Question 1

Which of the following statements concerning defined contribution pension plans is (are)true?
I.The contribution rate is fixed.
II.The retirement benefit varies.

Accepted Answer

I - The contribution rate is fixed, meaning that the employer and/or employee contribute a set amount or percentage of the employee's salary to the pension plan. 
II - The retirement benefit varies, as the eventual payout to the employee is dependent on the performance of the investments made by the pension plan. Therefore, the benefit may be higher or lower than expected based on the investment returns.

Question 2

A financial institution that provides for the accumulation or administration of the funds that will be used to pay pension benefits is called a

Accepted Answer

A funding agency is a financial institution that manages and administers funds specifically for the purpose of paying pension benefits.

Question 3

Which of the following distributions from a qualified retirement plan would be exempt from the 10 percent penalty tax if the distribution occurred before the covered employee was age 59.5?
I.A distribution made to an employee with a qualifying disability.
II.A distribution made to a beneficiary or to the employee estate's after the employee's death.

Accepted Answer

Both distributions made to an employee with a qualifying disability and distributions made to a beneficiary or the employee's estate after their death are exempt from the 10 percent penalty tax if they occur before the covered employee was age 59.5.

Question 4

All of the following are potential disadvantages to employees covered by a defined contribution pension plan EXCEPT

Accepted Answer

Defined contribution plans typically have a specified contribution rate by the employer, which is known and not uncertain. This contrasts with defined benefit plans, where the retirement benefit is defined, but the contribution rate may vary to ensure the promised benefit is met.

Question 5

Which of the following statements about Section 401(k)plans is true?

Accepted Answer

Elective salary deferrals to Section 401(k) plans are free of federal income taxation until the funds are actually withdrawn. This is a key feature of these retirement savings plans as it allows for tax-deferred growth on contributions until retirement.

Question 6

Which of the following statements about the tax implications of qualified pension plans is true?

Accepted Answer

Employer contributions to qualified pension plans are deductible as an ordinary business expense, up to certain limits set by the Internal Revenue Service (IRS). Investment income on plan assets is not taxed until it is withdrawn from the plan. Distributions from qualified pension plans are taxable as ordinary income to the retiree, unless the plan meets certain requirements for tax-free treatment (such as a Roth 401(k) plan). Therefore, option A, C, and D are incorrect.

Question 7

For a long-term employee who is covered by a defined benefit plan,the highest retirement income will be obtained if his/her retirement income is based on

Accepted Answer

Final average pay is the most common method used to calculate retirement income for long-term employees covered by a defined benefit plan. This method takes into account the employee's average salary over a set period of time, usually the employee's highest earning years leading up to retirement. This allows for a more accurate representation of the employee's retirement income based on their highest earning potential.

Question 8

Which of the following statements about the protection provided by the Pension Benefit Guaranty Corporation is (are)true?
I.Only defined benefit plans are insured.
II.Only benefits that are not yet vested are guaranteed.

Accepted Answer

The first statement is true. The Pension Benefit Guaranty Corporation only insures defined benefit plans, not defined contribution plans. However, the second statement is false. Both vested and non-vested benefits are guaranteed, up to certain limits.

Question 9

Which of the following statements about the minimum vesting standards for a qualified defined benefit plan is (are)true?
I.Under cliff vesting,an employee must be at least 50 percent vested after 5 years of service.
II.Under graded vesting,an employee must be at least 20 percent vested after 3 years of service and 100 percent vested after 7 years.

Accepted Answer

Under the Pension Protection Act of 2006, the minimum vesting standards for a qualified defined benefit plan specify that under cliff vesting, an employee must be 100% vested after 5 years of service, not 50%. For graded vesting, the law requires an employee to be at least 20% vested after 3 years of service, with vesting increasing by 20% each year until reaching 100% after 7 years, making statement II correct.

Question 10

Under a unit-benefit formula,benefits are a function of both

Accepted Answer

A unit-benefit formula calculates retirement benefits based on a combination of an employee's earnings and years of service. This means that the longer an employee works for a company and the higher their salary, the higher their retirement benefit will be. Age, gender, and position within a firm are not factors in a unit-benefit formula.

Question 11

Vesting refers to

Accepted Answer

Vesting refers to the employee's right to the employer's contributions or benefits attributable to the contributions if employment terminates prior to retirement. This means that even if the employee leaves the company before they retire, they are still entitled to the employer's contributions to their retirement savings plan.

Question 12

Which of the following statements about withdrawals from Section 401(k)plans is (are)true?
I.The penalty tax does not apply to hardship withdrawals.
II.Withdrawals may be made without penalty at age 59.5 or older.

Accepted Answer

Statement II is true. Withdrawals from a 401(k) plan may be made without penalty once the account holder reaches age 59.5.

Statement I is false. Hardship withdrawals from a 401(k) plan are subject to a penalty tax of 10% if the account holder is under age 59.5.

Question 13

Which of the following statements about pension funding agencies and funding instruments is true?

Accepted Answer

A separate investment account is indeed a group pension account with a life insurance company, allowing for pooled investments.

