Which of the following statements about the tax implications of qualified pension plans is true?

1. A) Investment income on plan assets is taxable in the year the investment income is earned.
2. B) Employer contributions are deductible up to certain limits as an ordinary business expense.
3. C) Employer contributions are considered taxable income to employees but are taxed at capital gains rates.
4. D) Distributions from qualified pension plans are received tax-free by the retiree.

Answer: B

Beta Corporation has 1,000 employees eligible to participate in the firm's pension plan, and 100 of these employees are considered highly compensated. All of the highly compensated employees are covered by the plan. What is the minimum number of the 900 non-highly compensated employees who must be covered by the plan in order for the plan to satisfy the ratio percentage test?

1. A) 500
2. B) 630
3. C) 667
4. D) 900

Answer: B

What are the minimum age and service requirements that can be imposed on employees eligible to participate in a retirement plan?

1. A) age 18 and 6 months of service
2. B) age 21 and 1 year of service
3. C) age 21 and 3 years of service
4. D) age 25 and 4 years of service

Answer: B

Which of the following statements about retirement ages in defined benefit pension plans is (are) true?

1. The normal retirement age in most plans is 65.
2. For a defined benefit plan, the early retirement age is the earliest age an employee can retire with full, unreduced benefits.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: A

Which of the following statements concerning defined-benefit pension plans is (are) true?

1. The contribution rate by the employer varies from year to year.
2. The retirement benefit is not known in advance.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: A

Which of the following statements concerning defined contribution pension plans is (are) true?

1. The contribution rate is fixed.
2. The retirement benefit varies.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: C

All of the following are potential disadvantages to employees covered by a money-purchase pension plan EXCEPT

1. A) The contribution rate by the employer is uncertain.
2. B) The retirement benefit can only be estimated in advance of retirement.
3. C) The benefit formula may produce an inadequate benefit if an employee enters the plan at an older age.
4. D) The investment losses are borne by the employees.

Answer: A

Which of the following statements about retirement benefits under pension plans is true?

1. A) Under a flat percentage of annual earnings defined benefit formula, each employee receives the same dollar benefit.
2. B) A benefit using final pay is usually based on an employee's earnings during the last month of plan participation.
3. C) A unit-benefit formula considers both earnings and years of service.
4. D) Past service benefits are the result of bonuses and overtime pay during the period an employee participated in the plan.

Answer: C

Under a unit-benefit formula, benefits are a function of both

1. A) earnings and years of service.
2. B) age and earnings.
3. C) age and gender.
4. D) years of service and position within a firm.

Answer: A

Vesting refers to

1. A) the employer's right to terminate contributions if a pension plan is adequately funded.
2. B) the employer's right to recapture employee contributions to a pension plan if employment terminates prior to retirement.
3. C) the employee's right to the employer's contributions or benefits attributable to the contributions if employment terminates prior to retirement.
4. D) the employer's right to discriminate against non-highly compensated employees when determining pension benefit levels.

Answer: C

Which of the following statements about the minimum vesting standards for a qualified defined benefit plan is (are) true?

1. Under cliff vesting, an employee must be at least 50 percent vested after 5 years of service.
2. Under graded vesting, an employee must be at least 20 percent vested after 3 years of service and 100 percent vested after 7 years.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: B

Which of the following statements about the protection provided by the Pension Benefit Guaranty Corporation is (are) true?

1. Only defined benefit plans are insured.
2. Only benefits that are not yet vested are guaranteed.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: A

Which of the following distributions from a qualified retirement plan would be exempt from the 10 percent penalty tax if the distribution occurred before the covered employee was age 59.5?

1. A distribution made to an employee with a qualifying disability.
2. A distribution made to a beneficiary or to the employee estate's after the employee's death.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: C

As Social Security slants benefits in favor of lower-paid workers, the Internal Revenue Code permits employers to adjust pension contributions so that the overall contributions (pension plus Social Security) are nondiscriminatory. This adjustment permits employers to increase pension contributions for highly-compensated employees. Adjusting contributions to consider Social Security contributions is called

1. A) prorating.
2. B) indexing.
3. C) offset.
4. D) integration.

Answer: D

For a long-term employee who is covered by a defined benefit plan, the highest retirement income will be obtained if his/her retirement income is based on

1. A) initial average pay.
2. B) random year annual pay.
3. C) career-average pay.
4. D) final average pay.

Answer: D

A financial institution that provides for the accumulation or administration of the funds that will be used to pay pension benefits is called a

1. A) trust fund.
2. B) mutual fund.
3. C) funding instrument.
4. D) funding agency.

Answer: D

Which of the following statements about pension funding agencies and funding instruments is true?

1. A) Under a trust-fund plan, individual annuities are purchased each year for employees participating in the plan.
2. B) A separate investment account is a group pension account with a life insurance company.
3. C) If the funding instrument is a commercial bank, the plan is called an insured plan.
4. D) Under a guaranteed investment contract, the insurer guarantees the principal of a lump sum deposit but does not guarantee the interest rate.

Answer: B

Which of the following statements about trust fund plans is (are) true?

1. The trustee typically purchases annuities for retiring employees.
2. The trustee guarantees the adequacy of the fund to pay the promised benefits.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: D

Which of the following statements about Section 401(k) plans is true?

1. A) Elective salary deferrals to these plans are free of federal income taxation until the funds are actually withdrawn.
2. B) These plans are exempt from rules that prevent discrimination in favor of highly compensated employees.
3. C) There is no limit on the actual percentage of salary that can be deferred by highly compensated employees under a qualified plan.
4. D) If an employee takes the funds made available to him or her in cash, the money received is not taxable.

Answer: A

Which of the following statements about withdrawals from Section 401(k) plans is (are) true?

1. The penalty tax does not apply to hardship withdrawals.
2. Withdrawals may be made without penalty at age 59.5 or older.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: B

Which of the following statements concerning retirement plans for the self-employed is true?

1. They can be used by owners of incorporated businesses only.
2. With certain exceptions, the same rules that apply to qualified corporate plans apply to retirement plans for the self-employed.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: B

Which of the following statements about SIMPLE retirement plans is true?

1. A) They are limited to employers with 100 or fewer eligible employees and who do not maintain another qualified plan.
2. B) Employees are not permitted to make SIMPLE plan contributions.
3. C) Employers are subject to more stringent nondiscrimination rules than those that apply to most qualified plans.
4. D) Employer contributions are fully taxable in the year of the contribution, but qualified distributions are received tax-free.

Answer: A

Which of the following statements is (are) true with respect to SIMPLE retirement plans?

1. Only large employers can start a SIMPLE plan, provided the employer does not maintain another qualified plan.
2. SIMPLE plans are exempt from most nondiscrimination and administrative rules that apply to qualified plans.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: B

Rita went to work for a manufacturing company. The company offers a defined-benefit pension plan. The retirement benefit is equal to 1.5 percent multiplied by years of service with the company, and the result is multiplied by average salary in the three highest consecutive years of paid employment with the company. The benefit formula used at Rita's company is a

1. A) flat dollar amount for all employees.
2. B) flat percentage of annual earnings.
3. C) flat dollar amount for each year of service.
4. D) unit-benefit formula.

Answer: D

Which of the following statements is (are) true with respect to vesting under a qualified retirement plan?

1. Vesting helps to reduce labor turnover.
2. An employee who terminates employment after four years of service has no vested retirement benefit under cliff vesting.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: C

Early distributions from qualified retirement plans are assessed a 10 percent penalty. However, there are some exceptions to this rule. All of the following distributions are exempt from the penalty tax EXCEPT

1. A) lump-sum distributions made after age 59.5.
2. B) lump-sum distributions made directly to the employee at any age when he or she changes employers.
3. C) lump-sum distributions made after the death or permanent disability of the employee.
4. D) distributions that are part of a series of substantially equal payments over the worker's life expectancy.

Answer: B

ACME Company is considering starting a retirement plan for its employees. One option ACME is considering is a profit-sharing plan. All of the following are advantages of this type of retirement plan EXCEPT

1. A) The employer's cost is not affected by the age and the number of employees.
2. B) Profit sharing plans provide an incentive for employees to work harder and more efficiently.
3. C) The 10 percent penalty tax does not apply to distributions prior to age 59.5.
4. D) ACME enjoys greater flexibility in employer contributions.

Answer: C

ABC Company offers a qualified retirement plan. ABC selected a funding instrument with an insurer in which the insurer promised to pay a specified interest rate for a number of years on a lump sum deposit. This funding instrument is called a

1. A) trust-fund plan.
2. B) group deferred annuity.
3. C) separate investment account.
4. D) guaranteed investment contract.

Answer: D

RST Company offers a qualified retirement plan. Each employee contributes 4 percent of his or her pretax income to the plan, and RST matches the employee's contribution. An employee's benefit at retirement is determined by his or her account balance at the time of retirement. What type of retirement plan does RST offer?

