Retirement Chapter 3: Types of Retirement Plans

Question 1

Are employee deferrals in a profit-sharing plan subject to FICA?

Answer 1

Yes, but ER contributions are not.

Question 2

Why are retirement benefits uncertain in a profit-sharing plan?

Answer 2

Contributions can be discretionary and occasionally skipped. This makes benefits at retirement unpredictable.

Question 3

What typically happens with forfeitures in a profit-sharing plan?

Answer 3

They are typically allocated to the EE account balances.

Question 4

Any business established as a ___________ may establish an ESOP.

Answer 4

Corporation; partnerships cannot offer stock bonus or ESOP plans because partnerships do not issue stock.

Question 5

Up to how much can profit-sharing plans invest in ER stock?

Answer 5

10% of plan assets

Question 6

ER contributions in a stock bonus or ESOP plan are typically made with cash. Why?

Answer 6

The plan then uses the cash to purchase shares from the company, thereby funding company operations.

Question 7

Can ESOPs be cross-tested?

Answer 7

No

Question 8

What is the gateway requirement for NHCE contributions?

Answer 8

The lesser of at least 1/3 of the allocation rate of the HCE with the highest allocation rate or 5% of the NHCE’s compensation

Question 9

Are self-employed persons permitted to adopt a money purchase cross-tested Keogh plan?

Answer 9

Yes

Question 10

What is the salary and annual benefit cap of a DB plan?

Answer 10

$345,000 / $275,000

Question 11

What formula, related to a defined benefit plan, factors both service and salary in determining the participant’s ultimate pension benefits?

Answer 11

Unit-benefit formula (a.k.a. % of earnings per year of service)

Question 12

Who assumes the risk of pre-retirement inflation in a defined benefit plan?

Answer 12

The employer

Question 13

Are defined benefit plan contributions earmarked to specific employees?

Answer 13

No

Question 14

Why aren’t contributions attributed to specific employees in a defined benefit plan?

Answer 14

Because contributions are pooled

Question 15

Factors that affect the amount of ER contributions to a DB plan

Answer 15

Participant’s proximity to retirement age

Past service

Forfeitures must be applied to reduce ER contributions because the actuarially determine annual contribution must be made–not more, not less

Investment return assumptions

Salary scale assumptions

Question 16

What is a cash balance plan?

Answer 16

DB plan that provides a hypothetical individual account for each participant. These accounts are funded by the ER annually with “interest credits” (the guarantee). The actual return can therefore lower or increase ER contributions.

Question 17

How must forfeitures be used in defined benefit plans?

Answer 17

Must be allocated to reduce the next contribution

Question 18

What affects defined contribution plans?

Answer 18

Investment return, inflation, and ER contributions

Question 19

Does life expectancy affect defined benefit plans?

Answer 19

Yes

Question 20

Do stock bonus and ESOP plans require participants to take distributions in ER stock?

Answer 20

No; under a put option participants may request cash distributions.

Question 21

Keogh plans are similar to _________ plans but for ________________ businesses.

Answer 21

qualified; non-incorporated

Question 22

What is a 412(i) plan?

Answer 22

Defined benefit plan funded entirely with insurance products; exempt from minimum funding standard; appeals to ERs with some need for life insurance

Question 23

Will actual investment experience affect the value of the benefit in a cash balance pension plan (defined benefit)?

Answer 23

No

Question 24

Why is a cash balance plan unfavorable to older EEs?

Answer 24

Because the lump sum payout at termination is generally considerably smaller; Doesn’t have as much time for the interest credits to compound

Question 25

What is the main difference between a money purchase pension plan and a target benefit plan (both defined contribution plans)?

Answer 25

Money purchase - ER contribution is a flat % based on EE’s compensation

Target benefit - ER contribution is based on projected retirement benefits affected by age, compensation, and other factors

Question 26

In a money purchase plan, investment returns affect what?

Answer 26

Account balances, not contributions

Question 27

If the forfeiture in a money purchase plan is not reallocated to the remaining participants, then they must be used to reduce company contributions.

Answer 27

True

Question 28

What is the retirement benefit based on when benefits begin in a target benefit plan?

Answer 28

The account value

Question 29

When target benefit plan is first installed, an actuarial calc is made. If the calc calls for a larger contribution (say, if there are many older highly compensated EEs), can the ER deduct more than 25% of the aggregate eligible compensation of all covered participants?

Answer 29

No!

Question 30

What is the most attractive plan for an ER looking to:
1) max benefits for older EEs
2) provide long-term EEs with a secure and specified retirement income, and
3) tie EEs to the company through the benefit program?

Answer 30

Defined benefit pension plan

Question 31

Forfeitures in defined benefit plans and cash balance plans (also DB) must reduce plan costs or contributions (not allocated to increase account balances of remaining plan participants).

Answer 31

True

Question 32

What kind of plan allows for maximum flexibility and contributions to/by an ER?

Answer 32

Profit-sharing 401(k); no requirements for contribution

Question 33

Unit-benefit <> %-of-earnings-per-year-of-service

Answer 33

Nice