Ch. 16 Money Purchase Pension Plan

Question 1

Money purchase pension plan is a qualified retirement plan where…. (4)

Answer 1

1. each employee has an individual account
2. only the employer contributes to each employee account
3. plan benefits are a result of employer contributions, interest, dividends, and/or capital gains
4. an employee account may be paid out as an annuity equivalent in value to the account balance

Question 2

When is it indicated? (5)

Answer 2

1. employer wants a simple and easy to explain qualified plan
2. young employees
3. employees willing to accept investment risk
4. some retirement income security is desired
5. an employer wants to reward long-term employees

Question 3

5 advantages

Answer 3

1. tax deferred savings
2. simple and inexpensive
3. employer annual contribution of 100% employee comp or $49,000
4. tax deduction limited to 25% of covered payroll
5. individual participant accounts allow participants to benefits from good investment results in the plan

Question 4

4 disadvantages

Answer 4

1. benefits may be inadequate for older plan entrants
2. limited annual addition to each account
3. employees bear investment risk
4. employer must make plan contributions each year or face penalties

Question 5

Benefit formulas

Answer 5

a flat % based on an employee’s compensation up to 25%—typically 15%

Question 6

What do service related factors favor?

Answer 6

owners

key and HCE

Question 7

What can the employer do to avoid discrimination?

Answer 7

comply with safe harbor rules
satisfy general nondiscrimination tests
restructure the plan
use cross-testing

Question 8

What can the plan benefit formula be integrated with?

Answer 8

social security

Question 9

___ year “cliff vesting” provisions is often used

Answer 9

3

Question 10

When are benefits usually paid?

Answer 10

at the termination of employment or a plan’s stated normal retirement age

Question 11

What must be provided as the automatic form of benefit?

Answer 11

joint and survivor annuities

Question 12

What is a popular alternative to annuities?

Answer 12

lump sum or installment plan

Question 13

There are no ‘in-service’ distributions unless due to….

Answer 13

death/disability
severance of employment
termination of plan

Question 14

What can contributions be vested in?

Answer 14

trust fund, group insurance, individual insurance contract, or a pooled account managed by the empoloyer

Question 15

Subject to ERISA?

Answer 15

yes