Exam #1 Questions

Question 1

TRUE OR FALSE: Undue influence is a potential source of money conflict that arises when both spouses are not working together towards the same savings goal.

Answer 1

False

Question 2

TRUE OR FALSE: Because of recent legislative changes, employers can now offer employee-funded savings accounts within their qualified plan.

Answer 2

True

Question 3

TRUE OR FALSE: A cliff vesting schedule provides an employee with full rights to the plan assets immediately upon the passage of a certain number of years of service, and the maximum years of service before full rights are acquired by the plan participant are regulated and limited.

Answer 3

True

Question 4

TRUE OR FALSE: All private industry employees have access to retirement benefits.

Answer 4

False

Question 5

TRUE OR FALSE: Standard eligibility requirements state that an employee must be considered eligible to participate in the qualified plan after the latter of attainment of age 21 or the completion of one year of service (1,000 hours within a 12-month timeframe).

Answer 5

True

Question 6

TRUE OR FALSE: ESOPs, unlike other stock bonus plans, do not allow for Social Security integration which allocates a higher contribution to those employees whose compensation is in excess of the Social Security wage base or selected integration for the plan year.

Answer 6

True

Question 7

TRUE OR FALSE: Since the 1980’s the number of Defined Benefit Plans has fallen, and since the 1970’s the number of Defined Contribution plans has risen. This is likely attributed to the higher cost, longevity risk, and potential funding shortfalls associated with defined benefit plans.

Answer 7

True

Question 8

TRUE OR FALSE: Defined benefit and cash balance pension plans are covered by the Pension Benefits Guarantee Corporation?

Answer 8

True

Question 9

TRUE OR FALSE: If a company cannot pay a plan participant the benefit promised from a defined benefit pension plan, the PBGC will pay the plan participant, but not necessarily the amount outlined in their employer’s plan document.

Answer 9

True

Question 10

TRUE OR FALSE: An actuary has been hired to calculate funding requirements for a qualified pension plan. Based on forecasts, the actuary anticipates inflation will increase in the future. The impact to plan cost (funding requirements) is that they will be lower due to the anticipated inflation increases.

Answer 10

False

Question 11

TRUE OR FALSE: In a defined contribution plan, the employer bears the investment risk.

Answer 11

False

Question 12

TRUE OR FALSE: Taking a trip that lasts an extended period, typically ranging from 2 – 6 months, often in a different part of the world, as opposed to taking a week-long vacation once a summer is known as a mini-retirement.

Answer 12

True

Question 13

TRUE OR FALSE: If an employer chooses to include a qualified retirement plan as part of their employee benefits package, the employer is always required to include all employees in the plan.

Answer 13

False

Question 14

TRUE OR FALSE: A pension plan may only invest up to 10% of plan assets in employer securities.

Answer 14

True

Question 15

TRUE OR FALSE: The put option associated with ESOPs protects the rank-and-file employees by giving employees the ability to buy more shares of the employer stock at a prescribed price, normally below the fair market value.

Answer 15

False

Question 16

TRUE OR FALSE: Stock bonus plans may vest plan participants in plan contributions using either a 5-year cliff vesting schedule or a 2-to-6-year graded vesting.

Answer 16

False

Question 17

TRUE OR FALSE: The U.S. Government has a fundamental interest in employer sponsored retirement plans and other employee benefits. One reason is a vested interest in taxing deferred accounts.

Answer 17

True

Question 18

TRUE OR FALSE: The Pension Benefit Guarantee Corporation is a regulatory body that exists to ensure qualified pension plans adhere to Internal Revenue Code (IRC) guidelines, disqualifying plans that fail certain guideline tests/

Answer 18

False

Question 19

TRUE OR FALSE: Profit-sharing plans are not subject to minimum funding standards; Employers who offer profit-sharing plans are allowed to make unlimited, deductible contributions on an annual basis.

Answer 19

False

Question 20

TRUE OR FALSE: Most Employee Stock Ownership Plans, also known as ESOPs, borrow money from a bank of other lending institution to purchase stock from the principal shareholder. These are known as leveraged ESOPs.

Answer 20

True

Question 21

TRUE OR FALSE: Limits associated with retirement plans (e.g., annual contribution limits) are static and never change.

Answer 21

False

Question 22

Which of the following are characteristics of defined benefit plans?

I. Participants may be given credit for prior service for the purposes of benefits.

II. Plan assets are usually held in separate accounts rather than comingled.

III. Except for professional firms with less than 25 employees, the plans are subject to Pension Benefit Guarantee Corporation (PBGC coverage).

A. II and III only
B. I and III only
C. All of the above are characteristics of defined benefit plans.
D. None of the above are characteristics of defined benefit plans.

Answer 22

B. I and III only

Question 23

Qualified plans must abide by non-discriminatory rules. Coverage of highly compensated versus non-highly compensated employees must be evaluated to ensure non-discriminatory rule compliance. Which of the following is not one of the three coverage tests utilized for qualified retirement plans?

A. The general safe harbor test.
B. The average benefits test.
C. The ratio percentage test.
D. The average coverage test.

Answer 23

D. The average coverage test.

Question 24

TLC Lawn and Garden is establishing a defined benefit pension plan this year. Michael, age 35, is a Project Manager for TLC Lawn and Garden and has worked for the company for 15 years. Michael plans on retiring in 30 years and has no intent to leaving TLC Lawn and Garden before retirement. Is TLC Lawn and Garden able to give Michael credit for his prior years of service, yes or no? If yes, how many years of service credits would Michael have at his target retirement age?

A. No, defined benefit pension plans may not give credit for prior service when first establishing the plan.
B. Yes, defined benefit pension plans may give credit for prior service when first establishing the plan. Michael would have 30 years of service credits.
C. Yes, defined benefit pension plans may give credit for prior service when first establishing the plan. Michael would have 35 years of service credits.
D. Yes, defined benefit pension plans may give credit for prior service when first establishing the plan. Michael would have 45 years of service credits.

Answer 24

D. Yes, defined benefit pension plans may give credit for prior service when first establishing the plan. Michael would have 45 years of service credits.

Question 25

Stock bonus plans and ESOPs must be established by: A. The due date of the tax return plus extensions B. December 31st C. The due date of the tax return D. July 15th

Answer 25

A. The due date of the tax return plus extensions

Question 26

401(k) plans are popular employer sponsored benefits. Which of the following is not an advantage/benefit to the employee offered by 401(k) plan participation? A. Assumption of investment risk. B. Shelter current income from taxation in qualified plans. C. The ability to direct how the money is invested. D. Earnings grow tax deferred until distributed.

Answer 26

A. Assumption of investment risk.

Question 27

Jeremiah, your new financial planning client, is a young Associate Attorney at a high-profile law firm. He read about the Financial Independence Retire Early (FIRE) Movement, an alternative to the traditional concept of retirement. Jeremiah would like $200,000 per year in retirement income. Ignoring inflation and/or taxes and assuming a $200,000 per year income target, how much would one need to have saved to be considered financially independent if following the FIRE methodology? A. $2 million B. $5 million C. $3 million D. $4 million

Answer 27

B. $5 million

Question 28

Employee benefits pose a cost to employers. According to the text, Retirement Planning and Employee Benefits, employee benefits may add an additional __________ to payroll costs: A. Because of tax deductions, employee benefits do not increase payroll costs. B. 10% - 20% C. 50% - 60% D. 30% - 40%

Answer 28

D. 30% - 40%

Question 29

Each of the following plans requires actuarial services either at plan inception or annually except: A. Defined Benefit B. Cash Balance C. Money Purchase D. Target Benefit

Answer 29

C. Money Purchase

Question 30

Which of the following are employee or employer advantages associated with qualified plans? I. Employer contributions are not income tax deductible. II. Employer contributions to the plan are not subject to payroll taxes. III. Employee Retirement Income Security Act (ERISA) protection. IV. Availability of pre-tax contributions. A. I, II, and III B. I, II, and IV C. I and IV only D. II, III, and IV only

Answer 30

D. II, III, and IV only

Question 31

If participant’s leave an employer and unvested balances remain in their qualified plan, defined benefit pension plans ______________. A. Must use the forfeitures to reduce plan costs. B. May allocate the forfeitures to other plan participants. C. May use the forfeitures to reduce plan costs, but other options exist. D. May invest the forfeitures in capital improvement projects

Answer 31

A. Must use the forfeitures to reduce plan costs.

Question 32

Which of the following is not one of the current 401(k) non-discrimination testing options? A. Non-safe harbor 401(k) plan B. Safe harbor 401(k) plan C. Qualified AutomaticContribution Arrangement (QACA) safe harbor 401(k) D. Defined Benefit(k), or DB(k), safe harbor plan

Answer 32

D. Defined Benefit(k), or DB(k), safe harbor plan

Question 33

There are additional tax advantages, beyond mismatch of income and deduction, for the establishment of an ESOP. One of these is non-recognition of gain treatment. To obtain non-recognition of gain treatment, what percent of company stock must the ESOP own after the transaction? A. At least 85% B. Over 50% C. At least 30% D. At least 25%

Answer 33

C. At least 30%

Question 34

For 2025 the maximum annual income against which Social Security tax is applied is limited to $176,100. Based on the Social Security tax of 6.2% paid by both the employee and the employer, what is the maximum Social Security tax collected (employee and employer) for an individual with an income that matches the 2025 Social Security wage base of $176,100 in 2025? A. $21,836.40 B. $10,918.20 C. $13,471.65 D. $26,943.30

Answer 34

A. $21,836.40

Question 35

Employer and employee payroll taxes include Social Security and Medicare (6.2% and 1.45%, respectively). The employee incurs a deduction for these taxes, and the employer also incurs a separate payroll tax for the equivalent amounts. Excluding the employer’s payroll tax cost and not taking other payroll deductions into consideration, what is the total payroll tax deduction incurred by an employee if their annual income is $100,000? A. $6,200 B. $1,450 C. $7,650 D. $15,300

Answer 35

C. $7,650

Question 36

In which of the following plans is the investment risk borne by the employee? A. Target benefit B. Money Purchase C. 401(k) D. All the above

Answer 36

D. All the above

Question 37

Chen-Li is a physician in the Houston medical center. He is a participant in his employer’s defined benefit pension plan. The plan includes a 5-year cliff vesting schedule. Dr. Chen-Li has worked for the employer for 4 years (or 80% of the vesting period). What is Chen-Li’s vested percentage in the defined benefit pension plan? A. 80% B. 100% C. 0% D. Not enough data to calculate.

