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.

Question 16

In order to avoid the necessity for Annual Deferral Percentage (ADP) testing, you have recommended that your client transition to a safe harbor 401(k) plan for the following plan year. Participation in the plan is generally low, with fewer than half of eligible employees participating in the plan. Your client wants to avoid ADP testing requirements, but has also expressed concern with minimizing any added costs to do so. Which of the following employer contribution arrangements would you recommend in this circumstance, assuming all options would allow for immediate vesting of employer contributions?

Choose the best answer.

1) A non-elective employer contribution of two percent of compensation for all eligible employees
2) A non-elective employer contribution of three percent of compensation for all eligible employees
3) An employer matching contribution providing a dollar for dollar match up to five percent of compensation
4) An employer matching contribution providing a dollar for dollar match up to three percent of compensation, with an additional match of fifty cents per dollar for contributions between three and five percent of eligible compensation

Answer 16

4) An employer matching contribution providing a dollar for dollar match up to three percent of compensation, with an additional match of fifty cents per dollar for contributions between three and five percent of eligible compensation

Given that participation in the plan is low the matching arrangement outlined in choice D would meet safe harbor requirements while minimizing costs to the employer.

Question 17

Amy is employed at Abacale Corporation and is a key employee. Abacale has a non-qualified plan for Amy and sets aside money into it for her in 2021, 2022, and 2023. In 2024, Amy is allowed to take a withdrawal and does so. In what year may Abacale take a deduction?

Choose the best answer.

1) 2021
2) 2022
3) 2024
4) 2023

Answer 17

3) 2024

Abacale Corporation may take a deduction in the year that Amy takes a distribution, or when the funds are made available, which is 2024.

Question 18

Which of the following are considered advantages of a nonqualified plan? (Select all that are true.)

1) The design is flexible
2) Minimal governmental regulatory requirements
3) The tax deduction is deferred
4) Can provide deferral of taxes to employees

Answer 18

1) The design is flexible
2) Minimal governmental regulatory requirements
4) Can provide deferral of taxes to employees

Nonqualified plans have many advantages, such as a flexible design, minimal government regulatory requirements, deferral of employee taxes, use by the employer as “golden handcuffs” that help bind the employee to the company, and some assets set aside in some informal arrangements are available to use for corporate purposes.

Question 19

What is the first thing most executives covered under a plan want to know?

Choose the best answer.

1) What benefits are provided?
2) How is the plan funded?
3) What distribution options are in the plan?
4) What investments are in the plan?

Answer 19

1) What benefits are provided?

Executives covered under the plan first want to know what benefits the plan provides, rather than methods of financing those benefits, such as corporate-owned life insurance (COLI) arrangements. The benefit formula is the basic starting point in designing or explaining a nonqualified deferred compensation plan.

Question 20

An excess benefit plan allows highly compensated employees to receive non-qualified compensation sufficient to replace lost compensation due to 415 limits.

Choose the best answer.

True
False

Answer 20

True

Highly compensated employees receive the difference between the amounts payable under their qualified plan and the amount they would have received if there were no benefit limitations under Code Section 415.

Question 21

A Rabbi Trust provides some protection for deferred compensation participants. What protection does it not provide?

Answer 21

These trusts do not provide protection from creditors of the company.

Question 22

Which of the following is considered constructive receipt for income tax purposes? (Select all that are true.)

1) Credited to an employee’s account
2) Set aside
3) Amount is payable in five years
4) Amount is payable upon termination

Answer 22

1) Credited to an employee’s account
2) Set aside

An amount is treated as received for income tax purposes, even if it is not actually received, if it is credited to the employee’s account, set aside, or otherwise made available. Constructive receipt does not occur if the employee’s control over the receipt is subject to a substantial limitation or restriction.

Question 23

Fred, a participant in ZZZ nonqualified deferred compensation plan, has passed away. Where will the value of the payments made to Fred’s beneficiary be included?

Answer 23

The value of the payments made to Fred’s beneficiary will be included in Fred’s estate.

Question 24

Which of the following conditions must be satisfied In order for an executive to defer taxation of income contributed to a non-qualified deferred compensation plan?

I) Plan assets must be held in trust for the benefit of the participating executive
II) Assets held in the plan must be subject to a substantial risk of forfeiture.
III) To maintain tax-deferred status participants must be offered an appropriate number of diversified
investment vehicles
IV) The plan must include restrictions and limitations regarding early distributions of contributed funds

Choose the best answer.

1) II and IV
2) II, III, and IV
3) II only
4) All of the above

Answer 24

1) II and IV

Question 25

Which of the following statements are NOT true regarding distributions from non-qualified deferred compensation plans?

