (are) advantage(s) of a defined benefit plan? - It can be structured to achieve specific income replacement objectives. - When compared to a defined contribution plan, it can be more efficient at allocating available funds primarily for retirement benefits. - When compared to a defined contribution plan, it can be designed to achieve a more equitable allocation of employer contributions taking into account an employee's age, past service, and pay.

1, 2, & 3

Which of the following is (are) advantage(s) of a defined contribution plan? - Its administrative costs are typically less than those of a defined benefit plan. - Its design can achieve greater employee identification with the company than that of a defined benefit plan. - Its design has the potential to enhance employee productivity.

1, 2, 3

Which of the following statements regarding the economic value of stock options is (are) correct? - The value can be substantial. - The value can decline all the way to zero. - The value can be approximated by looking at market prices of long term investment options called LEAPS.

1, 2, 3

Which of the following tax-deferred retirement savings vehicles could receive a tax-free rollover from a Keogh plan? - Another Keogh plan - An individual retirement account (IRA) - An employer-sponsored retirement plan

1, 2, 3

If a contribution to a profit sharing plan exceeds the maximum deductible contribution limit, the employer can carryover the excess contribution to the succeeding year, but will be subject to an excise tax on the excess contribution of:

10 percent

Which of the following is (are) a disadvantage of a solo 401(k) plan? - Elective deferral limits under these plans were severely reduced by the Economic Growth and Tax Relief Reconciliation Act. - The plan is required to comply with most of the administrative requirements of non-solo 401(k) plans. - The plan can only be offered to the owner and his or her spouse and not to other employees.

2

Which of the following provisions is (are) required to be provided in qualified retirement plans under federal law? - A provision offering an early retirement benefit before normal retirement age. - A provision allowing an employee to defer retirement beyond normal retirement age. - A provision insuring an income replacement ratio from the plan which is equivalent on an aggregate basis for highly compensated and nonhighly compensated employees.

2

Which of the following requirements would apply to a loan from a qualified profit sharing plan that is not being used to acquire a principal residence? - The loan must be repaid within ten years. - The loan must be amortized in a substantially level manner. - The loan must require payments that are made at least monthly.

2

Which of the following is (are) correct statements about Social Security "integration"? - It is a form of discrimination unintentionally allowable by the Internal Revenue Code. - It recognizes that the relative value of Social Security benefits decreases as pay goes up. - It refers to a plan design (when using a defined contribution plan) that provides a higher level of employer contributions for employee earnings above a specified amount than for those earnings below the specified amount.

2 & 3

Which of the following statements concerning the actual deferral percentage (ADP) test is (are) correct? - The ADP test indicates the maximum deferral percentage for any single individual in the highly compensated employee group. - If any highly compensated employee is a participant under two or more cash or deferred arrangements (CODAs) of the employer, all such CODAs will be treated as one CODA for purposes of determining the employee's actual deferral percentages. - The ADP test can be performed excluding any nonhighly compensated employees who participate in the plan before attaining age 21 and completing one year of service.

2 & 3

Which of the following statements describe the typical advantages of a final pay defined benefit plan? - This type of plan is usually less expensive than one that bases benefits on career average earnings. - A final pay plan generally produces more favorable results for key employees than the career average approach. - The employee's initial benefit keeps pace with preretirement inflation.

2 & 3

Which of the following would be considered generally accepted investment theories? - Alternate cycle investing - Modern portfolio theory - Strategic asset allocation

2 & 3

Employees withdrawing contributions from a savings incentive match plan for employees (SIMPLE plan) individual retirement account (IRA) during the two-year period beginning on the date of initial participation are subject to a penalty tax of

25 percent

For all defined contribution plans, there is a uniform employer deduction limit of

25% of compsensation

Which of the following employers could permit a loan from a Section 457 plan? - An organization exempt from tax under Internal Revenue Code (IRC) Section 501 - A corporation - A state government

3

Which of the following is (are) characteristics of Section 423 employee stock purchase plans? - They can favor highly paid executives. - Their purchase price must equal the stock's fair market value when the option is granted or when the option is exercised. - Employees who agree to have an estimated amount withheld from their pay to provide the funds with which to exercise their options at the end of an option period can decide not to exercise the option and have the amounts withheld refunded to them.

3

Which of the following statements is (are) correct concerning factors that impact on the accumulation of retirement savings? - The Tax Reform Act of 1986 substantially raised tax rates starting a trend toward higher tax rates that diminishes the capacity to save for retirement. - Advertising and installment credit availability have little to no effect on consumption and saving patterns by active workers. - The threat of inflation to purchasing power should always be considered when investing and planning for retirement.

3

For a distribution from a Roth IRA account to receive favorable tax treatment as a qualified distribution, how long must contributions be in the account?

5 years

In addition to current income taxation, any excess contribution to an individual retirement account (IRA) is subject to a nondeductible excise tax of:

6 percent

n general, the aggregate amount of employer contribution allocated to a younger employee under a defined contribution plan compared to that under a defined benefit plan is:

A higher amount

Top-hat plan

A retirement plan that is unfunded and maintained by an employer primarily for the purpose of providing deferred compensation for a "select group of management or highly compensated employees" is called a (n):

Contributions to a profit sharing plan must be made on

A substantial and reoccurring basis

Economic Benefit

A theory of income taxation that imposes current tax liability on taxpayers who receive something of reasonable value is known as the doctrine of:

Federal law defines normal retirement age to be the age specified in the plan, but it cannot occur beyond the later of

Age 65 or the fifth anniversary of the participant's date of initial participation

Which of the following plans is used in conjunction with debt financing?

