Chapter 4 Exam Questions Employer-Sponsored Retirement Plans

Chapter 04

Employer-Sponsored Retirement Plans

  / Questions TrueFalse

1. The Internal Revenue Code and ERISA’s Title I and Title II provisions set 13 minimum standards to determine whether retirement plans are qualified or nonqualified. (Qualified vs. Nonqualified Plans)

2. Forfeitures come from the accounts of employees who terminate their employment prior to earning vesting rights. (Defined Contribution Plans)

3. The Revenue Act of 1921 led to the increase in discretionary benefits such as pensions. (Origins of Employer-Sponsored Retirement Benefits)

4. Public organizations may offer both 40l(k) and 403(b) plans, but private tax-exempt organizations are prohibited from offering 401(k) plans. (403(b) Tax-Deferred Annuity Plans)

5. The Revenue Act of 1921 instituted retirement plans as a mandatory bargaining subject between unions and management. (Origins of Employer-Sponsored Retirement Benefits)

6. IRC Section 403(b) established the tax-deferred annuity program as a qualified contribution plan under ERISA guidelines. (403(b) Tax-Deferred Annuity Plans)

7. Wearaway occurs whenever benefits accrue at a substantially higher rate during the years close to an employee's eligibility to earn retirement benefits. (Cash Balance Plans and Pension Equity Plans)

8. A qualified preretirement survivor annuity (QPSA) is an annuity for the life of the participant, with a survivor annuity for the participant's spouse. (Qualified vs. Nonqualified Plans)

9. Accrual rules specify the rate participants can accumulate benefits. (Qualified vs. Nonqualified Plans)

10. Section 457 Plans are nonqualified retirement plans for government employees. (457 Plans)

11. Using the unit benefit formula, the annual benefits are based on age, years of service and final average wages or salary. ( Benefit Formulas)

12. Capital-intensive businesses require highly capable employees who have the aptitude to learn how to use complex physical equipments such as casting machines and robotics. (Trends in Retirement Plan Coverage and Costs)

13. In nonleveraged ESOPs, the company borrows money from a financial institution to purchase company stock. (Employee Stock Option Plans (ESOPs))

14. Savings Incentive Match Plans for Employees (SIMPLEs) can be either leveraged or nonleveraged. (Savings Incentive Match Plans for Employees (SIMPLEs))

15. According to the US Department of the Treasury, qualified retirement plans must cover at least 50 employees or at least 40% of the employer's workforce. (Qualified vs. Nonqualified Plans)

16. The major distinction between the unit and flat defined benefit formulas is the use of the employee's years of service. ( Benefit Formulas)

17. Usually, cash balance plans are less costly to employers than defined benefit plans. (Cash Balance Plans and Pension Equity Plans)

18. Nearly 55% of workers employed in the private sector participated in some form of retirement plan in 2016. (Trends in Retirement Plan Coverage and Costs)

19. Service industries such as retail and food service are not capital intensive, and most have the reputation of paying low wages and offering less generous benefits, including retirement plans. (Trends in Retirement Plan Coverage and Costs)

20. Unions generally secured high wages for their members through the earl 1960s, when competition from foreign companies offered quality products at similar or lower prices. (Trends in Retirement Plan Coverage and Costs)

21. A salary reduction agreement refers to the annual maximum allowable contribution to a participant’s account in a defined contribution plan. (Defined Contribution Plans)

22. Employees can participate in pension plans after they have reached the age of 25 (Qualified vs. Nonqualified Plans)

23. Pension plans do not automatically fulfill the nondiscrimination requirement if they fall in safe harbors. (Qualified vs. Nonqualified Plans)

24. Plan termination rules apply and procedures apply to all types of pension plans. (Qualified vs. Nonqualified Plans)

25. The present value of benefits based on a designated date is known as accumulated benefit obligation. (Defined Benefit Plans)

26. The Tenth Circuit Court ruled in Tomlinson et al. vs. El Paso Corporation that ERISA did not require the employer to provide notification of wearaway periods so long as employees were informed and forewarned of plan changes. (Cash Balance Plans and Pension Equity Plans)

27. In 2016, 44% employees participated in defined contribution plans. (Trends in Retirement Plan Coverage and Costs)

28. The average benefit test is a method for determining participation requirements. (Qualified vs. Nonqualified Plans)

29. Top-heavy provisions ensure minimum benefits for key employees. (Qualified vs. Nonqualified Plans)

30. Employers can take tax deductions on qualified plans. (Qualified vs. Nonqualified Plans)

31. The IRC limit on maximum annual benefit is indexed for inflation in $7000 increments each year beginning after 2006. (Defined Benefit Plans)

32. Defined contribution plans guarantee particular benefit amounts to participating employees. (Defined Contribution Plans)

