Retirement Planning & Employee Benefits

Question 1

On what is the maximum deductible contribution in a target benefit plan based?

1. An actuarial determination
2. The minimum-participation rule
3. A maximum of 25% of the aggregate eligible compensation of all covered participants
4. A maximum of 25% of the firm’s total payroll

Answer 1

3. A maximum of 25% of the aggregate eligible compensation of all covered participants.

A target benefit plan is a defined contribution plan. Although an actuarial calculation is made when a target benefit plan is first installed, the maximum deductible contribution is always limited. This is true even if the actuarial calculation calls for a larger contribution (likely if there are many older highly compensated employees and relatively few lower-paid rank-and-file employees). A maximum of 25% of the firm’s total payroll is wrong. It is not total payroll but eligible compensation or payroll.

Question 2

Which of the following is an advantage to an employee when his/her employer provides a profit-sharing plan?

1. Employees get a predictable level of funding under the plan.
2. Employees may get forfeitures from other employee accounts.
3. Employees bear no investment risk under the plan.
4. Employees of all ages receive adequate levels of retirement benefits.

Answer 2

2. Employees may get forfeitures from other employee accounts. For a profit-sharing plan to remain viable, contributions must be substantial and recurring. Contributions are discretionary, not predictable. Contributions are generally pooled for investment purposes and then allocated to each individual participant’s account. The plan favors younger employees who have substantial time to accumulate retirement savings.

Question 3

Sam works for Z Corporation. His salary is $60,000. Sam has disability insurance provided by the corporation based on 60% of his salary. The employer adds the cost of the disability insurance coverage annually to Sam’s W-2 ($3,000). Sam is in a 28% bracket. Calculate Sam’s net-of tax monthly disability benefit if he remains in the 28% bracket while disabled.

• $2,160
• $2,268
• $3,000
• $3,150

Answer 3

$3,000 - Sam’s salary is $60,000. The amount of insurance is based on his salary. His W-2 income is $63,000. The premium is added to his salary in the form of a bonus (not salary). He is paying the premiums; therefore, the benefits are tax-free.

Question 4

Mrs. Ball has accumulated $500,000 in her Section 457 non-governmental plan. She is approaching retirement. Which one of the following is not a correct statement?

1. She can defer taxation by rolling the 457 into an IRA.
2. She cannot defer taxation by rolling the 457 into a Roth IRA.
3. She can defer taxation by leaving the $500,000 in the Section 457 plan.
4. She can take a full distribution and have her employer withhold regular income and FICA taxes.

Answer 4

1. She can defer taxation by rolling the 457 into an IRA.​ - A nongovernmental 457 cannot be rolled either an IRA or into a Roth IRA. A governmental can be rolled directly into a Roth IRA. “She cannot defer taxation by rolling the 457 into a Roth IRA.” is incorrect, because it says cannot.

Question 5

When life insurance is purchased in a plan to provide death benefits, the current cost of the “pure insurance” protection is subject to taxation. The cost attributable to this pure life protection will be the lower of which of the following?

1. PS 58 cost and Table 2001
2. Table 2001 and the employee’s cost basis
3. Actual cost as provided by the carrier and Table 2001
4. PS 58 and the employee’s cost basis

Answer 5

3. Actual cost as provided by the carrier and Table 2001 - PS 58 is no longer used.

Question 6

Under ERISA rules, which organization is charged with the administration of defined benefit plan termination rules?

1. ERISA
2. PBGC
3. DOL
4. PWBA
5. IRS

Answer 6

2. PBGC - The PBGC insures against loss of benefits and also oversees plan terminations. The Department of Labor (DOL), through the Pension and Welfare Benefits Administration (PWBA), is charged with the enforcement of reporting, disclosure, and fiduciary provisions of ERISA.

Question 7

What is the employee contribution limit to a Flexible Spending Account (FSA) for healthcare in 2021?

• No limit
• $2,750 per person per year
• $5,000 per year
• $2,750 per year

Answer 7

$2,750 per year - There is a cap in 2021 on both the health FSA ($2,750) and the dependent care ($5,000).