Question 1

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?

Accepted Answer

RST Company offers a defined contribution money purchase plan where each employee contributes a fixed percentage of their pretax income, and RST matches each contribution. The employee's benefit at retirement will be determined by the amount of money in their account.

Question 2

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

Accepted Answer

All statements regarding a Roth 401(k) plan are true except for D, which states that qualified distributions at retirement are fully taxable. In fact, qualified distributions from a Roth 401(k) plan are tax-free.

Question 3

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 defining feature of SIMPLE plans.

Question 4

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

SIMPLE retirement plans (Savings Incentive Match Plan for Employees) are specifically designed for small businesses with 100 or fewer eligible employees. They are relatively easy to set up and have lower administrative costs compared to other qualified plans. Additionally, small employers are exempt from most of the nondiscrimination and administrative rules that apply to qualified plans. Keogh plans are a type of tax-deferred retirement savings plan for self-employed individuals or unincorporated businesses, and cash balance plans are defined benefit pension plans that are more complex and typically more expensive to administer than SIMPLE plans. Simplified employee pension (SEP) IRAs are another option for small businesses, but they do not have the same flexibility as SIMPLE plans in terms of matching contributions and employee eligibility requirements.

Question 5

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

Accepted Answer

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

Question 6

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?

Accepted Answer

The special set of rules described in the question are required for top-heavy plans. Top-heavy plans are retirement plans where over 60 percent of the benefits are designated for highly compensated employees. These plans have additional requirements to ensure that non-highly compensated employees receive certain minimum benefits and more rapid vesting.

Question 7

Which of the following statements about Keogh plans is correct?

Accepted Answer

Keogh plans are retirement savings plans for self-employed individuals or small business owners. Unlike individual retirement accounts (IRAs), Keogh plans are not available to everyone; they are designed only for those who run their own businesses. The maximum annual contribution is much higher than $2,000 and distributions must start by age 72 (not 59.5). The primary advantage of a Keogh plan is that investment income accumulates on a tax-deferred basis.

Question 8

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 10 percent penalty tax not applying to distributions prior to age 59.5 is not an advantage of a profit-sharing plan. It is a feature of all retirement plans, including IRA and 401(k) plans, as long as certain requirements are met. Therefore, option C is the correct answer. The other options are all advantages of a profit-sharing plan.

Question 9

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

Accepted Answer

The funding instrument selected by ABC Company, which guarantees a high interest rate for a number of years, is a guaranteed investment contract.

Question 10

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

The second statement is true, as qualified defined contribution plans with employee contributions and matching employer contributions may have graded vesting, with employer contributions required to be at least 20% vested after 2 years and an additional 20% vesting in each of the next 4 years. The first statement is false, as employer contributions are subject to the same vesting schedule as employee contributions under these rules.

Question 11

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

Accepted Answer

The tax-sheltered annuity plan that Lynn established with an insurer is a type of 403(b) plan, which is commonly offered to employees of educational and non-profit institutions.

Question 12

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

Accepted Answer

The 401(k) plan uses the Actual Deferral Percentage (ADP) test to compare the average percentage of salary deferred by highly compensated employees to that of other eligible employees to ensure the plan does not discriminate in favor of the former group.

Question 13

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)true...

Question 14

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 15

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 plan described is a cash-balance plan, where benefits are defined in terms of a hypothetical account balance, based on pay credits and interest rate credits. This is different from a traditional defined-benefit plan, where benefits are based on a formula that takes into account factors such as years of service and average salary. Section 401(k) plans are also different, as they are defined-contribution plans where employees contribute a portion of their salary and choose investment options. Deposit-administration and trust fund plans are not types of retirement plans.

Question 16

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

Accepted Answer

Distributions made when an employee of any age changes employers are not exempt from the penalty tax.

Question 17

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.

Accepted Answer

Vesting can help reduce labor turnover by incentivizing employees to stay with the company longer to receive full retirement benefits. Under graded vesting, an employee typically has some vested benefit after four years, so statement II is false.

Question 18

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 19

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

Accepted Answer

The benefit formula used at Rita's company is a unit-benefit formula, which means the benefit received is dependent on the amount of years worked and the average salary over the last three years of employment. This is different from a flat dollar amount or percentage of earnings, which would not take years of service into account.

Question 20

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.

Quiz 17: Employee Benefits: Retirement Plans

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

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

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

Which of the following statements about Keogh plans is correct?

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

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

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

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

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.

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

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.