EXAM #1 – Definitions (CH. 1, 3-6)

Question 1

Traditional Retirement

Answer 1

an individual leaves work at age 65 and pursues other initiatives during their remaining years until death.

Question 2

Financial Independence

Answer 2

ability to live comfortably without having to work for an income.

Question 3

Mini Retirement

Answer 3

vacation lasting 2 to 6 months often abroad.

Question 4

Qualified Plan

Answer 4

a retirement plan that meets the qualifications of IRC 401(a).

Question 5

QJSA

Answer 5

Qualified Joint and Survivor Annuity

Question 6

QPSA

Answer 6

Qualified Pre-retirement Survivor Annuity

Question 7

Pension Plan

Answer 7

within the meaning of 401(a) is a plan established and maintained by an employer, primarily to provide systematically for the payment of definitely determinable benefits to employees over a period of years, usually for life, after retirement

Question 8

Profit-sharing Plan

Answer 8

a plan established and maintained by an employer to provide for the participation in his profits by his employees or their beneficiaries

Question 9

Defined Contribution Plan

Answer 9

a plan which provides for an individual account for each participant and for benefits based solely on the amount contributed to the participant’s account and any income expenses, gains and losses, and any forfeiture of accounts of other participants which may be allocated to such participant’s accounts.

Question 10

Defined Benefit Plan

Answer 10

any plan which is not a defined contribution plan.

Question 11

Matching Principle

Answer 11

when one individual or entity has a tax-deductible expense, another entity or individual will have taxable income.

Question 12

Anti-alienation Protection

Answer 12

prohibits any action that may cause the plan assets to be assigned, garnished, levied, or subject to bankruptcy proceedings while the assets remain in the qualified retirement plan.

Question 13

Qualified Domestic Relations Order (QDRO)

Answer 13

a court order relayed to divorce property settlement or child support.

Question 14

Lump-sum Distribution

Answer 14

a complete distribution of a participants account balance within one taxable year and following the employees death disability attainment of age 59 1/2 or separation from service. It’s intent is to lower the overall income tax payable by the distribution recipient.

Question 15

NUA Treatment

Answer 15

stands for net unrealized appreciation treatment.

Question 16

Two-year Eligibility Election

Answer 16

a qualifying retirement plan that requires an employee to complete two years of service to be eligible for participation in the plan.

Question 17

Pension Benefit Guaranty Corporation (PBGC)

Answer 17

protects the retirement incomes of about 31 million American workers in private sector defined benefit pension plans. Created by ERISA (1974) to encourage the continuation and maintenance of private-sector defined benefit pension plans, provide timely and uninterrupted payment of pension benefits, and keep pension insurance premiums at a minimum.

Question 18

Controlled Group

Answer 18

consists of two or more commonly own corporations that are classified as a parent-subsidiary group or as a brother, sister group.

Question 19

Cliff Vesting Schedule

Answer 19

provides an employee full rights to a plan’s assets immediately upon the passage of a certain number of years of service, usually three years.

Question 20

Graduated Vesting Schedule

Answer 20

provides an employee with full rights to a certain percentage benefit (less than 100%) after completing a certain number of years of service and provides the employee with an additional percentage for additional years of service.

Question 21

Top-Heavy Defined Benefit Plans

Answer 21

when the present value of the total recruit benefits of employees in the defined benefit plan exceeds 60% of the present value of the total accrued benefits of the defined benefit plan for all employees.

Question 22

Top-Heavy Defined Contribution Plans

Answer 22

when the aggregate of the account balance balances of key employees in the plan exceeds 60% of the aggregate of the account of all employees.

Question 23

Covered Compensation

Answer 23

compensation of all employees.

Question 24

Profit-sharing Plan

Answer 24

a plan established and maintained by an employer to provide for the participation in profits by employees or their beneficiaries

Question 25

Nondiscriminatory

Answer 25

a requirement of all qualified plans. The eligibility rules, coverage requirements, and contributions allocations of a qualified plan cannot discriminate against the rank-and-file employees for the benefit of shareholder officers and highly compensated employees.

Question 26

Covered Compensation Limit

Answer 26

the maximum employee compensation that may be considered for contributions to qualify plans or the accrual of benefit to a qualified plan. For 2023, the limit was $330,000.

Question 27

New Comparability Plan

Answer 27

a qualified profit-sharing plan in which contributions are made to employees’ accounts based on their respective classification in the company as defined by the plan sponsor.

Question 28

Forfeitures

Answer 28

the percentage or amount of a participants accrued benefit that was not listed to the employee at the employees termination from the plant sponsor. The forfeited amount stays in the plan. It may be allocated to the other plan participants (defined contribution plan) or reduce future plane costs (defined contribution plan or defined benefit plan).

Question 29

One Year of Service

Answer 29

1000 hours of service with an employer within a 12-month period.

Question 30

Standard Eligibility Rules

Answer 30

IRC eligibility rules for participation in a qualify plan. Provides that the employee must be considered eligible to participate in the plan after completing a period of service with the employer extended beyond the later of the date on which the employee changes the age of 21 or the date on which the employee completes one year of service (1000 hours within 12 months).

