Module 6 Quiz Flashcards
Trends in retirement have changed over the years with more people working past traditional retirement age. Which one of the following is a reason for these changes in recent decades?
A) Workers near normal retirement age (63-67 years old) are more likely to find jobs in periods of high unemployment.
B) The mandatory retirement age was decreased by legislation.
C) There has been a decline in employers offering retiree health care insurance.
D) Defined benefit plans largely replaced defined contribution plans.
C) There has been a decline in employers offering retiree health care insurance.
There has been a decline in employers offering retiree health care insurance. Legislation passed in 1986 outlawed mandatory retirement almost entirely yet age discrimination is alive and well; as compared to their younger peers, workers in the 63- to 67-year-old age range are less likely to find jobs and more likely to be passed over for promotions. Defined contribution plans continue to supplant defined benefit plans.
It would not be appropriate for individuals whose sources of income are insufficient for retirement to take which of the following actions?
A) Postponing retirement
B) Reducing lifestyle expectations
C) Planning for part-time work
D) Eliminating health insurance coverage
D) Eliminating health insurance coverage
By working longer, individuals can save more, reduce the number of years over which retirement income will be required, and increase their benefits from company plans and Social Security. Other options include working part-time and reducing expectations regarding your lifestyle in retirement. Eliminating health insurance coverage would be a short-term solution for cash flow problems, but it would not be wise. Ultimately, many illnesses will require much more out-of-pocket expense than the insurance premiums required to cover them.
Which one of the following classes of employees is protected from early mandatory retirement laws?
A) Executives
B) Blue-collar employees
C) Police officers
D) Airline pilots
B) Blue-collar employees
Police officers and airline pilots are not protected against early mandatory retirement. This is due to the danger and physical demands of keeping us safe. Also subject to mandatory early retirement are high-level executives, and “high policy-making” employees-positions that require significant mental skill.
Benefits in defined benefit pension plans are often reduced for early retirees. The amount of the reduction is not affected by
A) years of service.
B) the actuarial expectation of the number of years that benefits will be paid.
C) final compensation.
D) whether or not the defined benefit plan has a separate account for each participant.
D) whether or not the defined benefit plan has a separate account for each participant.
Defined benefit plans do not provide a separate account for each participant. Final compensation affects the amount of the reduction. The benefit considers final average pay or career average pay, and length of service, both of which are negatively affected by early retirement.
Regarding defined contribution plans, it is FALSE that
A) participants are offered their vested benefit in a lump sum at retirement.
B) there are no “reduced benefit” provisions.
C) they promise to pay a particular benefit at retirement.
D) they provide a separate account for each participant.
C) they promise to pay a particular benefit at retirement.
Unlike defined benefit plans, defined contribution plans do not promise to pay a specific benefit at retirement. Instead, benefits are determined by the account balance which is a function of the amount of contributions and the performance of the underlying investments. Defined contribution plans provide a separate account for each participant, and participants are generally given their vested benefit in a lump sum at retirement or termination. Defined contribution plan benefits are not reduced by the same retirement plan mathematical calculations that cause benefit reductions in defined benefit plans.
Regarding Roth IRAs, it is FALSE that
A) taxpayers do not have to start taking distributions at age 73.
B) contributions are always nondeductible.
C) distributions may be tax-free under certain circumstances.
D) contributions must stop by age 73.
D) contributions must stop by age 73.
Contributions to Roth IRAs can be made at any age, assuming that the taxpayer is within certain earned income limits, and the original owner does not have to start taking distributions at age 73. Inherited Roth IRAs are subject to required minimum distributions. Roth IRA contributions are always nondeductible and distributions are tax-free if qualified.
“Bridge jobs” describe periods of partial retirement for older workers. Which one of the following statements regarding bridge jobs is false?
A) They are less likely to include health insurance coverage.
B) They are less likely to offer employer retirement plan contributions.
C) They generally allow more flexibility than employees’ previous full-time jobs.
D) They generally represent a move up the socioeconomic ladder, from less-skilled to more-skilled jobs.
D) They generally represent a move up the socioeconomic ladder, from less-skilled to more-skilled jobs.
Bridge jobs generally represent a move down the socioeconomic ladder, from more-skilled to less-skilled jobs or from white-collar to blue-collar jobs. They are also likely to pay less and are less likely to offer pension plans or health insurance coverage. On the other hand, due to their temporary or part-time nature, bridge jobs generally allow more flexibility than full-time career positions.
All of the following may prompt companies to offer early retirement programs EXCEPT
A) increasing profits.
B) moving a business unit to another state.
C) buyouts and mergers.
D) outsourcing of company functions.
A) increasing profits.