I) As there are no required minimum distributions imposed an executive may withdraw funds at any time once
full retirement age is reached
II) Participating executives must elect a distribution strategy when contributing assets to the plan
III) Once distributions have begun the planned distribution period may be extended with no restrictions
IV) Subject to certain limitations, planned distribution dates may be adjusted prior to the commencement of
distributions from the plan

Choose the best answer.

1) II and IV
2) I and III
3) I only
4) III only

Answer 25

2) I and III

Notes on option two, period may be extended but must provide for risk of forfeiture if requirements are not met, such as remaining available to the business for consulting purposes.

Question 26

Compensation deferred to a nonqualified deferred compensation program will be subject to Social Security taxes at what point in time?

Choose the best answer.

1) As for a qualified plan, deferred compensation is subject to Social Security taxation in the year it is earned by
the employee.
2) Contributed compensation is not subject to Social Security tax as it is deferred from income that is above the
Social Security taxable wage base.
3) In the year an employee no longer has a substantial risk of forfeiture.
4) In the year compensation is distributed/paid from the plan.

Answer 26

3) In the year an employee no longer has a substantial risk of forfeiture.

Question 27

A corporation interested in establishing an employee benefit program to provide highly paid executives with tax-advantaged savings opportunities beyond the limitations imposed by qualified retirement plans could utilize which of the following types of benefits:

I) Cross-tested profit sharing plan
II) Non-qualified deferred compensation plan
III) Split-dollar life insurance
IV) Excess benefit plan

Choose the best answer.

1) I only
2) II and III
3) II and IV
4) II, III, and IV

Answer 27

4) II, III, and IV

Question 28

Which legislative act or code section is applicable to qualified plans but generally not to any employer-sponsored retirement plan referred to as “non-qualified”?

Choose the best answer.

1) IRC Section 415
2) Employee Retirement and Security Act
3) IRC Section 401(a)
4) Economic Growth and Tax Relief Reconciliation Act

Answer 28

2) Employee Retirement and Security Act

Question 29

If a split dollar arrangement is treated as a loan transaction, the employee does not have to recognize taxable income.

Choose the best answer.

True
False

Answer 29

False

If a split dollar plan is treated as a loan, the employee may recognize taxable income as part of the transaction.

Question 30

A nonqualified stock option that has a readily ascertainable fair market value at the time it is granted to an employee will result in taxable ordinary income to the employee:

Choose the best answer.

1) in the year the option is granted
2) in the year stock is purchase under the option
3) in the year stock purchased under the option is sold
4) in the year stock purchased under the option is sold, if sold at a gain

Answer 30

1) in the year the option is granted

A nonqualified stock option that has a readily ascertainable fair market value at the time it is granted to an employee will result in taxable ordinary income to the employee in the year the option is granted.

Question 31

Which of the following is true about employee stock purchase plan requirements? (Select all that are true.)

1) Must be employee of corporation, its parent or subsidiary
2) Must be approved by stockholders
3) All participants must receive equal amount of shares
4) The exercise price must not be less than 85% of the FMV of the stock
5) Must be exercised within a specific time period
6) Negotiable, can be bought or sold

Answer 31

1) Must be employee of corporation, its parent or subsidiary
2) Must be approved by stockholders
4) The exercise price must not be less than 85% of the FMV of the stock
5) Must be exercised within a specific time period

Some of the following are requirements of employee stock purchase plans: must be an employee of the corporation, its parent or subsidiary, must be approved by stockholders, the exercise price must not be less than 85% of the FMV of the stock, and must be exercised within a specific time period.

Question 32

An employer that provides interest-free loans to executives must do the same for rank and file employees.

Choose the best answer.

True
False

Answer 32

False

There are no nondiscrimination rules for executive loan programs. Loans can be provided to selected groups of executives or even a single executive.

Question 33

The below-market loan rules between an executive and his company will not apply to a compensation-related loan for any day on which the amount of all loans between the executive and his company do not exceed which amount?

Choose the best answer.

1) $100
2) $1,000
3) $10,000
4) $100,000

Answer 33

3) $10,000

The below-market loan rules between an executive and his company will not apply to a compensation-related loan for any day on which the amount of all loans between the executive and his company do not exceed $10,000.

Question 34

Which of the following employers would not be subject to Code Section 457(b)’s rules for nonqualified deferred compensation plans?

Choose the best answer.

1) A school district
2) A city sewage authority
3) A charitable organization
4) A privately owned company

Answer 34

4) A privately owned company

Section 457(b) applies to nonqualified compensation plans of state and local government employers and tax-exempt employers/organizations.

