Question 1

An employer opts for Cliff vesting in one of their defined contribution plans under the Pension Protection Act of 2006.Here, an employee can obtain full vesting of employer contributions:
A)after three years.
B)at the retirement age.
C)after two years.
D)at the vesting age determined by the company.
E)at the vesting age specified by ERISA.

Accepted Answer

Cliff vesting under the Pension Protection Act of 2006 allows an employee to become fully vested in their employer's contributions to a defined contribution plan after three years of service.

Question 2

Which of the following provisions gives lifetime benefits to the spouse if the participant dies before the earliest retirement age allowed by the plan?
A)Cliff vesting annuity
B)Fixed dollar annuity
C)Pre-retirement survivor annuity
D)Immediate annuity
E)Graded vesting annuity

Accepted Answer

The pre-retirement survivor annuity is designed to provide benefits to the surviving spouse if the participant dies before reaching the plan's earliest retirement age, ensuring financial support continues.

Question 3

Supplemental costs are the amounts necessary to:
A)provide retirement benefits to temporary employees.
B)pay the insurance premiums of pensioners.
C)amortize any past service liability.
D)fund the pension benefit during the employee's working years.
E)pay the pension amount of employees covered under fixed-benefit plan.

Accepted Answer

Supplemental costs are used to amortize any past service liability, which refers to the costs associated with benefits for service periods prior to the implementation of a pension plan or changes to it.

Question 4

A plan specifies that the employer will contribute 10 percent of an employee's current salary.This plan is referred to as a(n):
A)money purchase plan.
B)target plan.
C)unit benefit plan.
D)supplemental benefit plan.
E)defined contribution plan.

Accepted Answer

A money purchase plan is a type of defined contribution plan where the employer is required to contribute a fixed percentage of an employee's salary each year.

Question 5

In a retirement plan, the employer commits to contribute a certain percentage of compensation each year and guarantees a rate of return.Under this arrangement, employees are able to calculate the exact lump sum that will be available to them at retirement because the employer guarantees both contributions and earnings.This plan is an example of _____.
A)cash balance plans
B)profit sharing plans
C)traditional defined benefit plans
D)money purchase plans
E)target pension plans

Accepted Answer

A cash balance plan is a type of defined benefit plan where the employer guarantees both contributions and a specific rate of return, allowing employees to calculate the exact lump sum available at retirement.

Question 6

Top-heavy plans are plans where:
A)the employee has to pay all of the fund contribution in exchange of a tax benefit.
B)the owners or highest-paid employees hold over 60 percent of the value of the pension plan.
C)the company contributes more to the plan than the employee.
D)the employee and employer can obtain heavy tax benefits simultaneously.
E)the employer has to pay all of the fund contribution by classifying it as a business expense.

Accepted Answer

Top-heavy plans are defined by the scenario where the owners or highest-paid employees hold a significant portion (over 60 percent) of the value of the pension plan, indicating a concentration of benefits at the top of the company hierarchy.

Question 7

Which of the following plans is a promise from the employer that the employee will receive a certain amount of income replacement at retirement?
A)Cash balance plan
B)Profit-sharing plan
C)Money purchase plan
D)Deferred profit-sharing plan
E)Traditional defined benefit plan

Accepted Answer

Traditional defined benefit plans promise employees a specific benefit at retirement, typically based on factors such as salary history and years of service. This contrasts with plans that are based on contributions and investment returns, where the retirement income depends on the performance of the investments.

Question 8

In the deposit administration arrangement, employer makes a one-time payment to the insurance company on behalf of employees.

Accepted Answer

In a deposit administration arrangement, the employer makes periodic payments, not a one-time payment, to the insurance company on behalf of employees to fund a group annuity plan.

Question 9

In order to calculate the employer contribution, a publishing company uses a defined benefit formula that recognizes both the employee's years of service and level of compensation.This defined benefit formula is called:
A)career average formula.
B)fixed percentage formula.
C)final average formula.
D)unit benefit plan.
E)initial average formula.

Accepted Answer

A unit benefit plan is a type of defined benefit formula that considers both the employee's years of service and level of compensation to calculate the employer contribution.

Question 10

This plan sets up a hypothetical individual account for each employee, and credits each participant annually with a plan contribution.The employer also guarantees a minimum interest credit on the account balance.Identify this plan.
A)Unit benefit plan
B)Money purchase plan
C)Target pension plan
D)Profit sharing plan
E)Cash balance plan

Accepted Answer

The described plan is a cash balance plan, which is a type of defined benefit pension plan that appears to be a defined contribution plan. Each employee has a hypothetical account that is credited with contributions and interest, but the employer bears the investment risk and guarantees a minimum return.

Question 11

Most nonqualified plans:
A)are designed to benefit the majority of employees in an organization.
B)are designed for lower level employees and temporary workers.
C)allow employer funding contributions to be deducted as a business expense.
D)are intended to obtain tax benefits rather than employee satisfaction.
E)are for executives and designed to benefit only a small group of highly paid executives.

Accepted Answer

Most nonqualified plans are specifically designed for executives and are intended to benefit only a small group of highly-paid individuals within an organization, rather than the majority of employees. These plans offer benefits beyond those in standard qualified retirement plans and are tailored to meet the unique needs of the organization's top executives.

Question 12

The normal retirement age is the age at which:
A)employee completes twenty-five years of service.
B)full vesting of employer contribution becomes available for employees.
C)the employer contribution becomes equal to employee contribution.
D)full retirement benefits become available to retirees.
E)employee completes twenty years of service.