33. Companies establish qualified plans for executive employees. (Qualified vs. Nonqualified Plans)

34. In defined contribution plans, employees vest in gross employer contributions. (Qualified vs. Nonqualified Plans)

35. Cliff vesting schedules must grant employees 100 percent vesting after no more than three years from beginning participation in the retirement plan. (Qualified vs. Nonqualified Plans)

36. Safe harbors refer to compliance guidelines in a law or regulation. (Qualified vs. Nonqualified Plans)

37. A top-heavy plan must also provide a special vesting schedule: 3-year 100% vesting schedule, or 6-year graded vesting schedule. (Qualified vs. Nonqualified Plans)

38. Only one event triggers a mandatory distribution: the participant reaches age 65 or the normal retirement age. (Qualified vs. Nonqualified Plans)

39. Under a defined benefit plan, the benefit is fixed by a formula and employer contributions remain the same from year to year. (Defined Benefit Plans)

40. The Pension Benefit Guarantee Corporation recognizes three types of plan terminations: distress terminations, involuntary terminations, and standard terminations. (Defined Contribution Plans)

Multiple Choice Questions
 

41. This type of hybrid plan is based on income and years of service, uses individual accounts, passes the IRS's cross-testing rules and the total benefits are based on the investment performance of the plan's assets. (Target Benefit Plans)
A. Target benefit plan
B. Money purchase plan
C. Age-weighted profit sharing plan
D. Cash balance plan

42. Which of the following are characteristics of the flat benefit formula used in defined benefits plans? (Defined Benefit Plans)
A. An employee's years of service are considered, is determined using a flat amount formula or a flat percentage formula, the benefit is based on a percentage of the employees final average wage or salary
B. Is determined using a flat amount formula or a flat percentage formula an employee's years of service are considered, the benefit is based on a percentage of the employees final average wage or salary, is based on the employee's last 3-4 years of service
C. Is based on the employee's last 3-4 years of service an employee's years of service are considered, The benefit is based on a percentage of the employees final average wage or salary, an employee's years of service are considered
D. The benefits are based on a percentage of the employees final average wage or salary, are based on the employee's last 3-4 years of service and are determined using a flat amount formula or a flat percentage formula

43. The 133^1/3 % rule refers to what? (Defined Benefit Plans)
A. The annual accrual rate for defined benefits plans
B. The annual accrual rate for defined contribution plans
C. The annual accrual rate for qualified benefit plans
D. The annual accrual rate for qualified contribution plans

44. What is the 3% rule used to determine? (Defined Benefit Plans)
A. Nondiscrimination in defined benefits plans
B. Nondiscrimination in defined contribution plans
C. Tax benefit qualification for defined benefits plans
D. Tax benefit qualification for defined contribution plans

45. There are three possible contribution sources for defined contribution plans. Which of the following is not one of those sources? (Defined Contribution Plans)
A. Social Security integration
B. Employer contributions
C. Forfeitures
D. Employee contributions

46. To qualify as a nondiscriminating defined contribution plan, it must meet which two safe harbors? (Defined Contribution Plans)
A. Base contribution formula or collateral contribution formula
B. Fixed first-dollar-of-profits formula or graduated first-dollar-of-profits formula
C. Uniform allocation formula or uniform points allocation formula
D. Profitability threshold formula or the backloading formula

47. Savings incentive match plans for employees (SIMPLEs) have the following characteristics (Savings Incentive Match Plans for Employees (SIMPLEs))
A. The company has at least 100 employees, the employees' preceding year's compensation totaled at least $5000, the company has no other employer-sponsored retirement plan
B. The company has fewer than 100 employees, the employees' preceding year's compensation totaled less than $5000, the company has no other employer-sponsored retirement plan
C. The company has fewer than 100 employees, the employees' preceding year's compensation totaled less than $5000, the company offers other employer-sponsored retirement plans
D. The company has fewer than 100 employees, the employees' preceding year's compensation totaled at least $5,000, the company has no other employer-sponsored retirement plan

 48. This type of defined contribution plan, also known as a CODA, permits only private sector or tax-exempt employers' employees to tax defer part of their compensation to the trust of a qualified plan. (401(k) Plans)
A. Section 457 plan
B. Section 403(b) annuities
C. Saving incentive match plan
D. 401(k) plan

49. This type of hybrid plan defines benefits for each employee by reference to the amount of the employee's hypothetical account balance. (Cash Balance Plans and Pension Equity Plans)
A. Money purchase plan
B. Target benefit plan
C. Cash balance plan
D. Pension equity plan

50. Retirement benefits are generally distributed in one of these three ways. (Qualified vs. Nonqualified Plans)
A. Backloading, collateral payments, offset approach
B. Periodic payments, lumps sums collateral payments
C. Annuities, lumps sums offset payments
D. Lumps sums, annuities, periodic payments

51. The benefits distributed from profit sharing plans are usually allocated using one of these three ways. (Profit Sharing Plans)
A. Lump sum payments, graduated payments, proportional payments based on their contributions to profits
B. Equal payments, proportional payments based on salary, lump sum payments, graduated payments
C. Equal payments, proportional payments based on salary, proportional payments based on their contributions to profits
D. Equal payments based on contributions to profits, equal payments based on salary, lump sum payments

