CFP NOV 2024 Prep > Retire Ch 4 Qualifed Pension Plans > Flashcards
Retire Ch 4 Qualifed Pension Plans Flashcards
A pension plan that is unable to deposit the mandatory funding amount may apply for a one time waiver eliminating the funding needed for that particular year.
a. True b. False
b. False
Pension plans do not permit in-service withdrawals for individuals less than 62 years old.
a. True b. False
b. False
Pension plans may only invest up to 15 percent of plan assets in employer stock.
a. True b. False
b. False
The unit credit formula helps retain employees more than either the flat benefit formula or the flat percentage formula.
a. True b. False
a. True
Defined benefit plans have separate accounts for each plan participant.
a. True b. False
b. False
The establishment of a defined benefit pension plan generally benefits older employees more than the younger employees.
a. True b. False
a. True
The plan participant bears the investment risk of the assets in a defined benefit pension plan.
a. True b. False
b. False
Defined benefit and defined contribution plans allocate all plan forfeitures in the same manner.
a. True b. False
b. False
If a company cannot pay a plan participant the benefit promised from a defined benefit pension plan, the PBGC will pay the plan participant the full defined benefit amount.
a. True b. False
b. False
Defined benefit plans can give plan participants credit for service prior to the establishment of the plan.
a. True b. False
a. True
A pension plan that is unable to deposit the mandatory funding amount may apply for a one time waiver eliminating the funding needed for that particular year.
a. True b. False
b. False
Pension plans do not permit in-service withdrawals for individuals less than 62 years old.
a. True b. False
b. False
Pension plans may only invest up to 15 percent of plan assets in employer stock.
a. True b. False
b. False
Participants in a cash balance pension plan have separate accounts.
a. True b. False
b. False
The establishment of a cash balance pension plan generally benefits the younger employees more than the older employees.
a. True b. False
a. True
A cash balance plan can be structured to benefit owners and higher compensated employees under certain circumstances.
a. True b. False
a. True
A plan sponsor cannot deduct more than 25 percent of their covered compensation as a contribution to a money purchase pension plan.
a. True b. False
a. True
Each participant has a separate account in a money purchase pension plan.
a. True b. False
a. True
The establishment of a money purchase pension plan generally benefits older employees more than younger employees.
a. True b. False
b. False
The establishment of a money purchase pension plan generally benefits older employees more than younger employees.
a. True b. False
b. False
A target benefit pension plan is a defined benefit pension plan.
a. True b. False
b. False
Target benefit pension plans have the same coverage and eligibility rules as money purchase pension plans.
a. True b. False
a. True
Which of the following is not a characteristic of pension plans?
a. Mandatory funding.
b. In-service withdrawals for employees under the age of 591⁄2.
c. Limited investment in life insurance.
d. A limit of 10 percent investment in the employer’s securities.
The correct answer is b.
A pension plan requires mandatory funding, limits the investment of plan assets in life insurance, and limits the investment of plan assets in employer’s securities.
A pension plan may not allow in-service
withdrawals for employees under the age of 59½.
Which one of the following statements is true for a defined benefit plan?
a. A defined benefit plan generally favors older age entrants.
b. The maximum retirement benefit payable from a defined benefit plan is the lesser of 100 percent of the participant’s compensation or $265,000 for 2023.
c. A defined benefit plan with 100 employees is required to pay PBGC insurance premiums.
d. All of the above are true.
The correct answer is d.
All of the statements are correct.
If a participant’s accrued benefit from a qualified defined benefit pension plan is $2,000 per month, what is the maximum life insurance death benefit coverage that the plan can provide based on the 100-to-1 ratio test?
a. $0.
b. $1,000.
c. $200,000.
d. $240,000.
The correct answer is c.
A qualified pension plan is limited in the amount of term life insurance it is able to purchase with plan assets.
The plan must pass either one of two tests, the 25 percent test or the 100-to-1 ratio test.
Under the 100-to-1 ratio test, the plan can purchase $200,000 ($2,000 x 100) of life insurance death benefit coverage.
