Deck 17: Employee Benefits: Retirement Plans

Question 1

All of the following are potential disadvantages to employees covered by a money-purchase pension plan EXCEPT

A)The contribution rate by the employer is uncertain.
B)The retirement benefit can only be estimated in advance of retirement.
C)The benefit formula may produce an inadequate benefit if an employee enters the plan at an older age.
D)The investment losses are borne by the employees.

Answer 1

A

Question 2

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

A)I only
B)II only
C)both I and II
D)neither I nor II

Answer 2

A

Question 3

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.

A)I only
B)II only
C)both I and II
D)neither I nor II

Answer 3

A

Question 4

As Social Security slants benefits in favor of lower-paid workers,the Internal Revenue Service 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

A)prorating.
B)indexing.
C)offset.
D)integration.

Question 5

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)I only
B)II only
C)both I and II
D)neither I nor II

Question 6

All of the following statements about Section 401(k)plans are correct EXCEPT

A)Elective salary deferrals to these plans are free of federal income taxation until the funds are actually withdrawn.
B)These plans are subject to rules that prevent discrimination in favor of highly compensated employees.
C)There is no limit on the actual percentage of salary that can be deferred by highly compensated employees under a qualified plan.
D)Most plans allow employees to determine how funds are invested.

Question 7

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.

A)I only
B)II only
C)both I and II
D)neither I nor II

Question 8

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.

A)I only
B)II only
C)both I and II
D)neither I nor II

Question 9

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.

A)I only
B)II only
C)both I and II
D)neither I nor II

Question 10

All of the following statements about various types of pension plans are true EXCEPT

A)Under a trust-fund plan,an individual annuity is purchased for each participant,and additional annuity credits are purchased annually.
B)A separate investment account is a group pension account with a life insurance company.
C)Under an investment guarantee contract,the insurer receives funds over a number of years and if actual interest rates are higher than the guaranteed projected rate for the later years,the higher rate is paid.
D)Under a guaranteed investment contract,the insurer guarantees the principal of a lump sum deposit as well as an interest rate for a number of years on the deposit.

Question 11

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.The early retirement age is the earliest age at which an employee can retire without receiving actuarially reduced benefits.

A)I only
B)II only
C)both I and II
D)neither I nor II

Question 12

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

A)earnings and years of service.
B)age and earnings.
C)age and gender.
D)years of service and position within a firm.

Question 13

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?

A)500
B)630
C)667
D)900

Question 14

Vesting refers to

A)the employer's right to terminate contributions if a pension plan is adequately funded.
B)the employer's right to recapture employee contributions to a pension plan if employment terminates prior to retirement.
C)the employee's right to the employer's contributions or benefits attributable to the contributions if employment terminates prior to retirement.
D)the employer's right to discriminate against non-highly compensated employees when determining pension benefit levels.

Question 15

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

A)age 18 and 6 months of service
B)age 21 and 1 year of service
C)age 21 and 3 years of service
D)age 25 and 4 years of service

Question 16

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.

A)I only
B)II only
C)both I and II
D)neither I nor II

Question 17

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

A)trust fund.
B)pension agency.
C)funding instrument.
D)funding agency.

Question 18

Which of the following requirements must be met by a top-heavy pension plan to retain its qualified status?
I.A special rapid vesting schedule must be used for non-key employees.
II.Certain minimum benefits or contributions must be provided for non-key employees.

A)I only
B)II only
C)both I and II
D)neither I nor II

Question 19

All of the following statements about tax implications of qualified pension plans are correct EXCEPT

A)Investment earnings on plan assets accumulate on a tax-deferred basis.
B)Employer contributions are deductible up to certain limits as an ordinary business expense.
C)Employer contributions are considered taxable income to employees but are taxed at capital gains rates.
D)Pension benefits attributable to the employer's contributions are not taxed until the employee retires or receives the funds.

Question 20

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

A)Under a flat percentage of annual earnings defined benefit formula,each employee receives the same dollar benefit.
B)A benefit using final pay is usually based on an employee's earnings during the last month of plan participation.
C)A unit-benefit formula considers both earnings and years of service.
D)Past service benefits are the result of bonuses and overtime pay during the period an employee participated in the plan.

Question 21

Under a 401(k)plan,how is it determined if the plan unfairly discriminates in favor of highly compensated employees?

A)The average dollar amount deferred by highly compensated employees is compared to the average dollar amount deferred by other eligible employees.
B)The ratio of highly compensated employees covered by the plan is compared to the ratio of other employees who are covered.
C)The average percentage of income deferred by highly compensated employees is compared to the average percentage of income deferred by other eligible employees.
D)The percentage of highly compensated employees who do not defer income is compared to the percentage of other employees who do not defer income.

Question 22

Which of the following statements about Keogh plans is correct?

A)They can be used by owners of incorporated businesses only.
B)Investment income accumulates on a tax-deferred basis.
C)The maximum annual contribution for any one participant is limited to $2,000.
D)Plan distributions must start prior to age 59.5.