Question 31

Cash or Deferred Arrangements (CODA)

Answer 31

permits and employee for a portion of their salary on a pretax or Roth basis to a qualified plan or receive the salary as current taxable income. Generally, these are referred to as 401(k) plans.

Question 32

“Catch Up” Contribution

Answer 32

a contribution that allows those nearing retirement to increase their deferral contributions to improve their financial situation for retirement. An elective contribution for employees 50 and over allow the employee to increase their elective default limit like up to $7500 for 2023. The catchup contribution is $1000 for IRAs and $3500 for SIMPLEs in 2023.

Question 33

Thrift Plan

Answer 33

a qualified retirement plan that permits employees to make after-tax contributions to the plan. Although the contributions are taxable before being contributed to the plan, the account still benefits from tax deferred growth on earnings. Individual 401(k) Plan – an easy-to-administer, low cost retirement plan designed for self-employed individuals and owner only businesses.

Question 34

Employee Elective Deferral Contributions

Answer 34

pretax employee contributions to qualified retirement plan with a CODA. The employee must use to defer the compensation before earning the compensation.

Question 35

Employer Matching Contributions

Answer 35

employer-provided contributions to a qualified retirement plan usually a 401(k) plan that are based on the employee contributions.

Question 36

Qualified Nonelective Contribution (QNEC)

Answer 36

in contribution made by the employer is satisfied the ATP or ATP test that increases ADP or ACP of the NHC employees by making additional contributions to all NHC eligible employees with regard to any elective deferral election made by the employees.

Question 37

Recharacterization of Defferals

Answer 37

to change the nature of any excess employee referrals from pretax employee contributions to after-tax employee contributions.

Question 38

Actual Deferred Percentage Test (ADP)

Answer 38

a non-discrimination test that limits employee elective referrals for highly compensated employees based on the elective default of non-highly compensated employees.

Question 39

Qualified Matching Contribution (QMC)

Answer 39

additional matching contributions made by the employer to satisfy the ADP or ACP test that increases the ACP or ADP of the NHC employees like who had deferred compensation during the plan year.

Question 40

Qualified Automatic Contribution Arrangement (QACA)

Answer 40

a plan that contains a “ qualified automatic enrollment feature” and is eligible for a nondiscrimination safe harbor under PPA 2006.

Question 41

Safe Harbor 401(k) Plans

Answer 41

a 401k plan that satisfies a minimum contribution or matching test and allows the plant sponsor to bypass the ATP test, the ACP test, and the top-heavy tests.

Question 42

Actual Contribution Percentage Test (ACP)

Answer 42

a non-discrimination test that limits the sum of employee after tax contributions and employer matching contributions for the highly compensated (HC) I’m here. I’m here based on the sum of employee after tax contributions and employer matching contributions for the non-highly compensated (NHC).

Question 43

Hardship Distributions

Answer 43

a distribution from a 401(k) plan because the employee has an immediate and heavy financial need, and the withdrawal is necessary to satisfy the need. The distribution is taxable and subject to penalties to the extent the participant has other resources to have satisfied the financial need.

Question 44

Thrift Savings Plan (TSP)

Answer 44

a retirement savings and investment plan for federal employees and members of the uniform services, including the Ready Reserve.

Question 45

7 Types of Profit-Sharing Plans

Answer 45

*all are defined as contribution profit-sharing (1) Profit-Sharing Plans (2) Stock Bonus Plans (3) ESOPs (4) 401(k) Plans (5) Thrift Plans (6) New Comparability Plans (7) Age-Based Profit-Sharing Plans

Question 46

Stock Bonus Plan

Answer 46

a qualified profit-sharing plan funded solely with employer stock.

Question 47

Rank-and-File Employees

Answer 47

the non-key, non-highly compensated employees.

Question 48

Discretionary

Answer 48

the choice for a plan sponsor of a profit-sharing plan as to the amount and frequency of a contribution.

Question 49

“Substantial and Recurring”

Answer 49

IRC standard defining the frequency requirement of contributions by employers to profit-sharing plans.

Question 50

Repurchase Option (Put Option)

Answer 50

an option that allows a terminating employee to receive in cash the fair market value of the employer’s stock with a stock bonus plan or ESOP if the employer stock is not readily tradable on an established market. An option to sell to the employer.

Question 51

Fair Market Value

Answer 51

the price that a willing buyer would pay a willing seller, both having reasonable knowledge of the pertinent facts and neither under duress.

Question 52

Adequate Consideration Standard

Answer 52

fair market value determined in good faith.

Question 53

Qualified Replacement Securities

Answer 53

securities in a domestic corporation, including stocks, bonds, debentures, or warrants, which receive no more than 25% of their income from passive investments.

Question 54

Leveraged ESOP

Answer 54

an ESOP that borrows the funds necessary to purchase the employer’s stock. The interest and principal repayments on the loan are tax deductible for the employer.

Question 55

Employee Stock Ownership Plans (ESOP)

Answer 55

a qualified profit-sharing plan that utilizes employer contributions to the plan to purchase the stock of the employer’s company and allocates the ownership to the plan participants.