Which of the following statements regarding defined benefit plans is true?
a. A defined benefit plan can allocate forfeitures to other plan participants.
b. A defined benefit plan can use forfeitures to reduce future plan costs.
c. A defined benefit plan cannot give credit for prior service.
d. Each participant of a defined benefit plan has an individual account.
The correct answer is b.
A defined benefit plan must use forfeitures to reduce future plan costs.
Statement a is incorrect because a defined benefit plan cannot allocate forfeitures to other plan participants.
Statement c is incorrect because a defined benefit plan can give credit for prior service.
Statement d is incorrect because a participant in a defined benefit plan does not have an individual account.
Which of the following is not a common defined benefit plan funding formula?
a. Flat amount formula.
b. Flat percentage formula.
c. Unit credit formula.
d. Excludable amount formula.
The correct answer is d.
Statements a, b, and c are common defined benefit plan funding formulas. The formula depicted in
statement d does not exist.
Which of the following statements is true regarding the anti-cutback rule, as it is referred to?
The anti-cutback rule prohibits the plan sponsor from making changes to the plan that are retroactive to the beginning of the year.
The anti-cutback rule prohibits the plan sponsor from freezing the benefits under the plan.
The anti-cutback rule prohibits the plan sponsor from terminating the plan.
The anti-cutback rule prohibits the plan sponsor from amending the plan such that prior accrued benefits are reduced.
the anti-cutback rule prohibits the plan sponsor from amending the plan such that prior accrued benefits are reduced.
Which of the following statements regarding defined benefit plans is true?
A defined benefit plan can allocate forfeitures to other plan participants.
A defined benefit plan can use forfeitures to reduce future plan costs.
A defined benefit plan cannot give credit for prior service.
Each participant of a defined benefit plan has an individual account.
A defined benefit plan can use forfeitures to reduce future plan costs.
Rationale
A defined benefit plan must use forfeitures to reduce future plan costs. Option a is incorrect because a defined benefit plan cannot allocate forfeitures to other plan participants. Option c is incorrect because a defined benefit plan can give credit for prior service. Option d is incorrect because a participant in a defined benefit plan does not have an individual account.
Which of the following statements regarding target benefit pension plans is true?
A target benefit pension plan cannot allocate plan forfeitures to remaining plan participant accounts.
Target benefit pension plans may not be established after 2001.
Assuming equal salaries, a target benefit pension plan would allocate a higher percentage of its current contributions to an older employee.
A target benefit pension plan may always exclude any participant who has not attained the age of 26 and completed one year of service.
Assuming equal salaries, a target benefit pension plan would allocate a higher percentage of its current contributions to an older employee.
Which one of the following statements is true for a defined benefit plan?
A defined benefit plan generally favors older age entrants.
The maximum retirement benefit payable from a defined benefit plan is the lesser of 100 percent of the participant’s compensation or $275,000 for 2024.
A defined benefit plan with 100 employees is required to pay PBGC insurance premiums.
All of the above are true.
All of the above are true.
Rationale
All of the statements are correct.
Of the following statements regarding target benefit pension plans, which is true?
A target benefit pension plan is a money purchase pension plan with a funding formula that considers age and salary.
The plan sponsor of a target benefit pension plan does not guarantee that the participant will receive an amount, expected to be the “target benefit” amount, at their retirement.
Plan participants of a target benefit pension plan do not have separate accounts.
The plan sponsor guarantees an earnings rate for the contributions made to target benefit pension plans.
The plan sponsor of a target benefit pension plan does not guarantee that the participant will receive an amount, expected to be the “target benefit” amount, at their retirement.
Rationale
Option b is true. Options a, c, and d are false. A target benefit pension plan is a defined contribution pension plan. The plan sponsor is required to fund the participant of a target benefit pension plan’s separate account each year with the actuarially equivalent present value of the “target.” The “target” is the expected benefit that the plan sponsor forecasts (at inception) that the participant will receive at retirement, but the sponsor does not make any guarantees on the benefit payable from the plan.
Which of the following actuarial assumptions is not used by the actuary who determines the mandatory funding range for a defined benefit plan?
