Types of Qualified Retirement Plans - Review Questions

Question 1

A money purchase pension plan is appropriate for ______ employees.

Answer 1

Young

Money purchase pension plans are appropriate when employees are relatively young and have substantial time to accumulate retirement savings.

Question 2

Contributions cannot be made even if there are no current or accumulated profits in a profit sharing plan.

Choose the best answer.

True
False

Answer 2

False

Contributions can be made even if there are no current or accumulated profits. Even a nonprofit organization can have a qualified profit sharing plan.

Question 3

What contribution must be made under the discretionary provision?

Answer 3

Under the discretionary provision, the employer chooses the contribution amount each year and can contribute even if there are no profits. On the other hand, the employer may choose not to contribute at all.

Question 4

What contribution must be made under the formula provision?

Answer 4

Under the formula provision the employer must contribute a specified percentage of the profits.

Question 5

What is the non-vested amount called that is left behind in a plan?

Answer 5

Forfeiture

If an employee leaves before becoming fully vested in his or her account balance, the non-vested amount is referred to as forfeiture.

Question 6

What is a pure discretionary contribution based on by the employer?

Choose the best answer.

1) Employee compensation
2) Employee salary deferral
3) Employee tenure with the company
4) Employer profits

Answer 6

1) Employee compensation

The employer makes a discretionary nonelective contribution to the plan that is allocated simply on the basis of each employee’s compensation, without regard to the amount of salary reductions elected by that employee.

Question 7

Section 401(k) account funds attributable to elective deferrals cannot be distributed prior to the occurrence of which of the following events? (Check all that are true.)

1) Hardship
2) Loan from plan
3) Retirement
4) Attainment of age 59½ by the participant

Answer 7

1) Hardship
3) Retirement
4) Attainment of age 59½ by the participant

Section 401(k) account funds attributable to elective deferrals cannot be distributed prior to the occurrence of retirement, death, disability, severance from employment with the employer, attainment of age 59 ½ by the participant, plan termination, and hardship.

Question 8

Erica has worked for FX company for 3 years and has decided to leave. The company chose a 5-year cliff vesting schedule. Her defined benefit plan will be portable, and roll over to her next employer.

Choose the best answer.

True
False

Answer 8

False

Employees who leave before retirement may receive relatively little benefit from the defined benefit plan. The plan generally lacks portability in that when an employee changes employment, it usually cannot go with him or her. In addition, since FX company has a 5-year cliff vesting schedule, Erica would not be vested at all.

Question 9

In a cash balance plan, does the employee or the employer bear the investment risk?

Choose the best answer.

Employee
Employer

Answer 9

Employer

The employer bears the investment risk, which in turn may increase employer costs.

Question 10

How does the employer credit the employee’s hypothetical individual account with pay credit?

Answer 10

The pay credit formula is a percentage of the employee’s compensation.

Question 11

How does interest credit differ from pay credit?

Answer 11

Unlike pay credit, the interest credit formula is not based on employee compensation.
It can be based on the rate of earnings based on
the Consumer Price Index
or
the on-year rate for U.S. Treasury securities.

Question 12

High Return Factory is an asset management firm composed of four well compensated portfolio managers. The owners of the firm have come to you for advice regarding the maximum deductible contribution the company can make to its profit sharing plan for 2024. They have provided the following census outlining each employee’s total expected compensation:

Jennifer, Age 58: $390,000
Hank, Age 44: $240,000
Tom, Age 54: $394,000
Diane, Age 46: $250,000
What number would you provide to the owners regarding the maximum allowable deductible contribution?

Choose the best answer.

1) $295,000
2) $318,500
3) $265,000
4) $305,000

Answer 12

1) $295,000

The maximum allowable employer contribution is 25% of covered payroll, up to a maximum of $345,000 (2024), which is the maximum compensation that can be considered for contributions, for any individual employee. In this example Jennifer’s and Tom’s compensation must be reduced to $345,000 in computing 25% of covered payroll: ($345,000 + $240,000 + $345,000 + $250,000) × .25 = $295,000. Deductibility limits are not affected by participants’ eligibility for catch-up contributions.

Question 13

The Planning Group, Inc. has put in place a defined benefit plan as well as a section 401(k) defined contribution plan with a 2% matching contribution on employee deferrals. Which of the following vesting schedules would be allowable under qualified plan regulations?

100% vesting in 401(k) matching contribution after one year, and in the defined benefit plan after two years
Vesting in one-third of 401(k) matching contributions and in defined benefit plan benefits every two years, until fully vested in both plans in year six
Vesting in one half of 401(k) matching contributions in year two, and the remaining half in year four. While vesting in one-third of defined benefit plan benefits every 2 years until fully vested in year six.
Choose the best answer.

1) I and III
2) All of the above.
3) I and II
4) None of the above
5) The employer is subject to a recurring annual funding obligation.

Answer 13

1) I and III

Under schedule 2 the 401(k) matching contributions would not meet the minimum two- to six-year graded vesting requirement in years three and five. Employees would still be only 33.33% vested in year three versus a minimum vesting of 40%, and would be 66.66% vested in year five versus a minimum vesting of 80%. All of the stated defined benefit plan vesting schedules would be permissible.

Question 14

A local credit union is considering establishing a money purchase plan for their employees. After reviewing their options, they are particularly interested in establishing a plan that is integrated with Social Security. The bank is considering possible base contribution levels to the plan, for amounts under the integration level, of 2%, 4%, or 6%. The credit union is planning to set the integration level equal to the current Social Security taxable wage base. Under such an arrangement, what would be the maximum permissible employer contributions for employee earnings over the integration level for a 2%, 4%, and 6% base contribution level, respectively?

Choose the best answer.

1) 4%, 6%, and 12%
2) 4%, 9.7%, and 11.7%
3) 4%, 8%, and 11.7%
4) 7.7%, 9.7%, and 11.7%

Answer 14

3) 4%, 8%, and 11.7%

The maximum employer contributions for employee income over the integration level for 2% is 4%, for 4% is 8% and for 6% is 11.7%.

Question 15

You have just been informed that due to Annual Deferral Percentage Test limitations the 401(k) deferral contributions for highly compensated employees in your organization will be limited to 6% of compensation. If this is the case, what would have been the minimum average annual deferral amount for non-highly compensated employees in your company?

Choose the best answer.

1) 4.8%
2) 4%
3) 3%
4) 6%

Answer 15

2) 4%

The ADP for eligible highly compensated employees for the plan year does not exceed the ADP for other eligible employees for the preceding plan year by more than 2% and the ADP for eligible highly compensated employees for the plan year is not more than the ADP of all other eligible employees for the preceding plan year multiplied by two.