Chapter 4

Question 1

What are the two types of defined benefit pension plans?

Answer 1

Defined Benefit Pension Plans and Cash Balance Pension Plans.

Question 2

What are the two types of defined contribution plans?

Answer 2

Money Purchase Pension Plans and Target Benefit Pension Plans.

Question 3

T/F IN a defined benefit pension plan, the plan sponsor must fund the plan on an annual basis with an amount within the actuaries calculated funding range.

Answer 3

True

Question 4

T/F Minimum require contribution towards a defined benefit pension plan will depend on a comparison of the FV of the plan’s assets with the plan’s funding target and normal costs.

Answer 4

False, the plan’s minimum requirements will depend on a comparison of the PV of the plan’s assets with the plan’s funding target and normal cost.

Question 5

How is the funding target defined in a defined benefit plan?

Answer 5

100 percent of the PV of all benefits accrued.

Question 6

How is the target normal cost defined in a defined benefit plan?

Answer 6

Equals the value of the plan benefits earned by employees during the year, including any benefit increases attributable to compensation increase during the year.

Question 7

T/F If the value of a plan’s assets is less than the plan’s funding target, the minimum required contribution will be the sum of the plan’s normal costs and any shortfall amortization charges.

Answer 7

True

Question 8

T/F If the value of the plan’s assets is equal to the plan’s funding target, the minimum required contribution for the plan year is the target normal cost plus the extent to which the value of the plan’s assets exceed the funding target?

Answer 8

False, less the extent to which the value of the plan’s assets exceed the funding target.

Question 9

T/F If the ratio of plan assets to benefit obligations is less than 100 percent, a funding shortfall exists. This amount must be amortized in level annual installments over seven years.

Answer 9

True.

Question 10

T/F In a defined contribution plan, the plan sponsor must fund the plan annual with the amount defined in the plan document.

Answer 10

True.

Question 11

What is an in service withdrawal?

Answer 11

Any withdrawal form a pension plan while the employee is a participant other than a loan.

Question 12

T/F A participation in a pension plan can take an in service withdrawal from the pension plan.

Answer 12

False, typically in service withdrawals cannot take an in service withdrawal except in the case where the individual is 62 years old and has a defined benefit pension plan.

Question 13

T/F There is a limit of 10 percent investment of pension plans assets in employer securities.

Answer 13

True.

Question 14

T/F Defined contribution plans holding publicly traded employer securities are not required to allow plan participants to diversify their contributions.

Answer 14

False, the are required to allow plan participants to diversify their contributions.

Question 15

T/F Pension plans have limited investment in life insurance.

Answer 15

True, limited to providing incidental death benefits. Must pass either the 25 percent test of 100 to 1 ratio test.

Question 16

T/F Life insurance can be the primary focus of a qualified plan

Answer 16

False, cannot be the focus of the qualified plan.

Question 17

What is the 25 percent in a term or universal life insurance policy?

Answer 17

The aggregate life insurance policy premiums cannot exceed 25 percent of the employer’s aggregate contributions.

Question 18

What is the 25 percent test for whole life insurance?

Answer 18

The aggregate life insurance premiums cannot exceed 50 percent of the employer’s aggregate contributions.

Question 19

What does the 100 to 1 ratio test limit?

Answer 19

Limits the death benefit amount of life insurance coverage purchased within a qualified plan to 100 times the monthly accrued retirement benefit provided under the qualified plan.

Question 20

What is a 412(e)(3) Plan

Answer 20

A specific type of defined benefit pension plan that is funded entirely by a life insurance contract or annuity. The employer claims a tax deduction for contributions made to pay premiums.

Question 21

T/F The only plans that require an actuary annually are defined benefit pension plans

Answer 21

True

Question 22

T/F Target benefit pension plans require an actuary at inception

Answer 22

True.

Question 23

T/F In a defined contribution plan, the investment risk is with the employer, while in a defined benefit plan the investment risk is with the employee?

Answer 23

False, DC- employee, DB- employer

Question 24

How are forfeitures handled in defined benefit plans?

Answer 24

Forfeitures reduce future plan funding costs to the employer.

Question 25

How are forfeitures handled in defined contribution plans?

Answer 25

The employer chooses to either reduce future plan funding cost for the employer, or allocate to other plan participants.

Question 26

What is PBGC?

Answer 26

Pension Benefits Guaranty Corporation. A federal corporation that actus as an insurance provider to maintain the benefits promised to lower paid employees by their defined benefit pension plans.

Question 27

T/F Plan Sponsors pay the premiums for PBGC

Answer 27

True

Question 28

T/F If the pension fund is inadequate or the company goes bankrupt, the PBGC will pay pension benefits, subject to a limit.

Answer 28

True

Question 29

What is the maximum annual PBGC benefits in 2016?

Answer 29

60,136 dollars.

Question 30

What is a participant’s accrued benefit in a defined benefit plan?

Answer 30

= Present value of the vested expected future payments at retirement.

Question 31

What is the participant’s accrued benefit in a defined contribution plan?

Answer 31

= Vested account balance in the qualified plan.

Question 32

How can credit for prior service be handled by defined benefit plans?

Answer 32

May give credit for prior service. If a DB gives credit for service prior to plan implementation it will create a large initial funding which may be spread out over a few years.

Question 33

How is credit for prior service handled in defined contribution plans?

Answer 33

No credit for prior service is permitted.

Question 34

What is the excess method?

Answer 34

A method which provides an excess benefit to those participants whose earnings are in excess of SS wage base.

Question 35

T/F The excess method is used by both DB and DC plans?

Answer 35

True

Question 36

What is the offset method?

Answer 36

The offset method reduces the benefit to those employees whose earnings are below the SS wage base. The offset method is only used by DB plans.

Question 37

T/F DB plans cannot use commingled accoutns

Answer 37

False, DB can use commingled accoutns.

Question 38

T/F DC plans generally use separate individual accounts

Answer 38

True.

Question 39

What is a defined benefit pension plan?

Answer 39

What most people think about when they think about historical pension plans. DB plans have mandatory funding requirements. Accounts are commingled and favors older plan entrants. Eligibility/coverage/vesting- same as qualified plans.

Question 40

How can defined benefit pension plan payouts be calculated?

Answer 40

Flat amount formula= dollar benefit. Flat percentage formula-percentage of salary. Unit credit forula= yeals of service times salary.

Question 41

What is a cash benefit pension plans?

Answer 41

Type of benefit pension plan- hybrid. Mandatory funding requirements. Pension benefit based on annual guaranteed contribution rate and guaranteed earnings on the contributions. Commingled.

Question 42

What are the benefits of cash balance pension plans?

Answer 42

Takes some risk away from the employer and guarantees a certain return on contributions. The benefit the employee receives may be less. Employees receive participation statements with hypothetical separate accounts. Favors younger plan entrants.

Question 43

What is a money purchase pension plan?

Answer 43

Define contribution plan and has mandatory annual funding at a fixed percentage of the employee’s compensation- up to 25 percent. The participant assumes investment risk. Favors younger plan entrants. Cousin to profit sharing plan but there is mandatory funding.

Question 44

Why would people not make a mandatory purchase plan in today’s environment?

Answer 44

Because you can contribute 25 percent of comp in profit sharing plans with no mandatory funding.

Question 45

What is a target benefit pension fund?

Answer 45

Allows to skew benefit based on age. The plan determines the contribution based on the participant’s age. Favors old entrants.