Answer 37

C. 0%

Question 38

The ability to live comfortably without having to work for an income is known as: A. Financial independence B. Hoarding C. Mini-retirement D. Semi-retirement

Answer 38

A. Financial independence

Question 39

Which of the following is not an Interested Professional when discussing qualified retirement plans and employee benefits? A. Actuaries B. Plan Administrators C. Certified Public Accountants D. All of the above are Interested Professionals

Answer 39

D. All of the above are Interested Professionals

Question 40

Stock bonus plans: A. Include a deductible contribution limit of 25% of covered compensation. B. Generally make contributions in cash. C. Distributions are generally in the form of cash. D. All the above are characteristics of stock bonus plans.

Answer 40

A. Include a deductible contribution limit of 25% of covered compensation.

Question 41

Kevin, a recent graduate of Texas A&M, was recently hired by what is considered the best engineering firm in the country. His new employer provides matching 401(k) contributions. The matching contributions are as follows: $1 per dollar contributed up to the first 3% of salary, and $0.50 per dollar contributed over 3% up to 6%? Kevin’s salary is $50,000 per year, and he intends on contributing 6% of his salary to his 401(k). What is the amount of the employer match? A. $2,250 B. $1,500 C. $3,000 D. $4,500

Answer 41

A. $2,250

Question 42

Which of the following retirement plans is available to eligible Federal employees and members of the Ready Reserve? A. Stock Bonus Plans B. Employee Stock Ownership Plans C. Thrift Savings Plans D. 401(k) Plans

Answer 42

C. Thrift Savings Plans

Question 43

Lopez, a psychologist, participates in a defined contribution profit-sharing plan with 5-year graded vesting schedule. Dr. Lopez completed three years of employment but then leaves the company to start a private practice in the middle of the fourth year. If Dr. Lopez had a balance of $72,000 in his profit-sharing plan at time of separation, what is his vested balance? A. $43,200 B. $72,000 C. $0 D. $57,600

Answer 43

A. $43,200

Question 44

Rather than offering standard qualified plan eligibility, an exception exists allowing the employer to require two years of service or attainment of age 21, whichever is later. If the employer utilizes this exception, what is the main consequence to the employer? A. Mandatory annual contributions. B. 100% immediate vesting of accrued benefit or account balance after two years of service. C. Loss of tax deduction. D. Tax penalty.

Answer 44

B. 100% immediate vesting of accrued benefit or account balance after two years of service.

Question 45

Employee Stock Ownership Plans, being largely if not entirely invested in employer stock, is inherently not diversified. However, Qualified Plan Participants may force diversification during the qualified election period. Which of the following are a Qualified Participant? I. Xavier, age 54 with 10 years of participation under the plan II. Tina, age 67 with 3 years of participation in the plan III. Josiah, age 56 with 5 years of participation in the plan A. II and III only B. I and III only C. III only D. None of the above are Qualified Plan Participants

Answer 45

D. None of the above are Qualified Plan Participants

Question 46

Which of the following statements is true? A. The legal promise of a profit-sharing plan is to pay a pension at retirement. B. Pension and profit-sharing plans are subject to mandatory funding requirements. C. Profit sharing plans cannot discriminate in favor of officers and shareholders. D. Employee Stock Ownership Plans are a type of pension plan.

Answer 46

C. Profit sharing plans cannot discriminate in favor of officers and shareholders.

Question 47

Patricia is a participant in her employer’s 401(k) plan. As her financial professional, she called your office this morning to confirm annual contribution limits. She read online that she is eligible for both a basic annual contribution and an age-based catch-up contribution. Is what she read online true or false? A. True, individuals over the age of 50 are eligible for an age-based catch-up contribution. B. False, to be non-discriminatory and retain qualified status, all participants are subject to the same annual contribution limits, regardless of age.

Answer 47

A. True, individuals over the age of 50 are eligible for an age-based catch-up contribution.

Question 48

There are additional tax advantages, beyond mismatch of income and deduction, for the establishment of an ESOP. One of these is non-recognition of gain treatment. To obtain non-recognition of gain treatment, qualified replacement property must be purchased. Which of the following investments would qualify as qualified replacement securities? A. International Bonds B. Domestic Stocks C. International Stocks D. Raw Land

Answer 48

B. Domestic Stocks

Question 49

A company sponsors a defined benefit pension plan. The plan document outlines the plan formula as follows: 2.3% x Years of Service x Average of Highest Five Years of Salary. A retiring participant has 27 years of service with a highest five-year salary of $100,000. What would their retirement benefit be based on the plan formula and participant’s relevant data? A. $27,000 B. $62,100 C. $23,000 D. Need additional data to calculate

Answer 49

B. $62,100