Mortality.
Turnover.
Divorce rate.
Disability rate.
Divorce rate.
Rationale
An actuary who determines the mandatory funding range for a defined benefit plan may consider mortality, turnover, disability, salaries, retirement ages, and interest rates.
A divorce has no effect on the funding requirements of a defined benefit plan.
Which of the following statements regarding EGTRRA 2001 is false?
EGTRRA 2001 increased the employer’s deductible contribution limit for profit-sharing plans to 25 percent of employer compensation.
After the enactment of EGTRRA 2001, money purchase pension plans adoptions have increased.
Many Tandem Plans were terminated and/or converted after the enactment of EGTRRA 2001.
Prior to EGTRRA 2001, an employer could deduct contributions to a money purchase pension plan up to 25 percent of employer covered compensation.
After the enactment of EGTRRA 2001, money purchase pension plans adoptions have increased.
Rationale
EGTRRA 2001 increased the deduction limit for profit-sharing plans to 25 percent of employer compensation.
This increase created an equal deduction limit for both profit-sharing plans and pension plans. Option a is a true statement.
Option b is false because fewer money purchase pension plans were established after EGTRRA 2001 because of the equal deductibility of contributions to profit-sharing plans. An employer would establish a profit-sharing plan rather than a money purchase pension plan because the profit-sharing plan does not have the mandatory funding requirements of the money purchase pension plan.
Option c is true - employers converted their target benefit pension plans to eliminate the mandatory funding requirements of the pension plans.
Option d is true.
Which of the following is not a characteristic of pension plans?
Mandatory funding.
In-service withdrawals for employees under the age of 59½.
Limited investment in life insurance.
A limit of 10 percent investment in the employer’s securities.
In-service withdrawals for employees under the age of 59½.
Rationale
A pension plan requires mandatory funding, limits the investment of plan assets in life insurance, and limits the investment of plan assets in employer’s securities. A pension plan may not allow in-service withdrawals for employees under the age of 59½.
Which of the following pension plans would allocate a higher percentage of the plans’ current costs to a certain class or group of eligible employees?
- Defined benefit pension plan
- Target benefit pension plan
- Money purchase pension plan with permitted disparity
1 only.
1 and 2.
2 and 3.
1, 2, and 3.
1, 2, and 3.
Rationale
All of the pension plans listed would allocate a higher percentage of the plans’ current costs to a certain class or group of eligible employees.
A defined benefit pension plan and a target benefit pension plan would allocate a higher percentage of the plans’ current cost to the older participants.
A money purchase pension plan with permitted disparity would allocate a higher percentage of the plan’s current cost to those participants whose earnings are in excess of the Social Security wage base (or integration level if different)
if a participant’s accrued benefit from a qualified defined benefit pension plan is $2,000 per month, what is the maximum life insurance death benefit coverage that the plan can provide based on the 100-to-1 ratio test?
$0.
$1,000.
$200,000.
$240,000.
$200,000.
Rationale
A qualified pension plan is limited in the amount of term life insurance it is able to purchase with plan assets. The plan must pass either one of two tests, the 25 percent test or the 100-to-1 ratio test. Under the 100-to-1 ratio test, the plan can purchase $200,000 ($2,000 x 100) of term life insurance death benefit coverage.
Oliver began employment with Arrow on January 1, Year 1, at the age of 57. Arrow sponsors a 401(k) plan, as well as a noncontributory defined benefit plan that provides for a straight life annuity beginning at age 65, based on the average of a participant’s high 3 years of consecutive compensation and uses the calendar year for the plan year.
Oliver becomes a participant in Arrow’s plan on January 1, Year 2, and works through December 31, Year 8, when Oliver is age 65. Oliver begins to receive benefits under the plan in Year 9.
Oliver’s average compensation for the period of his high-3 years of consecutive compensation is $90,000.
What is the most that could be paid to Oliver from the defined benefit plan?
$345,000.
$275,000.
$90,000.
$72,000.
$72,000.
