F.49 Non-qualified plan rules and options

Question 1

Which of the following statements about non-qualified plans is true?

A. Non-qualified plans are tax-qualified retirement plans.
B. Non-qualified plans are regulated by ERISA.
C. Non-qualified plans do not receive favorable tax treatment.
C. Non-qualified plans are only available to highly compensated employees.

Answer 1

C. Non-qualified plans do not receive favorable tax treatment.

Unlike tax-qualified retirement plans, non-qualified plans do not receive tax deductions on contributions or tax-deferred growth.

F.49 Non-qualified plan rules and options

Question 2

Which of the following is an advantage of a non-qualified deferred compensation plan?

A. The contributions are tax-deductible.
B. The plan is exempt from ERISA regulations.
C. The plan is not subject to contribution limits.
D. The plan is available to all employees.

Answer 2

C. The plan is not subject to contribution limits.

Non-qualified deferred compensation plans do not have contribution limits like tax-qualified plans, which allows participants to contribute more money to the plan.

F.49 Non-qualified plan rules and options

Question 3

Which of the following types of non-qualified plans allows participants to receive distributions at any time, without penalty?

A. 457(b) plan
B. 401(k) plan
C. Non-qualified deferred compensation plan
D. Supplemental executive retirement plan

Answer 3

C. Non-qualified deferred compensation plan.

Participants in non-qualified deferred compensation plans can receive distributions at any time, without penalty, as long as the plan is structured correctly.

F.49 Non-qualified plan rules and options

Question 4

Which of the following types of non-qualified plans allows participants to defer income taxes on contributions?

A. 401(k) plan
B. 457(b) plan
C. Non-qualified deferred compensation plan
D. Supplemental executive retirement plan

Answer 4

C. Non-qualified deferred compensation plan

Participants in non-qualified deferred compensation plans can defer income taxes on contributions until they receive distributions from the plan.

F.49 Non-qualified plan rules and options

Question 5

Which of the following statements about non-qualified plans is true?

A. Non-qualified plans are subject to the same contribution limits as 401(k) plans.
B. Non-qualified plans are subject to the same vesting requirements as 401(k) plans.
C. Non-qualified plans are not subject to the same discrimination testing requirements as 401(k) plans.
D. Non-qualified plans are required to provide the same level of employer contributions as 401(k) plans.

Answer 5

C. Non-qualified plans are not subject to the same discrimination testing requirements as 401(k) plans.

Non-qualified plans are exempt from the nondiscrimination rules that apply to tax-qualified plans, which allows employers to provide greater benefits to highly compensated employees.

F.49 Non-qualified plan rules and options

Question 6

Which of the following types of non-qualified plans is most commonly used to provide retirement benefits to key employees?

A. Non-qualified deferred compensation plan
B. Supplemental executive retirement plan
C. 401(k) plan
D. 457(b) plan

Answer 6

B. Supplemental executive retirement plan

Supplemental executive retirement plans are designed to provide retirement benefits to key employees, and are often used in conjunction with other types of non-qualified plans.

F.49 Non-qualified plan rules and options

Question 7

Which of the following types of non-qualified plans is subject to the same distribution rules as 401(k) plans?

A. Non-qualified deferred compensation plan
B. Supplemental executive retirement plan
C. 457(b) plan
D. Split-dollar life insurance plan

Answer 7

A. Non-qualified deferred compensation plan.

Participants in non-qualified deferred compensation plans are subject to the same distribution rules as 401(k) plans, which require participants to begin taking distributions at age 72.

F.49 Non-qualified plan rules and options

Question 8

Which of the following types of non-qualified plans allows participants to receive distributions before age 59 1/2 without penalty?

A. Split-dollar life insurance plan
B. 457(b) plan
C. Non-qualified deferred compensation plan
D. Supplemental executive retirement plan

Answer 8

B. 457(b) plan

The 457(b) plan is a type of non-qualified, tax-advantaged deferred-compensation retirement plan available for certain state and local public employees, and for employees of some tax-exempt organizations. One of the unique features of the 457(b) plan compared to other retirement accounts, such as the 401(k) or 403(b), is that there is no early withdrawal penalty for distributions taken before age 59½. However, it’s important to note that while there’s no early withdrawal penalty, the distributions are still subject to regular income taxation.

F.49 Non-qualified plan rules and options

Question 9

Which of the following types of non-qualified plans is funded by life insurance?

A. Split-dollar life insurance plan
B. Non-qualified deferred compensation plan
C. Supplemental executive retirement plan
D. 457(b) plan

Answer 9

A. Split-dollar life insurance plan

Split-dollar life insurance plans are funded by life insurance policies, and are designed to provide death benefits and cash value to key employees.

F.49 Non-qualified plan rules and options

Question 10

Which of the following statements about non-qualified plans is true?

A. Non-qualified plans must be offered to all employees.
B. Non-qualified plans are not subject to the same reporting requirements as tax-qualified plans.
C. Non-qualified plans must be approved by the IRS.
D. Non-qualified plans are not subject to the same fiduciary standards as tax-qualified plans.