Question 56

Net Unrealized Appreciation (NUA)

Answer 56

a special taxation treatment for a lump-sum distribution from a qualified plan that treats the appreciation in the value of employer stock after the day of contribution to the plan until the date of distribution as capital gain.

Question 57

Diversified Investment Portfolio

Answer 57

an investment portfolio invested in a broad range of investment classes to reduce investment risk.

Question 58

“Diluted”

Answer 58

the reduction in the monetary value or voting power of an owner’s stock as a result of contributions to stock bonus plans and ESOPs.

Question 59

Qualified Participant

Answer 59

the term qualified participant means any employee who is completed at least 10 years of participation under the plan and has attained age 55.

Question 60

Non-allocation Year

Answer 60

any plan year of an employee stock ownership plan that holds employer securities consisting of stock in a S-Corporation, and disqualified persons own at least 50% of the number of shares of stock in the S-Corporation.

Question 61

Qualified Election Period

Answer 61

the term qualified election period means the 6-plan-year-period beginning with the first plan year in which an individual first qualified as a participant.

Question 62

Disqualified Persons

Answer 62

any persons who ones with their family members 20% or more of the stock of the company, or in the case of someone without other family ownership, owns 10% or more of the stock of the company.

Question 63

Pension Plan

Answer 63

a qualified retirement plan that pays a benefit, usually determined by a formula, to a plan participant for the participant’s entire life during retirement (defined pension plan), or in which mandatory employment contributions are made each year (defined contribution pension plan).

Question 64

Whole Life Insurance

Answer 64

a permanent life insurance policy that guarantees that the policy will remain enforced as long as the premium is paid. The life insurance policy has a cash account that grows tax deferred.

Question 65

Term Insurance

Answer 65

a life insurance contract which states if the insured dies within the term of the contract, the insurance company will pay a stated death benefit.

Question 66

Universal Life Insurance

Answer 66

a term insurance policy with a cash accumulation account attached to it.

Question 67

Defined Benefit Plan

Answer 67

a qualified retirement plan that provides to participants with predetermined formula-based benefits at retirement.

Question 68

Mandatory Funding Requirement

Answer 68

an amount or percentage that must be contributed to a qualified pension plan by the employer each plan year.

Question 69

Noncontributory Plans

Answer 69

qualified retirement plans that do not include employee contributions.

Question 70

Actuary

Answer 70

an expert professional, who makes quantitative calculations and assumptions of valid inflation wage increases life expectancy of the assumed retiree's investment returns on plan, assets, mortality rate for retirees and forfeiture, resulting from termination in order to determine funding for a retirement plan.

Question 71

Flat Amount Formula

Answer 71

a benefit formula of a defined benefit pension plan that provides each participant with an equal dollar benefit at retirement.

Question 72

Credit for Prior Service

Answer 72

to give employees credit for years of service (with the plan sponsor) prior to the establishment of the qualified plan.

Question 73

Forfeitures

Answer 73

the percentage or amount of a participant accrued benefit that was not vested to the employee at the employees termination from the plant monster. The forfeited amount stays in the plan and may be allocated to the other plan participants (defined contribution plan) or reduce future plan costs (defying contribution plan or defined benefit plan).

Question 74

Flat Percentage Formula

Answer 74

a benefit formula of a defined benefit pension plan that provides all plan, part participants with a benefit equal to a fixed percentage of the participant salary usually the final salary or an average of the participant's highest salaries.

Question 75

Back Loading

Answer 75

a practice of Delaney, accrual of benefits until late and someone’s career so that if they were to leave the company, they would forfeit all or a large portion of their benefits.

Question 76

Unit Credit Formula

Answer 76

a benefit formula of a defined benefit pension plan that utilizes a combination of the participants of years of service and salary to determine the participant's accrued benefit.

Question 77

3-Percent Test

Answer 77

satisfied if the accrued benefit to which each participant is entitled upon the participant separation from the service is at least 3% of the normal retirement benefit to which the participant would be entitled if the participant commence participation at the earliest possible entry age under the plan and served continuously until the earlier age of 65 or the normal retirement age specified under the plan multiplied by the number of years (not an excess of 33.3) of participation in a plan.

Question 78

100-1 Ratio Test

Answer 78

limits the amount of death benefit for life insurance overage to 100 times the monthly accrued retirement benefit. Example: $4000 accrued retirement benefit x 100 = $400,000 face value amount)

Question 79

Disadvantages of Qualified Plans

Answer 79

1.Limited contribution amounts 2. Contributions cannot be made after money is received 3. Plans usually have limited investment options 4. No, or limited access to money while an active employee 5. Distributions are usually taxed as ordinary income 6. Early withdrawal penalties may apply (prior to 59.5 years old) 7. Mandatory distributions at age 73 (unless still employed) 8. Only ownership permitted is by the account holder 9. Cannot assign or apply as collateral 10. Limited enrollment periods 11. Considered to be an income in respect of a decendent asset, subjecting distributions to both income and estate taxes with no step up in basis 12. Costs of operating the plan