Rationale
Since Oliver only had eight years of service, the maximum distribution of $90,000 is reduced for period of service less than ten years: (8 ÷ 10) x $90,000 = $72,000
Knowledge Star is a 30-year-old company that has grown significantly in terms of revenue and product offerings. They sponsor a pension plan that provides a benefit of 2% times years of participation times the average of the final three years of salary less an offset. The offset equals 1% times years of service times income below the covered compensation limit of $40,000 (assumed).
Roberto has worked with Knowledge Star for the last 30 years and earned $90,000 two years ago, $110,000 last year, and $130,000 this year. If he is retiring this year, how much should he expect to receive as a pension benefit?
$45,000.
$54,000.
$66,000.
$78,000.
$54,000.
Rationale
Average Salary: $110,000
Benefit ($110,000 x 2% x 30 yrs.) $66,000
Less Offset ($40,000 x 1% x 30 yrs.) ($12,000)
Actual Benefit $54,000
Accent, Inc. sponsors a 25% money purchase pension plan for its eligible employees. Carlos earns $200,000, Kevin earns $60,000, Kelly earns $300,000, and Rick, who is ineligible, earns $27,000.
What is Accent’s required deductible contribution for the year?
All employees are under age 50.
$134,000.
$140,000.
$146,750.
$183,000.
$134,000.
Rationale
Accent’s deductible contribution for the year would equal the sum of the maximum contributions for each participant.
In this problem, the contributions on behalf of Carlos and Kelly would be $50,000 and $69,000 respectively (2024).
The contribution on behalf of Kevin would be $15,000 ($60,000 x 25%).
Therefore, Accent’s deductible contribution would equal $134,000 ($50,000 + $69,000 + $15,000).
Rick is ineligible.
Employee Compensation 25% x Compensation Maximum
Carlos $200,000 $50,000 $50,000
Kevin $60,000 $15,000 $15,000
Kelly $300,000 $75,000 $69,000
Rick $27,000 $0* $0*
TOTAL $587,000 $134,000
Rick, who is age 45, is having a few leadership issues and must resign from his current position as CEO. He worked for A-Send, which sponsors a cash balance plan and a standard 401(k) plan. Each of the plans uses the longest permitted vesting schedule and neither plan is top heavy. He has a balance of $80,000 in the cash balance plan, has deferred $40,000 into the 401(k) plan and has employer matching contributions of $20,000.
If he has been employed for two and a half years, but only participating in the plans for the last two years, how much does he keep if he resigns and terminates his employment today?
$44,000.
$60,000.
$124,000.
$140,000.
$44,000.
Rationale
Vesting is based on years of service with the employer. He keeps his entire deferral of $40,000. The cash balance plan uses a 3 year cliff, which means that he keeps none of the $80,000. The matching contributions will vest over a 2 to 6 graded schedule, which means that he keeps 20% of the $20,000, for a total of $44,000. Option b is wrong because it assumes that cash balance plans use a 2 to 6 graded schedule.
Jax is the owner of Ideal Mechanics, Inc. He would like to establish a qualified pension plan and would like most of the plan’s current contributions to be allocated to his account. He does not want to permit loans and he does not want Ideal to bear the investment risk of the plan’s assets. Jax is 47 years old and earns $300,000 per year. His employees are 25, 29, and 32 and they each earn $25,000 per year. Which of the following qualified pension plans would you recommend that Jax establish?
Defined benefit pension plan.
Cash balance pension plan.
Money purchase pension plan.
Defined benefit pension plan using permitted disparity.
Money purchase pension plan.
Rationale
Because Jax does not want Ideal to bear the investment risk of the plan assets, the money purchase pension plan is the only option listed that would fulfill his requirements.
Which of the following statements is true?
A cash balance pension plan usually benefits older employees the most.
A defined benefit plan promises a contribution to a hypothetical account each year for a plan participant.
Cash balance pension plan participants under age 59½ may take a withdrawal from the plan during employment with the plan sponsor.
A cash balance pension plan does not have individual separate accounts for each participant
A cash balance pension plan does not have individual separate accounts for each participant.