Answer 10

B. Non-qualified plans are not subject to the same reporting requirements as tax-qualified plans.

F.49 Non-qualified plan rules and options

Question 11

ABC Company wants to provide retirement benefits to its CEO, who earns $500,000 per year. Which of the following non-qualified plans would be most appropriate?

A. 401(k) plan
B. Non-qualified deferred compensation plan
C. 457(b) plan
D. Split-dollar life insurance plan

Answer 11

B. Non-qualified deferred compensation plan

F.49 Non-qualified plan rules and options

Question 12

XYZ Company wants to provide death benefits to its CFO, who is a key employee. Which of the following non-qualified plans would be most appropriate?

A. Non-qualified deferred compensation plan
B. Supplemental executive retirement plan
C. 457(b) plan
D. Split-dollar life insurance plan

Answer 12

D. Split-dollar life insurance plan

F.49 Non-qualified plan rules and options

Question 13

DEF Corporation wants to provide retirement benefits to all of its employees, not just highly compensated employees. Which of the following non-qualified plans would be most appropriate?

A. 401(k) plan
B. Non-qualified deferred compensation plan
C. 457(b) plan
D. Supplemental executive retirement plan

Answer 13

B. Non-qualified deferred compensation plan.

F.49 Non-qualified plan rules and options

Question 14

GHI Enterprises wants to provide retirement benefits to its sales manager, who earns $150,000 per year. Which of the following non-qualified plans would be most appropriate?

A. Non-qualified deferred compensation plan
B. Supplemental executive retirement plan
C. 457(b) plan
D. Split-dollar life insurance plan

Answer 14

B. Supplemental executive retirement plan

F.49 Non-qualified plan rules and options

Question 15

MNO Inc. wants to provide retirement benefits to its CEO, who is age 65 and plans to retire in 5 years. Which of the following non-qualified plans would allow the CEO to receive distributions without penalty?

A. Non-qualified deferred compensation plan
B. Supplemental executive retirement plan
C. 457(b) plan
D. Split-dollar life insurance plan

Answer 15

B. Supplemental executive retirement plan

A supplemental executive retirement plan would allow the CEO of MNO Inc. to receive retirement benefits without penalty, as long as he or she is separated from service.

F.49 Non-qualified plan rules and options

Question 16

PQR Corporation wants to provide death benefits to its CFO, who is age 45 and plans to retire in 20 years. Which of the following non-qualified plans would be most appropriate?

A. Non-qualified deferred compensation plan
B. Supplemental executive retirement plan
C. 457(b) plan
D. Split-dollar life insurance plan

Answer 16

A. Non-qualified deferred compensation plan

F.49 Non-qualified plan rules and options

Question 17

STU Enterprises wants to provide retirement benefits to all employees, but does not want to be subject to the same nondiscrimination rules as tax-qualified plans. Which of the following non-qualified plans would be most appropriate?

A. 401(k) plan
B. Non-qualified deferred compensation plan
C. 457(b) plan
D. Supplemental executive retirement plan

Answer 17

B. Non-qualified deferred compensation plan

F.49 Non-qualified plan rules and options

Question 18

VWX Corporation wants to provide retirement benefits to its highly compensated employees, but does not want to be subject to the same vesting requirements as tax-qualified plans. Which of the following non-qualified plans would be most appropriate?

A. Non-qualified deferred compensation plan
B. 457(b) plan
C. Supplemental executive retirement plan
D. Split-dollar life insurance plan

Answer 18

A. Non-qualified deferred compensation plan

F.49 Non-qualified plan rules and options

Question 19

XYZ Company wants to provide retirement benefits to its sales manager, who earns $150,000 per year, and also wants to provide death benefits to the manager’s family in the event of his or her death. Which of the following non-qualified plans would be most appropriate?

A. Non-qualified deferred compensation plan
B. Supplemental executive retirement plan
C. 457(b) plan
D. Split-dollar life insurance plan

Answer 19

D. Split-dollar life insurance plan

F.49 Non-qualified plan rules and options

Question 20

A company offers its employees a defined contribution plan with a variety of investment options, ranging from conservative to speculative. The plan complies with ERISA Sec. 404(c), and employees have been given educational materials to assist with investment decisions. Despite this, several participants experienced losses due to their speculative asset allocations. If the participants were to hold the fiduciary accountable for the investment losses, how much of the losses is the fiduciary responsible for?

A. None of the losses.
B. 50% of the losses incurred by participants over age 55.
C. 100% of the losses and must allocate funds to the plan to cover such losses.
D. 100% of the losses and must pay a 5% penalty on the losses.

Answer 20

A. None of the losses.

ERISA Section 404(c) provides a safe harbor for plan fiduciaries against losses in a participant-directed individual account plan (like a 401(k) plan) if certain requirements are met. One of those requirements is that participants must be given a broad range of investment options and must have the ability to exercise control over their assets. If these requirements are met and participants make their own investment decisions, the fiduciaries are generally not liable for any losses that result from those decisions. Given that the company has provided a range of investment options and has educated its employees, it would likely be protected by the ERISA Section 404(c) safe harbor, meaning the fiduciary would not be responsible for the investment losses participants incurred due to their own choices.

F.49 Non-qualified plan rules and options