Question 14

As Social Security slants benefits in favor of lower-paid workers,the Internal Revenue Code permits employers to adjust pension contributions so that the overall contributions (pension plus Social Security)are nondiscriminatory.This adjustment permits employers to increase pension contributions for highly-compensated employees.Adjusting contributions to consider Social Security contributions is called

Accepted Answer

The adjustment of pension contributions to consider Social Security contributions is called integration. This allows employers to increase pension contributions for highly-compensated employees, while still ensuring overall contributions are nondiscriminatory.

Question 15

Which of the following statements about retirement ages in defined benefit pension plans is (are)true?
I.The normal retirement age in most plans is 65.
II.For a defined benefit plan,the early retirement age is the earliest age an employee can retire with full,unreduced benefits.

Accepted Answer

I is true as the normal retirement age in most defined benefit pension plans is indeed 65. II is incorrect because the early retirement age typically refers to the earliest age an employee can retire with benefits, but these benefits are often reduced compared to retiring at the normal retirement age.

Question 16

Which of the following statements concerning defined-benefit pension plans is (are)true?
I.The contribution rate by the employer varies depending on the amount needed to fund the desired benefit.
II.The retirement benefit is not known in advance.

Accepted Answer

I is true because in a defined-benefit plan, the employer adjusts contributions to ensure the promised benefit can be paid. II is false because the retirement benefit is predetermined in a defined-benefit plan.

Question 17

What are the minimum age and service requirements that can be imposed on employees eligible to participate in a retirement plan?

Accepted Answer

The most common minimum age and service requirements for retirement plans are age 21 and 1 year of service. This means an employee must have reached age 21 and completed one year of service (usually defined as working at least 1,000 hours) in order to be eligible to participate in the plan.

Question 18

Which of the following statements about trust fund plans is (are)true?
I.The trustee typically purchases annuities for retiring employees.
II.The trustee guarantees the adequacy of the fund to pay the promised benefits.

Accepted Answer

Trust fund plans involve a trustee managing the funds to ensure they are sufficient to meet future obligations, but the trustee does not typically purchase annuities for retiring employees nor guarantee the adequacy of the fund to pay the promised benefits. These responsibilities usually fall to the employer or plan sponsor.

Question 19

Which of the following statements about retirement benefits under pension plans is true?

Accepted Answer

A unit-benefit formula considers both earnings and years of service to calculate retirement benefits. Option A is incorrect because a flat percentage of annual earnings formula provides higher dollar benefits to higher earners. Option B is incorrect because a benefit using final pay is usually based on an employee's earnings during the last 1-3 years of participation in the plan, not just the last month. Option D is incorrect because past service benefits are the result of crediting a participant's account with benefits for years of service completed before the plan began or before the participant entered the plan.

Question 20

Beta Corporation has 1,000 employees eligible to participate in the firm's pension plan,and 100 of these employees are considered highly compensated.All of the highly compensated employees are covered by the plan.What is the minimum number of the 900 non-highly compensated employees who must be covered by the plan in order for the plan to satisfy the ratio percentage test?

Accepted Answer

The ratio percentage test is satisfied if the percentage of non-highly compensated employees covered by the plan is at least 70% of the percentage of highly compensated employees covered. Since all 100 highly compensated employees are covered (100%), at least 70% of that, which is 70% of the non-highly compensated employees, must be covered. 70% of 900 is 630.

Quiz 17: Employee Benefits: Retirement Plans

Which of the following statements concerning defined contribution pension plans is (are) true? I.The contribution rate is fixed. II.The retirement benefit varies.

A financial institution that provides for the accumulation or administration of the funds that will be used to pay pension benefits is called a

All of the following are potential disadvantages to employees covered by a defined contribution pension plan EXCEPT

Which of the following statements about Section 401(k) plans is true?

Which of the following statements about the tax implications of qualified pension plans is true?

For a long-term employee who is covered by a defined benefit plan,the highest retirement income will be obtained if his/her retirement income is based on

Which of the following statements about the protection provided by the Pension Benefit Guaranty Corporation is (are) true? I.Only defined benefit plans are insured. II.Only benefits that are not yet vested are guaranteed.

Under a unit-benefit formula,benefits are a function of both

Vesting refers to

Which of the following statements about withdrawals from Section 401(k) plans is (are) true? I.The penalty tax does not apply to hardship withdrawals. II.Withdrawals may be made without penalty at age 59.5 or older.

Which of the following statements about pension funding agencies and funding instruments is true?

Which of the following statements about retirement ages in defined benefit pension plans is (are) true? I.The normal retirement age in most plans is 65. II.For a defined benefit plan,the early retirement age is the earliest age an employee can retire with full,unreduced benefits.

Which of the following statements concerning defined-benefit pension plans is (are) true? I.The contribution rate by the employer varies depending on the amount needed to fund the desired benefit. II.The retirement benefit is not known in advance.

What are the minimum age and service requirements that can be imposed on employees eligible to participate in a retirement plan?

Which of the following statements about trust fund plans is (are) true? I.The trustee typically purchases annuities for retiring employees. II.The trustee guarantees the adequacy of the fund to pay the promised benefits.

Which of the following statements about retirement benefits under pension plans is true?