Rationale
Option d is true. The cash balance pension plan consists of a commingled account that must be equal to the actuarial equivalent of the present value of the expected future benefits that will be paid from the cash balance pension plan. Option a is false because cash balance pension plans usually benefit younger participants because of the guaranteed contribution rate and the guaranteed earnings rate. Option b is false because a defined benefit plan promises a defined benefit at the participant’s retirement. If the funding requirements are met with plan earnings, a contribution is not required. Option c is false because the participant of a cash balance pension plan under age 59½ cannot take in-service withdrawals.
Confidence of your answer
Marcia is a participant in her law firm’s defined benefit plan. Marcia, an attorney, is 44 years old and earns $150,000. She has four years of service for purposes of the plan and has worked at the firm for four years. The plan provides a benefit of 1% for the first three years of service and a benefit of 1.5% for all additional years of service. The plan has the least generous vesting schedule possible. Almost eighty percent of the accrued benefits are attributable to the two equal owners, Clark and Nicole, who have been working at the company for decades.
If Marcia were to leave, what percent of her salary (as defined by the plan) could she expect to receive at normal
retirement?
3.6%.
4.8%.
5.5%.
6.4%.
4.8%.
Rationale
This plan is top heavy as Clark and Nicole are key employees who have accrued benefits in excess of 60%.
Therefore, vesting will shift and there is a minimum benefit that must be provided to non-key employees.
Her benefit will be 2% times YOS (8%) times the vesting percentage (60%).
Remember, the vesting for a defined benefit plan shifts (from 3-to-7-year graded vesting to 2-to-6-year graded vesting) if the plan is top heavy.
Which of the following statements regarding the plan sponsor of a money purchase pension plan is correct?
The plan sponsor is required to make an annual contribution to the plan.
The excess earnings of a money purchase pension plan are returned to the plan sponsor.
The plan sponsor generally bears the investment risk of the plan assets.
A plan sponsor with fluctuating cash flows would adopt a money purchase pension plan.
The plan sponsor is required to make an annual contribution to the plan.
Rationale
A money purchase pension plan is a defined contribution pension plan; therefore, it requires an annual contribution by the plan sponsor.
Options b and c are incorrect because the participant in a money purchase pension plan generally bears all of the investment risk and benefit of the plan assets. Option d is incorrect because an employer with fluctuating cash flows would not choose a money purchase pension plan because of the mandatory funding requirement (they would instead choose a profit-sharing plan).
UPDATED FOR 2024:
A defined benefit pension plan has a funding formula equal to 1% x years of service x final salary. If Jodi’s final salary is $600,000 and Jodi has earned 30 years of service, what is Jodi’s retirement benefit in 2024?
$103,500.
$180,000.
$275,000.
$345,000.
$103,500.
Rationale
1% x 30 years x $345,000 = $103,500.
Recall that when calculating the benefit payable from a qualified plan, the compensation in excess of the covered compensation limit ($345,000 for 2024) is not considered.
A company’s defined benefit pension plan utilizes a funding formula that considers years of service and average compensation to determine the pension benefit payable to the plan participants. If Kim is a participant in this defined benefit pension plan and she has 30 years of service with the company and average compensation of $75,000,
what is the maximum pension benefit that can be payable to Kim at her retirement?
A. $23,000 B. $69,000 C. $75,000 D. $275,000
Solution: The correct answer is C.
The maximum amount payable from a defined benefit pension plan is the lesser of $275,000 (2024) or 100% of the average of the employee’s three highest consecutive years of compensation.
Because the average of Kim’s compensation is $75,000, she would be limited to receiving a pension benefit at her retirement of $75,000
Which of the following statements concerning the use of life insurance as an incidental benefit provided by a qualified retirement plan is (are) correct?
The premiums paid for the life insurance policy within the qualified plan are taxable to the participant at the time of payment. Under the 25 percent test, if term insurance or universal life is involved, the aggregate premiums paid for the policy cannot exceed 25 percent of the employer’s aggregate contributions to the participant’s account. If a whole life policy other than universal life is used, however, the aggregate premiums paid for the whole life policy cannot exceed 50 percent of the employer’s aggregate contributions to the participant’s account. In either case, the entire value of the life insurance contract must be converted into cash or periodic income, or the policy distributed to the participant, at or before retirement. A. 1 only B. 2 only C. Both 1 and 2 D. Neither 1 nor 2
Solution: The correct answer is B.