Accepted Answer

The normal retirement age is defined as the age at which full retirement benefits become available to retirees. This is not necessarily related to the number of years of service, the vesting of employer contributions, or the equality of employer and employee contributions.

Question 13

Which of the following types of plans is considered to be a hybrid plan?
A)Money purchase plan
B)Traditional defined benefit plan
C)Cash balance plan
D)Profit-sharing plan
E)Cost-sharing plan

Accepted Answer

Cash balance plans are considered hybrid plans because they have characteristics of both defined benefit and defined contribution plans. They define benefits in terms of a stated account balance, making it easier for participants to understand than traditional defined benefit plans, yet they are employer-funded and guarantee a certain payout at retirement, similar to a defined benefit plan.

Question 14

Under the money purchase plan, the employer:
A)commits to contribute a certain percentage of compensation each year and guarantees a rate of return.
B)provides certain benefits that are not explicitly defined.
C)promises a certain amount of income replacement to the employees at retirement.
D)allows the employees to select the employer contribution subject to certain limitations.
E)guarantees only the annual contribution but not any returns.

Accepted Answer

Under a money purchase plan, the employer commits to making a fixed annual contribution to the employee's account but does not guarantee any specific rate of return on the investments. The future benefits depend on the performance of the investments made with these contributions.

Question 15

Which of the following is a drawback of Employee Retirement Income Security Act of 1974?
A)Lower-level employees did not get protection under the act.
B)The act failed to address portability issues when employees changed jobs.
C)The act and its amendments did not cover fiduciary responsibilities.
D)The act is believed to cause discrimination amongst employees of an organization.
E)Reporting and disclosure rules were not given importance in the act.

Accepted Answer

The Employee Retirement Income Security Act of 1974 (ERISA) failed to address portability issues for employees when they changed jobs, which is a significant drawback because it affects the ability of employees to maintain their retirement savings and benefits consistently across different employers.

Question 16

In a qualified plan, employer contributions:
A)are significantly high compared to employee contributions.
B)cannot be deducted as a business expense.
C)are classified as taxable compensation to the employee.
D)are not taxable until employees receive them as benefits.
E)are significantly low compared to employee contributions.

Accepted Answer

Employer contributions to a qualified plan are not considered taxable income to the employee at the time of the contribution. Instead, these contributions and the investment earnings on them are taxed as income when the employee receives them as benefits, typically upon retirement.

Question 17

Identify a situation in which an employee will not get protection under ERISA.
A)The employee has worked only for two years.
B)The employee has worked only for 1200 hours.
C)The employee has not reached twenty-one years of age.
D)The employee was hired at the age of sixty-five.
E)The employee is highly compensated.

Accepted Answer

The answer of Identify a situation in which an employee...

Question 18

Which of the following requirements should be fulfilled by a plan to be qualified?
A)The plan must be designed to be permanent and have continuing contributions.
B)The plan must be legally binding, in writing, and communicated clearly to all the stakeholders of the company.
C)The plan must be for the exclusive benefit of the employees rather than their beneficiaries.
D)The plan must not be applicable to the highly compensated employees of the organization.
E)The principal or income of the pension plan cannot be diverted to any other purpose even if the assets exceed those required to cover accrued pension benefits.

Accepted Answer

The answer of Which of the following requirements should be...

Question 19

Which of the following is an example of a qualified pension plan where the contribution amount is defined but the benefit amount available at retirement varies?
A)Traditional defined benefit plan
B)Money purchase plan
C)Integrated plan
D)Cash balance plan
E)Unit benefit plan

Accepted Answer

A money purchase plan is a type of defined contribution plan where the employer commits to making a specific contribution to the employee's plan each year, but the benefit available at retirement depends on the performance of the plan's investments, not a predefined benefit formula.

Question 20

Final average formula sets the compensation base as:
A)average compensation of employees in the organization.
B)compensation for a recent number of years.
C)career average compensation of the employee.
D)average compensation of employees in the employee's department.
E)the total salary earned by the employee and the total experience.

Accepted Answer

The final average formula typically uses the compensation for a recent number of years to determine the base for calculating benefits or pensions.

Quiz 21: Employment-Based and Individual Longevity Risk Management

An employer opts for Cliff vesting in one of their defined contribution plans under the Pension Protection Act of 2006.Here, an employee can obtain full vesting of employer contributions:

Which of the following provisions gives lifetime benefits to the spouse if the participant dies before the earliest retirement age allowed by the plan?

Supplemental costs are the amounts necessary to:

A plan specifies that the employer will contribute 10 percent of an employee's current salary.This plan is referred to as a(n) :

Top-heavy plans are plans where:

Which of the following plans is a promise from the employer that the employee will receive a certain amount of income replacement at retirement?

In the deposit administration arrangement, employer makes a one-time payment to the insurance company on behalf of employees.

In order to calculate the employer contribution, a publishing company uses a defined benefit formula that recognizes both the employee's years of service and level of compensation.This defined benefit formula is called:

This plan sets up a hypothetical individual account for each employee, and credits each participant annually with a plan contribution.The employer also guarantees a minimum interest credit on the account balance.Identify this plan.

Most nonqualified plans:

The normal retirement age is the age at which:

Which of the following types of plans is considered to be a hybrid plan?

Under the money purchase plan, the employer:

Which of the following is a drawback of Employee Retirement Income Security Act of 1974?

In a qualified plan, employer contributions:

Identify a situation in which an employee will not get protection under ERISA.

Which of the following requirements should be fulfilled by a plan to be qualified?

Which of the following is an example of a qualified pension plan where the contribution amount is defined but the benefit amount available at retirement varies?

Final average formula sets the compensation base as: