Practice Questions Flashcards
What percentage of the full Social Security benefit will a worker receive if he or she retires 9 months prior to attaining the individual's full Social Security retirement age? (A) 50 percent of total benefit (B) 80 percent of total benefit (C) 95 percent of total benefit (D) 100 percent of total benefit
The answer is (C). The benefit is reduced by 5/9 of one percent for each month prior to the full Social Security retirement age (5/9 of 1% x 9 = 5%). (A), (B), and (D) do not use the correct formula. (Chapter 19)
An employee exercises nonqualified stock options with an option price of $5 a share and a market price of $10 a share. How much ordinary income does the individual have for each share at the time of exercise? (A) $ 0 (B) $ 5 (C) $ 10 (D) $ 15
The answer is (B). (A), (C), and (D) are incorrect. With a nonqualified stock option, the participant receives ordinary income in the amount of the difference between the market value at the time of exercise and the option price ($10 - $5 = $5). (Chapter 16)
Which of the following statements concerning the SIMPLE is correct?
(A) To sponsor a SIMPLE, an employer must have 25 or fewer employees.
(B) An employer can sponsor both a SIMPLE and a SEP.
(C) An employer cannot place any restrictions on participant withdrawals.
(D) The deferral limit for a SIMPLE is the same as for a 401(k) plan.
The answer is (C). (A) is incorrect because the maximum number of employees an employer can have and still sponsor a SIMPLE is 100, not 25. (B) is incorrect because a SIMPLE sponsor cannot sponsor any other tax-advantaged retirement plan, including qualified plans, SEPs, and 403(b) plans. (D) is incorrect because the maximum employee salary deferral in a SIMPLE is lower than in a 401(k) plan. (Chapter 6)
Which of the following statements concerning contributions to a SIMPLE is correct?
(A) The employer can elect to provide a 50-cent match for each dollar that the employee elects to defer, as long as the employer matches a salary deferral of up to 6 percent of compensation.
(B) Employee salary deferrals are subject to a nondiscrimination test.
(C) A contribution for all eligible employees in the amount of 2 percent of compensation satisfies the employer-contribution requirement.
(D) The employer has the option to skip making contributions for a specific year.
The answer is (C). (A) is incorrect because the employer-matching contribution to a SIMPLE must be a dollar-for-dollar match up to 3 percent that employees elect to defer. (B) is incorrect because employees can make pretax salary deferrals of up to the maximum deferral limit without regard to how much the other employees contribute. (D) is incorrect because the employer must always contribute either a matching contribution or a nonelective contribution. (Chapter 6)
Which of the following statements concerning employee contributions to a qualified plan (other than to a 401(k) plan) is correct?
(A) Employee contributions to a plan must comply with the top-heavy vesting schedule.
(B) Voluntary employee contributions must satisfy a nondiscrimination test.
(C) Contributions of up to 50 percent of pay can be made if a plan allows voluntary employee contributions.
(D) Voluntary contributions are not counted as annual additions under the limit of Code Sec. 415c. (C).
The answer is (B). Voluntary contributions must satisfy the ACP test. Essentially, this means that highly compensated employees cannot make such contributions unless nonhighly compensated employees contribute to the plan. (A) is incorrect because voluntary contributions must be fully vested at all times. (C) is incorrect because it is a nonexistent requirement. (D) is incorrect because voluntary contributions are treated as annual additions. (Chapter 8)
The systematic withdrawal strategy to retirement income
(A) relies heavily on annuities, bonds, and guarantee income streams to create a systematic income stream to meet basic expenses every year.
(B) often relies on market investments like stocks in order to generate investment growth to help meet retirement income needs.
(C) does not allow for a retiree to be invested in bonds, CDs, or annuities due to their low yields.
(D) cannot provide for flexible spending behaviors of the client nor can it adjust the income to deal with inflation.
(B) is correct
(A) is incorrect because this is describing the flooring approach not the systematic withdrawal approach. (C) is incorrect because the systematic withdrawal approach takes an agnostic view of products, and will utilize all of these investment options if it can help improve total returns for the portfolio through diversification and improved safety of investments. (D) is incorrect because systematic withdrawal strategies can be built to increase income over time to handle inflation or variable spending needs.
If a defined-benefit plan covered by the PBGC has sufficient assets to pay the present value of accrued benefits, the plan qualifies for a (A) standard termination (B) distress termination (C) abandoned plan termination (D) simple termination
standard termination
Which of the following statements concerning a stock option program is correct?
(A) The employer does not ever get a deduction with a nonqualified stock option program.
(B) A nonqualified stock option program must be available for all employees.
(C) With an incentive stock option (ISO) program, the participants must meet certain holding period requirements to take full advantage of the special tax rules.
(D) There are never any income tax consequences at the time participants sell stock within a nonqualifed stock option program.
The answer is (C). (A) is incorrect because, at the time of exercise, the employer gets a deduction in the amount that the participant has in ordinary income. (B) is incorrect because, like other programs of executive compensation, the program can be only for a small group of executives. (D) is incorrect because, at the time of the sale, the participant has long-term capital gain if the sale price exceeds the market value at the time of exercise. (Chapter 16)
Which of the following statements concerning defined-contribution plans with contribution formulas that are integrated with Social Security is correct?
(A) Only money-purchase pension plans can have a formula that integrates with Social Security.
(B) A plan with a formula that integrates with Social Security must be tested every year to ensure the plan does not violate the 401a. (A)(4) requirements.
(C) The maximum integration level is covered compensation.
(D) If the integration level is the taxable wage base and employees receive a contribution of 3 percent of total compensation, an additional 3 percent can be contributed for compensation in excess of the taxable wage base.
The answer is (D). (A) is incorrect because all types of defined-contribution plans can be integrated with Social Security. (B) is incorrect because properly integrated formulas satisfy a design safe harbor. This means that nondiscrimination tests do not have to be performed each year. (C) is incorrect because the maximum integration level in a defined-contribution plan is the current year’s taxable wage base. Covered compensation is typically the integration level in a defined-benefit plan. (Chapter 8)
Which of the following statements concerning the Code Sec. 401a. (A)(4) nondiscrimination rules that apply to qualified plans is correct?
(A) The regulations require that all plans perform a mathematical test each year.
(B) The regulations confirm that a plan satisfies the rules if highly compensated employees receive contributions that are no more than two times the rate of contribution for nonhighly compensated employees.
(C) There are only subjective “fact and circumstances” tests for determining whether a plan’s benefit or contribution formula satisfies the nondiscrimination rules.
(D) A plan can show that it satisfies the nondiscrimination rules by demonstrating that either benefits or contributions are nondiscriminatory.
The answer is (D). This is a correct statement of the rules. (A) is incorrect because a plan that satisfies one of the design safe-harbors does not have to do any other testing. (B) is incorrect because there is no such rule. The rules do say that if contributions constitute a level percentage of compensation for all employees, then the plan will be in compliance. (C) is incorrect because there are clear objective tests under the regulations for determining whether a plan satisfies the rules. (Chapter 8)
For taxpayers under age 70½ who are active participants in an employer-maintained qualified plan, which of the following statements concerning annual deductible contributions to an individual retirement account (IRA) in 2017 is correct?
(A) For unmarried taxpayers, a full IRA deduction is allowed for adjusted gross income of up to $62,000.
(B) For married taxpayers filing jointly, a full IRA deduction is allowed for adjusted gross income of up to $119,000.
(C) For unmarried taxpayers, a reduced deduction is allowed for adjusted gross income of up to $150,000.
(D) These taxpayers are ineligible to make any tax-deductible contributions to an IRA.
The answer is (A). Table 17-1 in the textbook summarize all of the applicable rules. (B), (C), and (D) are incorrect because they do not correctly state the IRA phaseout limits. (Chapter 17)
Esther is a participant in her employer’s profit-sharing plan. Esther attained age 70 on October 1, 2014. She is not a 5 percent owner and she retires on January 15, 2017. Her required beginning date is
(A) April 1, 2015
(B) April 1, 2016
(C) April 1, 2017
(D) April 1, 2018
The answer is (D). Because this is a qualified plan, Esther is not a 5 percent owner, and because she continues working beyond age 70½, the required beginning date is the April 1 following the calendar year in which she retires. (Chapter 24)
Which of the following statements concerning participant loans from qualified retirement plans is correct?
(A) A qualified plan must include a participant loan provision in one form or another.
(B) Nonhighly compensated participants typically are charged below-market interest rates.
(C) Loans frequently are secured by using a participant’s account balance as security.
(D) Loans can be limited only to the owners of the company.
The answer is (C). Securing the loan with the account balance is a good idea because it both satisfies the DOL’s regulations and simplifies the administration of the loan. (A) is incorrect because a plan need not include a loan provision. (B) is incorrect because the plan is required to charge a market rate of interest. (D) is incorrect because a loan program must be available to all participants. (Chapter 9)
Which of the following statements concerning Code Sec. 409A that applies to nonqualified deferred-compensation plans is correct?
(A) Deferral amounts not subject to a substantial risk of forfeiture that do not comply with the distribution provisions are subject to a 100 percent penalty tax.
(B) Payments to meet the requirements of a domestic relations order do not violate the acceleration of benefit provisions.
(C) A distribution to pay for a child’s college education is likely to be considered an unforeseeable emergency.
(D) A participant will generally be able to make a benefit election at the time distributions are to be made from the plan.
The answer is (B). This is an exception to the general rule that benefits cannot be accelerated. (A) is incorrect because the penalty tax is 20 percent. (C) is incorrect because regulations specifically identify this as a situation that is not an unforeseeable emergency. (D) is incorrect because elections have to be made at the time of the deferral election, not the time of distribution. (Chapter 15)
Which of the following statements concerning the reversion of assets in a qualified plan is correct?
(A) There is a 50 percent excise tax if the entire amount of the excess assets in a defined-benefit plan is reverted to the employer.
(B) A reversion can occur in a defined-contribution plan if assets exceed promised assets.
(C) A defined-benefit plan can be amended at the time of termination to allow for a reversion of plan assets.
(D) There is no excise tax if 20 percent of the excess assets is shared with participants in a defined-benefit plan.
The answer is (A). The excise tax is a prohibitive 50 percent unless a portion of the excess is shared with participants. (B) is incorrect because a defined-contribution plan does not have excess assets. All assets are allocated among the participants. (C) is incorrect because a defined-benefit plan must provide for a reversion at the time the plan is drafted. It cannot be amended later to allow a reversion. (D) is incorrect because the tax does not go away if a portion of the excess is shared with participants. The tax is reduced to 20 percent. (Chapter 14)
As far as profit-sharing plans are concerned, the IRS will recognize an involuntary termination under which of the following circumstances?
(A) The minimum-funding standards have not been satisfied.
(B) The plan contributions are not substantial and recurring.
(C) The long-run liability of the company to the PBGC is expected to increase unreasonably.
(D) A substantial owner has terminated with a plan distribution of over $10,000 and the plan is left with unfunded vested liabilities.
The answer is (B). In the case of profit-sharing-type plans, failure to make substantial and recurring contributions results in an involuntary plan termination as of the time contributions cease. Participants become fully vested in their benefits as of the date of the involuntary plan termination. (A) and (C) are incorrect because profit-sharing plans are not subject to actuarial funding. (D) is incorrect because other restrictions apply. (Chapter 14)
Jim Rock, aged 65, is retired and annually receives a fully taxable $29,000 pension income and $9,000 in Social Security benefits. Jim has no other sources of retirement income and files jointly with his wife. How much of Jim's Social Security benefits will be subject to federal income taxation given his provisional income? (A) $0 (B) $ 750 (C) $ 1,500 (D) $ 9,000
The answer is (B). Because Jim Rock’s adjusted gross income ($29,000) plus one-half of his Social Security income ($9,000/2 = $4,500) exceeds $32,000 (but does not exceed $44,000), as a married taxpayer, he will have to include $750, or one-half of the excess over the $32,000 threshold, as taxable income ($33,500 - $32,000 = 1,500/2 = $750). (A), (C), and (D) do not use the correct formula. (Chapter 19)
Which of the following statements concerning a Sec. 423 employee stock purchase plan is correct?
(A) The effective discount can be substantially higher than 15 percent off the stock’s price.
(B) The plan can be limited to a few highly compensated executives.
(C) Participants pay taxes at the time the stock is purchased.
(D) Like nonqualified stock options, the entire value of the discount is taxed as ordinary income.
The answer is (A). If the price of the stock rises over the purchase period and the price is 15 percent off the market price at the beginning of the period, the discount can vastly exceed 15 percent of the market price of the stock at the time of the purchase. (B) is incorrect because these plans must cover most full-time employees. (C) is incorrect because taxes are not paid until the stock is sold. (D) is incorrect because only a portion of the value is taxed as ordinary income. (Chapter 16)
Which of the following are benefits typically covered under Part A of Medicare?
hospital nursing services
Which of the following statements concerning the “retirement ladder” model of retirement savings is correct?
(A) Personal savings has replaced Social Security benefits in the retirement ladder.
(B) Home equity is a possible source of funding for retirement that was not included on the old three-legged stool.
(C) Inheritances are a key retirement source because about 80 percent of baby boomers will be receiving significant inheritances.
(D) Wages are not included as a source of retirement funding because an individual cannot be retired and still work.
The answer is (B). Home equity was not recognized in the “three-legged stool” model of sources of retirement income, but it has been added to the expanded list included in the retirement ladder. (A) is incorrect because the retirement ladder still considers Social Security, personal savings, and employer pensions as key sources of retirement funding. (C) is incorrect because only about 15 percent of baby boomers expect significant inheritances. (D) is incorrect because many individuals who consider themselves retired will choose to do some form of work. (Chapter 20)
Retirement Ladder
Financial Independence in Retirement! Other forms of support Inheritances Retiree health, long-term care, and other insurance solutions Personal savings Informed planning Fiscal welfare/social assistance Part-time wages Company-sponsored retirement plans Social Security Home equity life insurance Rental income
Which of the following documents must be provided automatically to all participants in a qualified plan?
summary plan description
The annual report is filed with the government and is not furnished to participants, although they may request to see it. Participants have a right to see and copy the plan document and trust agreement. However, it need not be provided automatically to them.
Which of the following statements concerning the fee disclosure rules that apply to service providers is correct?
(A) The rules apply to SEPs and SIMPLEs.
(B) The rules only require that service providers report direct compensation.
(C) If the rules are not followed the service providers are charged a $1,000 fine.
(D) The rules apply to those providing brokerage services to a 401(k) plan with participant-directed accounts.
The answer is (D). (A) is incorrect because the fee disclosure rules do not apply to SEPs and SIMPLEs. (B) is incorrect because covered service providers must disclose both direct and indirect compensation. (C) is incorrect because if the rules are not followed the fiduciary has engaged in a prohibited transaction and the service provider can be subject to a penalty tax, which is 15 percent of the amount involved. (Chapter 12)
Which of the following statements concerning the minimum funding requirements is correct?
(A) Plans that are “at risk” are given additional time to fund the plan.
(B) Fully insured (Code Sec. 412(e)) plans are subject to additional minimum funding requirements.
(C) The funding target normal cost is the cost for the current year’s benefit accruals.
(D) The rules allow a plan sponsor to choose from a wide range of actuarial cost methods.
The answer is (C). (A) is incorrect because at-risk plans are subject to more accelerated funding. (B) is incorrect because fully insured plans are exempt from the minimum funding requirements (D) is incorrect because the rules today require all sponsors to use the same method for determining costs; in the past employer’s had more choice. (Chapter 11)
Which of the following statements concerning money-purchase pension plans is correct?
(A) They must contain a specified contribution formula.
(B) They are covered by the PBGC.
(C) They must contain a formula for allocating profits.
(D) They are difficult to administer.
The answer is (A). Because contributions are tied to each year’s compensation, the benefit grows relatively evenly over the accumulation period. This is good for employees who change jobs often, but may not be good for a long-term employee in an economic environment of high inflation in the years just preceding retirement. In this environment, a defined-benefit plan that bases benefits on final-average compensation can better protect the participant. (B) is incorrect because it refers to defined-benefit plans. (C) is incorrect because it refers to profit-sharing plans. (D) is incorrect because these plans are relatively easy to administer. (Chapter 4)
Which of the following statements correctly describes a simplified employee pension (SEP) plan?
(A) The plan can exclude employees who are aged 25 or younger.
(B) The plan must provide for immediate and full vesting.
(C) The plan can exclude employees who work fewer than 1,000 hours a year.
(D) The allocation formula cannot be integrated with Social Security.
The answer is (B). (A) is incorrect because the plan can only exclude employees from participation prior to age 21. (C) is incorrect because the plan can disregard only those part-time employees who earn less than a specified dollar limit ($600 in 2017). (D) is incorrect because SEPs can have an allocation formula that is integrated with Social Security. (Chapter 6)
Which of the following statements concerning the design of a 401(k) plan is (are) correct?
I. All types of plans have minimum vesting requirements.
II. The employer always receives a deduction at the time contributions are made.
Both I and II
Which of the following statements concerning profit-sharing plans is (are) correct?
I. The employer can choose from a number of different allocation formulas.
II. Profit-sharing plans are popular because contributions may be made on a discretionary basis.
Both I and II
Which of the following statements concerning the cost of living in retirement is (are) correct?
I. Income taxes are reduced because a nonworking person is not subject to FICA taxes and the individual is more likely to be eligible for a deduction for heath care expenses.
II. One of the largest expenses that goes away in retirement is the expense of saving for retirement.
Both I and II
Which of the following statements concerning retirement security concerns for women is (are) correct?
I. Women have less income for retirement because they tend to work in jobs that do not provide pension benefits.
II. Women may have less income for retirement because they are more likely to leave a job to become caregivers then men.
Both I and II
Which of the following statements concerning the expense method used in retirement planning is (are) correct?
I. The expense method of retirement planning focuses on the percentage of a person’s final salary that should be provided for retirement.
II. The expense method of retirement planning is more precise for younger than for older people.
Neither I nor II
I is incorrect because the expense method focuses on the projected expenses a retiree will have in the first year of retirement. II is incorrect because the expense method is more precise for older people than for younger people. (Chapter 21)
Which of the following statements concerning rules that apply to 401(k) plans is (are) correct?
I. The ADP test can have the result of limiting the salary deferral contributions of the highly compensated employees.
II. Employee salary deferral contributions can only be distributed in-service prior to age 59½ if the employee has an unforeseen emergency.
I only
II is incorrect because the standard is financial hardship, which under the safe-harbor rules includes purchasing a primary residence or paying for a child’s college education expenses. The unforeseen emergency standard is more difficult to satisfy, it is a rule that applies to nonqualified plans under Code Sec. 409A. (Chapter 5)
Which of the following statements concerning post-ERISA legislative changes that have an effect on retirement planning is (are) correct?
I. The laws have been changed so that today corporations and self-employed individuals have virtually the same opportunities (with a few minor exceptions) under the pension rules.
II. The laws have added special tax advantages for distributions from qualified plans.
I only
II is incorrect because, over the years, some of the special tax rules that apply to qualified plan distributions have been repealed. (Chapter 2)
Which of the following statements about 403b. (B) plans is (are) correct?
I. A 403b. (B) plan can be designed to include independent contractors.
II. A 403b. (B) plan can allow participants to make Roth elections on their salary deferral contributions.
II only
I is incorrect because 403(b) plans are not allowed to cover independent contractors. (Chapter 6)
Which of the following statements concerning the coverage requirements that apply to qualified plans is (are) correct?
I. The 401a. (A)(26) minimum-participation rule applies only to defined-benefit plans.
II. If an employer has separate lines of business, the 410b. (B) tests may be applied separately in each line of business when the businesses are operated for bona fide business reasons, have at least 50 employees, and meet several other regulatory requirements.
Both I and II
Which of the following statements concerning the vesting break-in-service rules is (are) correct?
I. A break in service is a year in which the individual does not complete more than 500 hours of service.
II. In a defined-contribution plan, if an individual has five consecutive breaks in service, the nonvested portion of the benefit earned prior to the break can be permanently forfeited.
Both I and II
Which of the following statements concerning information sources for a pension practitioner is (are) correct?
I. Online services provide up-to-date information about laws, regulations, and related areas.
II. Primary sources include books and periodicals that provide in-depth overviews of pension plans.
I only
II is incorrect because primary sources are laws and regulations.
Which of the following statements concerning 401(k) plans is (are) correct?
I. 401(k) plan can allow for employee salary deferral contributions, employer-matching contributions, and employer profit-sharing contributions.
II. Employee salary deferral contributions can be distributed 2 years after they have been made.
I only
II is incorrect because employee salary deferral contributions cannot be distributed in service until the participant attains age 59½ or suffers a financial hardship. (Chapter 5)
Which of the following statements concerning incentive stock options (ISO) is (are) correct?
I. An ISO’s exercise price must be equal to or greater than 100 percent of the underlying stock’s fair market value on the date of grant.
II. If an employee does not satisfy the ISO’s holding period requirements, the gain to the extent of the spread at the time of exercise is taxed as ordinary income.
Both I and II
Which of the following statements concerning 401(k) plans with safe harbor contributions is (are) correct?
I. The safe harbor option that is available for plans with automatic enrollment may require two years of service before participants are fully vested in the safe harbor contribution.
II. A contribution of 3 percent of compensation for all nonhighly compensated employees eligible to participate in the plan satisfies the safe harbor contribution requirements.
Both I and II
Which of the following statements concerning a rabbi trust is (are) correct?
I. It can have an “insolvency trigger” in which benefits are paid to the executive if the company begins to fail financially.
II. It is a way to protect participants from a corporate takeover without triggering taxation at the time contributions are made to the trust.
II only
I is incorrect because a rabbi trust cannot contain an insolvency trigger. This would be a way to circumvent the requirement that assets in the trust must be available to the company’s creditors. (Chapter 15)
What is a Rabbi Trust and what are the primary benefits?
Assets must remain available for who?
With the rabbi trust (first conceived in 1981 to provide benefit security for a rabbi),
contributions are made to a separate trust. Under the terms of the trust, assets generally cannot
revert to the company—meaning that plan assets will be available to pay plan benefits, even
if new hostile management takes over the company. However, to avoid current taxation to the
participants, the trust’s assets remain subject to the claims of the employer’s creditors.
Which of the following statements concerning cross-tested defined-contribution plans is (are) correct?
I. In a cross-tested plan, contributions allocated to participants are tested for nondiscrimination by first converting the contributions to equivalent benefit accruals.
II. An age-weighted plan is a type of cross-tested plan that allocates the amount necessary so all participants receive the same allocation of contributed funds (as a percentage of salary).
I only
Statement II is describing a level allocation of salary formula. (Chapter 8)
Longest possible vesting period?
7 years
Which of the following statements concerning pension portfolio investments is (are) correct?
I. Bond investments can be used to create sufficient cash flow to satisfy benefit payouts.
II. A plan purchasing an operating car wash could result in the assessment of the unrelated business income tax.
Both I and II
Which of the following statements concerning disability benefits in a qualified plan is (are) correct?
I. An employer is required to fully vest participants when they become disabled.
II. Many plans give credit for those on disability for years of benefit service.
Neither I nor II
I is incorrect because full vesting at disability is common but not required. II is incorrect because providing benefit service to disabled participants can be costly, and most employers provide disability benefits outside of the qualified plan environment. (Chapter 10)
Which of the following statements concerning the prohibited transaction rules is (are) correct?
I. A sale of an investment to the plan from a party in interest is a prohibited transaction unless it is exempted by a statutory, administrative, or individual exemption.
II. The plan’s attorney is not a party in interest.
I only
II is incorrect because all service providers to the plan, including an attorney, are considered parties in interest. (Chapter 12)
Which of the following statements concerning IRA rollovers is (are) correct?
I. An IRA account can never be rolled into a 403b. (B) plan.
II. A qualified plan benefit can generally be rolled into an IRA.
II only
I is incorrect because an IRA can be rolled into or transferred into another IRA, qualified plan, 403(b) plan, and a even government sponsored 457 plan. (Chapter 24)
Which of the following statements concerning qualified domestic relations orders (QDROs) is (are) correct?
I. The divorce court determines whether a domestic relations order is qualified or not.
II. Only a spouse or former spouse can be an alternate payee under a QDRO.
Neither I nor II
I is incorrect because the plan administrator must determine whether the court order meets the qualification requirements. II is incorrect because a child or other dependant can also be an alternate payee under a QDRO. (Chapter 13)
Characteristics of a properly structured nonqualified plan include which of the following?
I. fully secured benefit promises
II. deferral of taxation until benefit receipt
II only
I is incorrect because fully secured promises would be taxable as soon as benefits became fully vested. (Chapter 15)
Which of the following statements concerning the tax treatment of nonqualified plans is (are) correct?
I. Salary deferrals are not included in income as long as they are subject to a substantial risk of forfeiture.
II. Salary deferrals are not included in income as long as the participant does not have current possession of the benefits.
I only
II is incorrect because a participant could have taxable income without having possession since the economic benefit doctrine or the requirements of Code Sec. 409A are not followed. (Chapter 15)
Which of the following statements concerning the ERISA 404c. (C) participant-directed individual account plan exception is (are) correct?
I. The exemption means that the fiduciaries are not responsible for the investment alternatives available to plan participants.
II. The fiduciary relief can not apply to an individual who fails to make affirmative investment elections.
Neither I nor II
I is incorrect because the fiduciaries remain responsible for the investment alternatives that they choose to include in the plan. II is incorrect because there is an exception to the general rule that the participant must make an affirmative election if the assets are invested in a qualified default investment alternative and certain disclosure requirements are satisfied. (Chapter 12)
For individual retirement account (IRA) contribution purposes, which of the following statements concerning who is an active participant in an employer-maintained retirement plan is (are) correct?
I. Generally, a person is an active participant in a defined-benefit plan unless excluded under the plan’s eligibility provision.
II. Generally, a person is an active participant in any type of defined-contribution plan if employer contributions or forfeitures are allocated to the individual’s account for the year.
Both I and II
Which of the following statements concerning retirement investing during the accumulation period is (are) correct?
I. Annual retirement funding during this period should be concentrated in investments of employer stock.
II. A tax efficient way to save for retirement is to invest in tax-deferred accounts (such as IRAs in stock) and invest taxable accounts in bonds.
Neither I nor II
I is incorrect because clients are not well diversified if they concentrate on employer stock. II is incorrect because it is better to invest in bonds in a tax deferred account and better to invest in stock (because of its special tax treatment) in taxable accounts. (Chapter 21)
Which of the following statements concerning a life annuity is (are) correct?
I. If a client dies within one year of a life annuity’s starting date, the amount of the purchase price less any payments made is distributed to the client’s beneficiary.
II. All else being equal, a life annuity will provide a lower monthly benefit than a joint-and-survivor annuity.
Neither I nor II
I is incorrect because there are no death benefits paid out under a life annuity. II is incorrect because, all other things being equal, a life annuity will provide a higher monthly benefit than a joint-and-survivor annuity. (Chapter 25)
Which of the following statements concerning retirement planning for individuals is (are) correct?
I. A worker’s income can fall by the amount being saved for retirement with no concurrent reduction in standard of living.