Statement 1 is incorrect. The economic value of pure life insurance coverage is taxed annually to the participant.
Statement 2 is correct because the 25 percent test is actually a misnomer, for it is really two tests: a 25 percent test and a 50 percent test, depending on which type of life insurance protection is involved.
Robbie is the owner of SS Automotive and he would like to establish a qualified pension plan. Robbie would like most of the plan’s current contributions to be allocated to his account. He does not want to permit loans and he does not want SS Automotive to bear the investment risk of the plan’s assets. Robbie is 32 and earns $700,000 per year. His employees are 25, 29, and 48 and they each earn $25,000 per year.
Which of the following qualified pension plans would you recommend that Robbie establish?
A. Target benefit pension plan B. Cash balance pension plan C. Money purchase pension plan D. Defined benefit pension plan using permitted disparity
solution: The correct answer is C.
Because Robbie does not want SS Automotive to bear the investment risk of the plan assets, the money purchase pension plan or the target benefit plan would be the available options to fulfill his requirements.
The target benefit plan would not fulfill Robbie’s desires because as a percentage of compensation, older employees receive a greater contribution in a target benefit plan and one of the employees is older than Robbie. In such a case, the older employee would receive a greater (as a percentage of compensation) contribution to the plan.
Which of the following statements is true regarding defined benefit and defined contribution pension plans?
A. In a defined contribution plan, the employer bears the investment risk and must make up any shortfall if investments decline in value. B. Defined contribution plans have become more common because employers want to avoid the funding volatility during periods of low investment returns. C. Participants in a defined contribution pension plan must select their own investments and are not limited to those offed within the plan. D. The Pension Benefit Guaranty Corporation (PBGC) provides insurance to guarantee payment of accrued benefits if a defined contribution plan fails.
Solution: The correct answer is B
Defined benefit plans have become less common as employers seek to avoid the mandatory funding requirements and cost volatility, especially during recessions. Employers choose defined contribution plans to avoid the risk.
Choice A is a false statement. In a defined contribution plan, the participant bears the investment risk, not the employer. The employer’s obligation ends after contributing the amount stated in the plan document.
Choice C is a false statement. Participants in a defined contribution plan may select their own investments IF the plan offers self-directed accounts, otherwise they choose from the investments offered by the plan sponsor.
Choice D is a false statement. The PBGC guarantees payment of accrued benefits under defined benefit plans, not defined contribution plans. If a defined contribution plan fails, participants may lose account assets
Which of the following statements is true regarding the Pension Benefit Guaranty Corporation (PBGC)?
A. The PBGC guarantees the full pension benefits owed to participants under terminated pension plans. B. The PBGC insures defined contribution plans in addition to defined benefit pension plans. C. Plan sponsors do not pay premiums to the PBGC for pension insurance coverage. D. The maximum annual benefit paid by the PBGC is lower than the maximum benefit allowed under pension plan documents.
Solution: The correct answer is D.
The PBGC maximum guarantee is a formula tied to the Social Security index. The formula generally pays a portion of benefits offered by the plan and is indexed annually. The amount is lower than the indexed maximum annual benefit for a defined benefit plan.
Choice A is incorrect. The PBGC does not guarantee the full pension benefits owed under terminated plans. PBGC benefits are subject to a maximum annual limit that is lower than the maximum benefit allowed under plan documents.
Choice B is incorrect. The PBGC only insures defined benefit pension plans, not defined contribution plans.
Choice C is incorrect. Plan sponsors pay both a flat-rate, per-participant premium and a variable-rate premium based on any underfunding
Which of the following types of pension plans is not insured through the PBGC?
A. Defined benefit pension plans B. Target benefit pension plans C. Cash balance pension plans D. All of the above are insured.