Question 35

Since eligible 457(b) plans are a form of nonqualified deferred compensation, there is no statutory limit on the amount of income that participants may defer.

Choose the best answer.

True
False

Answer 35

False

Under Section 457 of the IRC, plans that include limits on the amounts deferred are subject to favorable tax treatment. These plans are generally referred to as eligible Section 457 plans.

Question 36

Section 457(b) plans are subject to the minimum distributions requirements under Section 401(a)(9).

Choose the best answer.

True
False

Answer 36

Minimum distributions must be made under the rules of Section 401(a)(9) (distributions from IRAs must generally begin no later than April 1 of the year following an age based on year of birth (72-75) which apply to other tax-advantaged plans as well.)

Question 37

Which unexpected circumstances resulting in financial hardship are considered an unforeseeable emergency? (Check all that are true.)

1) Sudden illness
2) Property loss due to casualty
3) College education
4) Loan defaults

Answer 37

1) Sudden illness
2) Property loss due to casualty

Sudden and unexpected illness or accident or property loss due to casualty is considered an unforeseeable emergency.

Question 38

Governmental employers may establish 401(k) plans as a benefit to their employees?

Choose the best answer.

True
False

Answer 38

False

The following plans are not available to governmental employers: 401(k) plans, SIMPLE 401(k) plans (except plans established prior to May 6, 1986), and Section 403(b) types of plans.

Question 39

Which of the following statements are true concerning split dollar life insurance arrangements?

I) Policy cash values will not be tax-deferred as split dollar arrangements are not qualified under ERISA
II) Under an equity split dollar arrangement the covered employee is the owner of the purchased policy
III) Corporations are typically named as beneficiary for the majority of available death benefits in order to
recover from a dip in earnings that may result from the loss of a key employee.
IV) The majority of newly established split dollar life insurance arrangements utilize the endorsement method

Choose the best answer.

1) I, II, and IV
2) II and IV
3) I and III
4) II only

Answer 39

2) II and IV

Question 40

Which of the following statements are true regarding Code Section 409(A)?

1) To defer taxation a stock option’s exercise price must be set at the underlying stock’s fair market value at the
date of grant
2) Deferral amounts not in compliance with Section 409(A) may be subject to interest payments as well as a 20
percent penalty tax
3) Based on section 409(A) guidelines income will be taxable in the current year to the extent it is subject to a
substantial risk of forfeiture
4) To defer taxation a stock option’s exercise price must be set at or above the underlying stock’s fair market
value at the date of grant

Choose the best answer.

1) II, III, and IV
2) I and III
3) II and IV
4) I, II, and III

Answer 40

3) II and IV

Note for option 3 income is NOT subject to current year taxation to the extent it is subject to a risk of forfeiture.

Question 41

When is an incentive stock option (ISO) subject to taxation under the alternative minimum tax rules?

Choose the best answer.

1) At time of exercise
2) At time of grant
3) When the underlying stock is sold
4) At time of vest

Answer 41

1) At time of exercise

Question 42

What is the maximum permissible discount under an employee stock purchase plan (ESPP) that is tax qualified under Code Section 423?

Choose the best answer.

1) 25%
2) 15%
3) 5%
4) 10%

Answer 42

2) 15%

Question 43

Which of the following is NOT an applicable catch-up contribution amount for a non-governmental section 457 plan?

Choose the best answer.

1) $7,500 (2024) age 50 catch-up amount
2) Twice the annual elective deferral limit
3) 100% of earned compensation
4) The total of unused prior-year deferrals

Answer 43

1) $7,500 (2024) age 50 catch-up amount

Question 44

Which of the following statements concerning plans under subsection 457(b) and subsection 457(f) are correct?

Choose the best answer.

1) Contributions to a governmental 457(b) plan must be unfunded, and contributions to a non-governmental
457(f) plan must be both unfunded and subject to a substantial risk of forfeiture to plan participants.
2) Contributions to a governmental 457(b) plan must be funded, and contributions to a non-governmental
457(f) plan must be both funded and subject to a substantial risk of forfeiture to plan participants.
3) Contributions to a non-governmental 457(b) plan must be unfunded, and contributions to a non-
governmental 457(f) plan must be both unfunded and subject to a substantial risk of forfeiture to plan
participants.
4) Contributions to a non-governmental 457(b) plan must be unfunded, and contributions to a non-
governmental 457(f) plan must be both funded and subject to a substantial risk of forfeiture to plan
participants.

Answer 44

3) Contributions to a non-governmental 457(b) plan must be unfunded, and contributions to a non-
governmental 457(f) plan must be both unfunded and subject to a substantial risk of forfeiture to plan
participants.