II. A replacement ratio approach is appropriate for determining the retirement needs of a young person who cannot anticipate retirement expenses.
Both I and II
Which of the following statements concerning plan distributions is (are) correct?
I. Minimum distributions from an IRA must begin as of the April 1 following the year in which the person reaches age 70½.
II. The net unrealized appreciation rule is available to a participant who receives a qualifying lump-sum distribution from a qualified plan that includes a distribution of stock of the sponsoring employer.
Both I and II
All the following statements concerning the use of an early retirement age are correct EXCEPT
(A) A plan is required to provide for early retirement benefits.
(B) A subsidized early retirement benefit provision is more costly than a provision that is not subsidized.
(C) A subsidized early retirement provision is a good idea when the employer wants to encourage older employees to retire.
(D) Common early retirement provisions allow for retirement at age 55, 60, or 62.
The answer is (A). Every plan must have a normal retirement provision, but early retirement is optional. (Chapter 9)
Assuming that the plan satisfied the Code Sec. 410b. (B) minimum coverage rule, all the following could be permitted eligibility requirements for a qualified pension plan EXCEPT
(A) Only employees of the employer’s California plant are eligible to participate.
(B) All hourly paid employees are eligible who are not members of a collective-bargaining unit.
(C) All employees who have attained age 18 are eligible to participate.
(D) All employees who have earned 4 years of service are eligible to participate.
The answer is (D). Even if a plan satisfied Code Sec. 410(b) the eligibility provisions relating to age and years of service are specifically restricted. The Code requires that the age requirement for eligibility in a qualified plan be no older than 21 and the required years of service for eligibility be no more than one unless immediate 100 percent vesting is provided, in which case, up to 2 years may be required. (Chapter 7)
Reasons why an employer should adopt a defined-benefit plan to account for past service include all the following EXCEPT
(A) Long-service employees will benefit if past service is accounted for.
(B) A past-service provision can maximize the tax-shelter potential of the plan for owner-employees.
(C) A past-service provision will lower the employer’s costs.
(D) The minimum funding requirements apply when past service is accounted for.
The answer is (C). A past-service provision will increase an employer’s costs. (Chapter 4)
All the following employees are considered highly compensated employees in 2017 EXCEPT
(A) Jane Johnson, who earns $100,000 in 2016 and is the second highest paid employee in a 25-person firm
(B) Bill James, a 10 percent owner in 2016 and 2017
(C) Cathy Carr, a 6 percent owner who earns $155,000 in 2016
(D) John Smith, an officer earning $140,000 in 2016, whose compensation is in the top 20 percent of all employees
The answer is (A). Jane Johnson is not highly compensated in 2017 because she neither earns $120,000 in 2016 nor is a 5 percent owner. Bill James is a highly compensated employee because he is a more-than-5-percent owner. Cathy Carr also is considered a highly compensated employee because she is a 5 percent owner. John Smith earns more than $120,000 in 2016 and is an employee whose earnings put him in the top 20 percent group. (Chapter 5)
All the following statements concerning profit-sharing plans are correct EXCEPT
(A) They allow for a deductible contribution of up to 25 percent of the aggregate compensation of all eligible participants.
(B) They can be designed to allow participants withdrawal flexibility.
(C) They can only be funded if the employer has profits.
(D) They can be designed to enable the employer to skip contributions as long as contributions are made on a substantial and recurring basis.
The answer is (C). Since 1987, contributions are allowed in profit-sharing plans even if the company has no profits. (Chapter 3)
All the following statements concerning nonqualified plan design features are correct EXCEPT
(A) Nonqualified plans always are structured as defined-contribution plans.
(B) Nonqualified plan participation typically is restricted to a select group of executives and highly compensated employees.
(C) Nonqualified plans can contain death benefits covering the preretirement period, the postretirement period, or both.
(D) Nonqualified plans can contain provisions for the forfeiture of benefits.
The answer is (A). Nonqualified plans can be structured in the defined-benefit format. (Chapter 15)