Solution: The correct answer is B.
The PBGC does not insure defined contribution pension or profit-sharing plans. Target benefit plans are defined contribution pension plans.
Choice A is incorrect. The PBGC does insure defined benefit pension plans.
Choice C is incorrect. The PBGC does insure defined benefit plans such as cash balance pension plans.
Choice D is incorrect. The PBGC does not insure all the listed pension plans, such as defined contribution plans.
Which of the following statements is true?
In the year that Electron Products, Inc. has a loss for income tax purposes, they do not have to make a contribution to the 10% money purchase pension plan established in the prior year. Because of the risk of mismanagement of plan assets, plan sponsors of defined benefit plans are prohibited from investing more than 5% of the plan’s assets in the stock of the plan sponsor. In calculating the minimum funding amount for a cash balance plan, the actuary considers plan forfeitures. The Pension Benefit Guaranty Corporation (PBGC) guarantees that the participants of a defined benefit plan will receive their accrued benefit as calculated under the private plan funding formula.
The correct answer is C.
Statement C is true as the actuary does consider the plan forfeitures when calculating the minimum funding amount. The plan forfeitures of a cash balance plan are allocated to the future plan funding costs.
Statement A is incorrect as Electron will be required to contribute at 10% to the money purchase pension plan as part of the mandatory funding requirements.
Statement B is incorrect as the actual limit of investment in the plan sponsor’s stock is 10%.
Statement D is incorrect as the PBGC only insures to a certain amount - not the full accrued benefit.
Monarch Machines sponsors a 15% money purchase pension plan and 401(k) profit sharing plan in which the employees are permitted to defer up to 75% of their compensation. Monarch Machines matches employee deferral contributions 100% up to 6% of deferred compensation.
If James, age 31, is a highly compensated employee who earns $270,000, what is the maximum he will receive as an employer match from Monarch in 2024 if the ADP of the NHC is 4%?
$0 $14,250 $16,200 $28,500
Solution: The correct answer is B.
The maximum amount that may be contributed to qualified plans on James’ behalf is $69,000 (2024). If James receives an allocation from Monarch’s money purchase pension plan of $40,500 ($270,000 × 15%), he can only receive an additional $28,500 from other sources. The ADP of the NHC is 4%, so James, as a HC employee could, based upon the ADP test, defer up to 6% of his compensation and Monarch will match him 100%.
However, James cannot defer 6% of his compensation because this would cause him to exceed the annual additions limit, and he would not benefit from the 100% match from Monarch. If James deferred $16,200 (6% of $270,000) of his compensation, then Monarch would match $16,200; however, that would exceed the limit. He will have received total annual additions of $72,900 ($40,500 + $16,200 + $16,200).
If James reduces his contribution to roughly 5.28%, his contributions will total $69,000 ($40,500 +14,250 +$14,250).
Baja’s employer sponsors a discretionary profit sharing plan and a 12% Money Purchase Pension Plan. For the current year, aggregate covered compensation totaled $1,500,000. If the company would like to contribute the maximum deductible amount to the profit sharing plan, how much can they contribute?
$0
$180,000
$195,000
$375,000
Solution: The correct answer is C.
The combined limit for contributions to multiple plans is 25% of employer covered compensation, $375,000 ($1,500,000 x 25%). In this case, since Baja’s employer made a mandatory MPPP contribution of $180,000, they could only make a contribution of $195,000 ($375,000 - $180,000) to the profit sharing plan.
Bobby, age 54, has worked for Cairns Airlines for 15 years. He earns $450,000 per year and is covered by a qualified defined benefit pension plan with a funding formula of (1.5% × Years of Service × Last Year’s Salary). What is Bobby’s accrued benefit under this defined benefit plan given the funding formula, his earnings and his years of service?
$51,525 $69,000 $77,625 $101,250
$ 77,625
Because of the covered compensation limit of $345,000 (2024), Bobby’s compensation in excess of $345,000 cannot be considered for purposes of calculating his accrued benefit.
The answer of $77,625 is calculated as 1.5% × 15 × $345,000.