An employee stock ownership plan

Must be given the election to remain under the pre-amendment vesting schedule for both pre-and post-amendment benefit accruals.

An employee with four years of service participates in a retirement plan. The vesting schedule in this plan is changed by plan amendment. Under tax law, this plan participant:

Employer sponsered IRAs

Can be discriminatory in benefits

Under which of the following situations are premature distributions from individual retirement accounts (IRAs) exempt from the early distribution penalty tax?

Distributions because of an Internal Revenue Service levy on the account to pay

Under certain conditions, a nonworking spouse may establish an individual retirement account (IRA) using which of the following types of payments as the basis for eligibility to make contributions?

Earned income of a working spouse

The limitation on exclusions for elective deferrals under 401(k) plans is:

Indexed in increments established by the Economic Growth and Tax Relief Reconciliation Act (EGTRRA)

The Supreme Court ruled in Arizona Governing Committee v. Norris that:

Life annuities under an employer-sponsored defined contribution plan must be provided on a uniform basis

Under a technique known as a wage-related formula, the impact of postretirement inflation on pension income is

Measured on the basis of current wage measures to adjust benefits

An employer can take which of the following actions regarding a retirement plan covering organized workers without the approval of the authorized bargaining agent for those employees? -Install a retirement plan -Terminate a retirement plan -Alter the terms of a retirement plan

None

Generally most profit sharing plans do not have difficulties passing the nondiscrimination-in-contributions requirements for which of the following reasons? Profit sharing plans must have a definite predetermined contribution formula. Vesting schedules favor lower paid employees. The definition for breaks-in-service is more stringent than the one used for pension plans.

None

Which of the following participants would be prohibited from receiving a plan loan from a Keogh plan? - A sole proprietor - A partner owning 12% of the profit interest in a partnership - A shareholder-employee of an S corporation

None

Which of the following services generally would be provided by a directed trustee to a 401(k) plan under an unbundled service arrangement when the directed trustee is not performing recordkeeping services for a 401(k) plan? - Tracking incoming plan contributions and the allocation of funds among specific individual participant accounts. - Approving individual participant loan and hardship requests. - Performing the actual deferral percentage (ADP) test for the overall plan.

None

Those questioning the validity of the human depreciation concept of private pensions would argue that the employer should be held responsible only for the increase in the rate of aging caused by:

Occupational hazards

Under the Pension Protection Act of 2006, a benefit statement must be provided to a plan participant of a defined contribution plan entitled to direct plan investments

Once a quarter

Key employees, for purposes of the top-heavy rules, include all:

One percent owners receiving annual compensation in excess of $150,000

Which of the following are types of eligible Section 457 plans that must be unfunded?

Plans maintained by nongovernmental tax-exempt organizations

The most frequently used criterion to establish participation in a supplemental executive retirement plan (SERP) is:

Position and management status

Which Internal Revenue Code Section generally mandates that, except for certain exceptions that meet specific requirements, income from deferred compensation arrangements may no longer be deferred beyond the year in which such compensation is earned?

Section 409A

What can't an employer do to encourage early retirement?

Stop accruing benefits when an employee attains a maximum age limit

To receive tax-preferred treatment under an ineligible Section 457 plan, amounts deferred must be

Subject to a substantial risk of forfeiture

How did the Pension Protection Act of 2006 change requirements for investment advice provided to individual retirement account (IRA) owners?

The Act requires that fees for such advice not be contingent on the investment option chosen.

Which of the following statements describes the tax treatment of nonqualified stock options for the employer

The employer gets a corporate income tax deduction for the amount of compensation income the employee realizes at the exercise of the option

Of all of the following factors in the Black-Scholes option pricing model, which one is generally deemed to have the most relative impact on the value of the option?

The expected volatility of the underlying stock's market price

Under the Employee Retirement Income Security Act of 1974 (ERISA), a fiduciary shall discharge his (or her) duties with respect to an employee benefit plan solely in the interest of:

The plan's participants and beneficiaries

If you knew that a vendor servicing a 401(k) plan was clearing trades internally and not using an outside directed trustee, you generally could conclude that:

The vendor was providing plan services as a bundled service provider.

One reason major administrative issues of savings incentive match plans for employees (SIMPLE plans)

They are not required to perform nondiscrimination testing where employer matching contributions are invovled

The annual limit on deferral amounts for an ineligible Section 457 plan is

Unlimited

The vesting provision of executive retirement arrangements:

Varies depending on the intent of the executive arrangement

In 1948 the National Labor Relations Board (NLRB) found that the provisions of retirement plans affect conditions of employment and that retirement benefits constitute:

Wages

All of the following are decision elements in the initial design and ongoing administration of a 401(k) plan

Ways in which plan sponsors... - design the plan - handle continuing administrative tasks - communicate plan offerings and features - ways in which plan sponsor will serve as a discretionary trustee

Changes enacted by the PPA 2006 with important implications for 401k are

amended the ERISA to expliciltyly preempt any state wage and hour law that may prohibit or restrict auto enrollment - extended conditions that would allow hardship distributions - imposed stricter diversification requirements to plans of public traded companies that hold publicly traded securities - act made changes in the notice and consent rules applicable when plan distributions occur

An example of a sponsor of a 403(b) plan is

public college