52. Using the ratio percentage test for tax benefit qualification, what does the percentage of non-highly compensated employees to highly compensated employees in the plan have to be? (Qualified vs. Nonqualified Plans)
A. 30%
B. 70%
C. 60%
D. 40%

53. In 2017, the IRC set the maximum annual benefits of defined benefits plans at what amount? (Defined Benefit Plans)
A. $135,000
B. $215,000
C. $235,000
D. $250,000

54. Which one of these is not a defined contribution plan? (Types of Defined Contribution Plans)
A. Cash balance plan
B. ESOPs
C. SIMPLEs
D. Profit sharing

55. Which of the following factors does not determine the accrual rate in defined contribution plans? (Defined Contribution Plans)
A. Benefits equal balance in the account
B. Company cannot set maximum age limits for discontinuing contributions
C. Company's contribution cannot be reduced because of employee age
D. Benefits exceed the balance in the account

56. Which of the following is a tax benefit associated with 401(k) plans? (401(k) Plans)
A. Employees pay taxes on their contribution
B. Employees do not pay taxes on their contributions
C. Investment gains are taxed
D. Employees cannot deduct their contributions from taxable income

57. Which of the following is not a hybrid plan? (Hybrid Plans)
A. Money purchase
B. Cash balance
C. Stock option
D. Target benefit

58. Which of the following is not an accrual criteria? (Defined Benefit Plans)
A. Average benefit test
B. 3% rule
C. Fractional rule
D. 113 1/3 rule

59.  _____ provides non-key employees with a minimum benefit if it is a defined benefit plan or a minimum contribution if it is a defined contribution plan. (Qualified vs. Nonqualified Plans)
A. The fractional rule
B. An accumulated benefit obligation
C. A top-heavy plan
D. A fiduciary

60. Roth 401(k) plans differ from 401(k) plans in which two ways? (Roth 401(k) Plans)
A. Employee contributions are not taxed at the individual’s tax rate, upon retirement employee withdrawals are not taxed
B. Employee contributions are taxed at the individual’s tax rate, upon retirement employee withdrawals are not taxed
C. Employee contributions are not taxed at the individual’s tax rate, upon retirement employee withdrawals are taxed
D. Employee contributions are taxed at the individual’s tax rate, upon retirement employee withdrawals are taxed

Essay Questions
 

61. Discuss the controversies related with cash balance retirement plans. (Concerns about Cash Balance Plans)

Main Points
● Age-related treatment
● Are believed to also favor workers who switch employers periodically
● These plans do NOT define benefits as a percentage of final or career average pay or as a flat-dollar amount per years of service (like in defined benefits plans)
● Award annual pay-related credits that appreciate each year based on a specified interest rate
● According to a U.S. General Accounting Office

• Cash balance plans provide favorable treatment to younger workers
• GAO compared the rates of retirement benefit accrual in defined benefit plans and cash balance plans and concluded that cash balance plan accrual favors younger employees
• The Internal Revenue Code and ERISA’s Title I and Title II provision set 13 minimum standards to determine whether retirement plans are qualified or nonqualified.
• Possible standards students may list include:
  • Participation requirements
  • Coverage requirements
  • Vesting rules
  • Accrual rules
  • Nondiscrimination rules: Testing
  • Top-heavy provisions
  • Minimum funding standards
  • Social Security integration
  • Contribution and benefit limits
  • Plan distribution rules
  • Qualified survivor annuities
  • Qualified domestic relations orders
  • Plan termination rules and procedures
• Qualified plans provide both employees and employers with immediate tax benefits
• In most cases, monetary contributions to qualified plans reduce the amount of an employee’s or company’s annual earnings that are subject to taxation
• Vesting refers to an employee’s nonforfeitable rights to retirement plan benefits
• In defined benefit plans, employees vest in a specific annual amount, as defined under the terms of the plan, each year after retirement
• In defined contribution plans, employees vest in net employer contributions
• Net employer contributions equal gross employer contributions plus investment gains or minus investment losses
• Cliff vesting schedules must grant employees 100% vesting after no more than three years from beginning participation in the retirement plan
• The six-year graduated schedule allows workers to become 20% vesting after two years and to vest at a rate of 20% each year thereafter until they are 100% vested after six years from beginning participation in the retirement plan
• Fiduciary responsibilities include:
  • Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them
  • Carrying out their duties prudently
  • Following the plan documents (unless inconsistent with ERISA)
  • Diversifying plan investments
  • Paying only reasonable plan expenses
• The duty to act prudently is a central responsibility under ERISA
• Prudence focuses on the process for making fiduciary decisions
• Shift in labor force toward different occupation and industries – decline in full-time, union workers and workers in goods-producing companies
• Defined benefit plans are costly to employers compared to defined contribution plans