Question 1

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

Accepted Answer

II is true because profit-sharing plans do provide greater funding flexibility for employers compared to other qualified plans, allowing employers to adjust contributions based on profitability. I is false because there are limits on the amount an employer can contribute annually to an employee's account under a profit-sharing plan, set by the IRS.

Question 2

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

Accepted Answer

A guaranteed investment contract is a funding instrument with an insurer in which the insurer guarantees to pay a specified interest rate for a number of years on a lump sum deposit. This type of instrument is typically used to fund defined benefit pension plans.

Question 3

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

Accepted Answer

Lump-sum distributions made directly to the employee at any age when he or she changes employers are not exempt from the 10 percent penalty tax. The other options (A, C, D) are specific exceptions to the early distribution penalty.

Question 4

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

Accepted Answer

RST offers a defined contribution money purchase plan, where the employee and employer both contribute a specific percentage of the employee's income to the plan, and the retirement benefit is determined by the account balance at retirement. This is different from a defined benefit plan, which guarantees a specific retirement benefit based on a formula that considers factors such as years of service and final average salary.

Question 5

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

Accepted Answer

The statement "The 10 percent penalty tax does not apply to distributions prior to age 59.5" is incorrect. In fact, the 10 percent penalty tax does apply to early distributions from profit-sharing plans, unless an exception applies, such as disability or death. Therefore, option C is the correct answer because it is not an advantage of a profit-sharing plan. Options A, B, and D are advantages of a profit-sharing plan.

Question 6

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

Accepted Answer

Cash balance plans are a type of defined benefit plan, not defined contribution plans, and they provide hypothetical (not actual) individual accounts for employees. The employer credits the employee's account with a set percentage of their yearly compensation plus interest charges.

Question 7

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

Accepted Answer

A 403(b) plan (also known as a tax-sheltered annuity or TSA) is a retirement savings plan for employees of certain tax-exempt organizations, such as universities, colleges, charities, and some hospitals. Lynn's election to withhold $5,000 of her salary and contribute it to a tax-sheltered annuity indicates that she is participating in a 403(b) plan. Therefore, B) is the correct choice. The other options (A) SIMPLE plans, (C) defined benefit plans, and (D) Keogh plans) are not applicable to Lynn's situation based on the information provided in the question.

Question 8

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

Accepted Answer

The plan described in the question is a SIMPLE (Savings Incentive Match Plan for Employees) retirement plan, which is designed specifically for small businesses with 100 or fewer employees. This plan allows employers to make contributions to their own retirement accounts and to their employees' accounts, while also being exempt from many of the administrative and nondiscrimination rules that apply to other types of qualified plans, making it a popular choice for small businesses.

Question 9

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

Accepted Answer

Qualified distributions at retirement are actually tax-free for Roth 401(k) plans as long as certain conditions are met.

Question 10

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

Accepted Answer

The benefit formula used at Rita's company is a unit-benefit formula, where the retirement benefit is calculated based on a percentage of years of service and average salary in the three highest consecutive years of paid employment with the company. This type of formula is common in defined-benefit pension plans.

Question 11

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

Accepted Answer

The answer of Which of the following statements concerning defined...

Question 12

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

Accepted Answer

The type of plan described is a cash-balance plan, which is a type of defined-benefit plan that defines benefits in terms of a hypothetical account balance. Each year, employees receive interest and pay credits, just like in this scenario. A section 401(k) plan is a type of defined-contribution plan, not a defined-benefit plan. A deposit-administration plan and a trust fund plan are not types of retirement plans.

Question 13

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

Accepted Answer

I. Vesting helps to reduce labor turnover because employees are more likely to stay with a company if they know that they will eventually own their retirement benefits.II. An employee who terminates employment after four years of service has no vested retirement benefit under cliff vesting because cliff vesting requires employees to work for a specific number of years (e.g., five years) before they become vested in any of their retirement benefits.

Question 14

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

Accepted Answer

The correct answer is C because under a 401(k) plan, the actual deferral percentage (ADP) test is used to ensure that the plan does not disproportionately benefit highly compensated employees over non-highly compensated employees. This involves comparing the average percentage of salary deferred by highly compensated employees to the average percentage deferred by non-highly compensated employees.

Question 15

Which of the following statements concerning retirement plans for the self-employed is true?
I. They can be used by owners of incorporated businesses only.
II. With certain exceptions, the same rules that apply to qualified corporate plans apply to retirement plans for the self-employed.

Accepted Answer

Retirement plans for the self-employed can be used by owners of unincorporated businesses as well as incorporated businesses. However, statement II is true – with certain exceptions, the rules that apply to qualified corporate plans (such as 401(k) plans) apply to retirement plans for the self-employed (such as a solo 401(k) or a SEP IRA).

Question 16

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

Accepted Answer

Matching employer contributions are indeed permitted under a 403(b) plan.

Question 17

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

Accepted Answer

With a defined benefit plan, the retirement benefit is known in advance but the contributions vary; with a defined contribution plan, the contribution rate is fixed but the retirement benefit varies. Option A is incorrect because it is easier for an employer to determine its annual pension contribution under a defined contribution plan than under a defined benefit plan. Option B is incorrect because older workers typically benefit more from a defined benefit plan than a defined contribution plan. Option C is incorrect because the employer typically bears the investment risk under a defined benefit plan, whereas the employee bears the investment risk under a defined contribution plan.

Question 18

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

Accepted Answer

SIMPLE retirement plans are limited to employers with 100 or fewer eligible employees and who do not maintain another qualified plan. This is the main eligibility requirement for a SIMPLE plan.

Question 19

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

Accepted Answer

Qualified defined contribution plans with voluntary employee contributions and matching employer contributions are subject to the same vesting rules as other defined contribution plans. Graded vesting is permitted, meaning that vesting can occur over a period of time rather than immediately. Specifically, employer contributions must be at least 20 percent vested after 2 years, with an additional 20 percent vesting in each of the next 4 years. Therefore, statement I is incorrect as immediate vesting is not required, but statement II is correct.

Question 20

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

Accepted Answer

The answer of Which of the following statements is (are)...

Quiz 17: Employee Benefits: Retirement Plans