Question 23

RST Company offers a qualified retirement plan.Each employee contributes 4 percent of his or her pretax income to the plan,and RST matches each 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?

A)defined benefit,flat percentage of annual earnings
B)defined benefit,flat dollar amount for all employees
C)defined benefit,unit-credit formula
D)defined contribution money purchase plan

Question 24

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

A)After-tax dollars are used to fund the plan.
B)Investment earnings accumulate on a tax-free basis.
C)Employees at all income levels may contribute to the plan,but annual contributions are limited.
D)Qualified distributions at retirement are fully taxable.

Question 25

Small business owners have a number of retirement savings options.One type of plan is limited to self-employed individuals and business owners who have no employees other than a spouse.The plan combines a profit-sharing plan with deferral of salary.Such plans are called

A)self-employed 401(k)plans.
B)Roth 401(k)plans.
C)cash balance plans.
D)simplified employee pension (SEP)IRAs.

Question 26

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.

A)I only
B)II only
C)both I and II
D)neither I nor II

Question 27

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

A)Contributions to a 403(b)reduce an employee's taxable income.
B)403(b)plans are designed for employees of public school systems and tax-exempt organizations.
C)The law limits the amount of income that an employee can elect to defer under a 403(b)plan.
D)Matching employer contributions are not permitted under a 403(b)plan.

Question 28

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(n)

A)section 401(k)plan.
B)deposit-administration plan.
C)cash-balance plan.
D)trust fund plan.

Question 29

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.

A)I only
B)II only
C)both I and II
D)neither I nor II

Question 30

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.

A)I only
B)II only
C)both I and II
D)neither I nor II

Question 31

Lynn works for a state university.In addition to her regular pension plan,Lynn established 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

A)SIMPLE plan.
B)403(b)plan.
C)defined benefit plan.
D)Keogh plan.

Question 32

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 actual account for each employee into which the employer makes contributions and allocates investment gains and losses.

A)I only
B)II only
C)both I and II
D)neither I nor II

Question 33

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

A)distributions made after age 59.5.
B)distributions made when an employee of any age changes employers.
C)distributions made after the death or permanent disability of the employee.
D)distributions that are part of a series of substantially equal payments over the worker's life expectancy.

Question 34

Harrison Company just received notice from the Internal Revenue Service that there is a problem with its retirement plan.Because over 60 percent of the benefits are designated for highly compensated employees,a special set of rules apply.These rules require more rapid vesting for non-highly compensated employees and certain minimum benefits for non-highly compensated employees.What name is given to such plans?

A)top-heavy plans
B)top-hat plans
C)golden handshake plans
D)defined-benefit plans

Question 35

All the following statements about SIMPLE retirement plans are true EXCEPT

A)They are limited to employers with 100 or fewer eligible employees and who do not maintain another qualified plan.
B)They encourage small employers to establish pension plans for their employees.
C)They are subject to more stringent discrimination rules than those that apply to most qualified plans.
D)They can be structured either as an IRA or as a 401(k)plan.

Question 36

Rita went to work for a manufacturing company.The company offers a defined-benefit pension plan.The benefit at retirement is equal to 1.5 percent multiplied by years of service with the company,with the result 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

A)flat dollar amount for all employees.
B)flat percentage of annual earnings.
C)flat dollar amount for each year of service.
D)unit-benefit formula.

Question 37

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 graded vesting.

A)I only
B)II only
C)both I and II
D)neither I nor II

Question 38

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

A)The employer's cost is not affected by the age and the number of employees.
B)Profit sharing plans provide an incentive for employees to work harder and more efficiently.
C)The 10 percent penalty tax does not apply to distributions prior to age 59.5.
D)ACME enjoys greater flexibility in employer contributions.

Question 39

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.

A)I only
B)II only
C)both I and II
D)neither I nor II

Question 40

ABC Company offers a qualified retirement plan.ABC selected a funding instrument with an insurer in which the insurer guarantees a relatively high interest rate for a number of years on a lump sum deposit.This funding instrument is called a(n)

A)trust-fund plan.
B)group deferred annuity.
C)separate investment account.
D)guaranteed investment contract.

Question 41

Many future retirees lost a significant share of their 401(k)plan balances during the economic downturn during 2008 and early 2009.To reduce the chance of a significant reduction in your 401(k)account balance as you near retirement,financial planners suggest that you should

A)increase the amount of company stock held in the account.
B)begin taking distributions from the account before age 60.
C)reduce the proportion of common stock in the account.
D)invest in riskier stocks.

Question 42

Under one type of retirement plan for small businesses,the employer contributes to an IRA established for each eligible employee.Under this type of plan,the contribution limits are significantly higher than they are for traditional IRAs and Roths IRAs.What is this type of plan,which requires little paperwork,called?

A)simplified employee pension (SEP)plan
B)defined benefit plan
C)Keogh plan
D)403(b)plan