Declining profits may prompt companies to offer early retirement programs when reductions in personnel become a condition of business survival. Buyouts and mergers may prompt early retirement programs, as mergers can make certain departments or functions redundant. Outsourcing of company functions may prompt companies to offer early retirement programs, as outsourcing will eliminate many internal positions. Finally, moving a business unit may prompt companies to offer early retirement programs because it is often cheaper to offer such a program than it is to move employees to a new location.
Early retirement programs typically may not offer
A) severance benefits.
B) enhancement of pension benefits in excess of ERISA regulations.
C) pre-retirement and tax counseling.
D) health and insurance benefits.
B) enhancement of pension benefits in excess of ERISA regulations.
Early retirement programs may offer enhanced pension benefits, but these benefits cannot exceed ERISA regulations. ERISA limits the enhancements so that they do not favor highly compensated individuals. Such programs typically do provide lump-sum payouts equivalent to a multiple of the retiree’s salary; continuation of health, dental, and life insurance; and pre-retirement and tax counseling to enable retirees to make informed decisions in these areas.
“Golden parachute” agreements may include all of the following, EXCEPT
A) company stock.
B) cash.
C) reduced pension benefits.
D) medical and life insurance.
C) reduced pension benefits.
Golden parachute agreements may include various combinations of cash, company stock, medical and life insurance, extra pension benefits, and other benefits.
All of the following are true regarding COBRA-mandated continuation of group medical coverage for terminated employees EXCEPT
A) proof of insurability is required.
B) continued coverage must be made available for at least 18 months.
C) certain small employers are not covered by COBRA.
D) the terminated employee must pay full premiums including up to a 2% increase.
A) proof of insurability is required.
COBRA requires employers to provide continued group medical coverage without proof of insurability. Continued coverage must be made available for at least 18 months, and for up to 36 months in certain circumstances. Terminated employees are required to pay full premiums and up to a 2% administrative cost. Employers with less than 20 full-time employees do not have to extend COBRA coverage.
At age 56, Frank began taking substantially equal payments from his IRA using the fixed amortization method. Two years later, Frank now wants to take smaller IRA distributions because the value of his account has declined by 40% during the recent bear market. If he switches to the required minimum distribution method, all of these are true except
A) he cannot change his distribution method until he is 61.
B) he must continue to take substantially equal payments using a method approved by the IRS for five years or until age 59 1/2, whichever comes later, or he will trigger the 10% penalty on previous payments.
C) switching to the required minimum distribution method will drastically reduce his required withdrawal.
D) he will avoid the 10% penalty on premature distributions.
A) he cannot change his distribution method until he is 61.
As a general rule, an individual must continue payments using the same distribution method for five years or until age 59½, whichever comes later. If an individual is receiving payments under either the fixed amortization or the fixed annuitization method, they may make a one-time change to the required minimum distribution method in a subsequent year (For further details, see IRS revenue ruling 2002-62). Once such a change is made, it must be followed until the above-described time restriction ends. Frank is required to continue the payments for at least five years to avoid triggering the 10% penalty. Switching to the RMD method usually reduces the withdrawal by over 50%.
Which one of the following does not contribute to the trend toward delayed retirement?
A) There is a high savings rate among American workers.
B) The “delayed retirement credit” with Social Security for those who work past their FRA is 8/12th of a percent for each month past FRA until the person reaches age 70.
C) Defined contribution plans continue to displace defined benefit plans.
D) The full retirement age is being gradually increased to age 67.
A) There is a high savings rate among American workers.
Compared to other developed countries, the U.S. has a relatively low worker savings rate. This will necessitate people working longer. Defined contribution plans, which depend upon employee contributions and investment results to accumulate funds, continue to displace defined benefit plans. People must work longer to enable fund assets to grow. Finally, regarding Social Security, the full retirement age is being gradually increased from age 65 originally to age 67, depending upon an individual’s birth date. There is a generous delayed retirement Social Security credit for those individuals who work past their FRA until age 70.
Which one of the following is FALSE regarding taxation of Social Security benefits?
A) Social Security benefits received may be taxable at any age.
B) Social Security benefits are usually not taxable to retirees with low annual incomes.
C) Social Security benefits are never taxable after full retirement age.
D) The maximum amount of Social Security retirement benefits that might be taxable is 85%.
C) Social Security benefits are never taxable after full retirement age.
Social Security benefits are taxable for incomes over certain thresholds, up to a maximum of 85%. Payments are subject to taxation regardless of the recipient’s age.
Which one of the following reasons for premature distributions from qualified retirement plans does not avoid the 10% early withdrawal penalty?
A) Payment of income taxes
B) Death
C) Medical expenses in excess of 7.5% of adjusted gross income
D) Disability
A) Payment of income taxes
Premature distributions to pay taxes are still subject to the 10% early withdrawal penalty rules. The other options are exceptions to the 10% early withdrawal penalty.