1. A) defined benefit, flat percentage of annual earnings
2. B) defined benefit, flat dollar amount for all employees
3. C) defined benefit, unit-credit formula
4. D) defined contribution money purchase plan

Answer: D

Which of the following statements is true with regard to defined benefit and defined contribution pension plans?

1. A) It’s easier for an employer to determine its annual pension contribution under a defined benefit plan than under a defined contribution plan.
2. B) When a new pension plan is installed, it’s more beneficial for older workers if it’s a defined contribution plan rather than a defined benefit plan.
3. C) The employer bears the investment risk under a defined contribution plan, and the employee bears the investment risk under a defined benefit plan.
4. D) With a defined benefit plan, the retirement benefit is known is advance but the contributions vary; with a defined contribution plan, the contribution rate is fixed but the retirement benefit varies.

Answer: D

JKL Company just converted its traditional defined-benefit plan to another type of plan. Under the plan, benefits are defined in terms of a hypothetical account balance, with retirement benefits dependent upon the value of the participant's account at retirement. Each year, employees receive an interest rate credit and a pay credit which is a specified percentage of compensation. This type of plan is called a

1. A) section 401(k) plan.
2. B) deposit-administration plan.
3. C) cash-balance plan.
4. D) trust fund plan.

Answer: C

All the following statements concerning a Roth 401(k) plan are true EXCEPT

1. A) After-tax dollars are used to fund the plan.
2. B) Investment earnings accumulate on a tax-free basis.
3. C) Employees at all income levels may contribute to the plan, but annual contributions are limited.
4. D) Qualified distributions at retirement are fully taxable.

Answer: D

Special vesting rules apply to qualified defined contribution plans with voluntary employee contributions and matching employer contributions. Which of the following statements is (are) true with respect to these vesting rules?

1. Employer contributions must vest immediately.
2. Graded vesting is permitted, and employer contributions must be 20 percent vested after 2 years, with an additional 20 percent vested in each of the next 4 years.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: B

Small business owners have a number of retirement plans available to them. One type of plan is limited to employers with 100 or fewer eligible employees. Under this type of plan, small employers are exempt from most of the nondiscrimination and administrative rules that apply to qualified plans. Such plans are called

1. A) Keogh plans.
2. B) SIMPLE retirement plans.
3. C) cash balance plans.
4. D) profit sharing plans.

Answer: B

Which of the following statements is (are) true with respect to profit-sharing plans?

1. There is no limit on the amount that an employer can contribute annually to an employee's account under a profit sharing plan.
2. Profit sharing plans offer greater funding flexibility for employers than under other qualified plans.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: B

Lynn works for a state university. In addition to the university’s regular retirement plan, Lynn participates in another retirement savings plan. She elected to have $5,000 of her salary withheld and contributed to a tax-sheltered annuity with an insurer. The type of plan that Lynn established is called a

1. A) SIMPLE plan.
2. B) 403(b) plan.
3. C) defined benefit plan.
4. D) Keogh plan.

Answer: B

All of the following statements about 403(b) plans are true EXCEPT

1. A) Contributions to a 403(b) reduce an employee's taxable income.
2. B) 403(b) plans are designed for employees of public school systems and tax-exempt organizations.
3. C) The law limits the amount of income that an employee can elect to defer under a 403(b) plan.
4. D) Matching employer contributions are not permitted under a 403(b) plan.

Answer: D

Which of the following statements is (are) true regarding cash-balance pension plans?

1. Cash balance plans are defined contribution plans.
2. Under a cash balance plan, the employer creates an investment account for each employee into which the employer makes actual contributions and allocates investment gains and losses.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: D

Which of the following statements concerning defined benefit and defined contribution pension plans is (are) true?

1. The employer bears the investment risk with a defined contribution plan.
2. Defined benefit plans favor workers who enter the plan at older ages.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: B

Under a 401(k) plan, what is compared to determine if the plan unfairly discriminates in favor of highly compensated employees?

1. A) the average percentage of salary made available to the highly compensated to defer is compared to the average percentage of salary made available to other eligible employees to defer
2. B) the ratio of eligible highly compensated employees is compared to the ratio of eligible other employees
3. C) the average percentage of salary deferred by the highly compensated is compared to the average percentage of salary deferred by other eligible employees
4. D) the percentage of highly compensated employees over age 50 who participate is compared to the percentage of all other employees who participate

Answer: C

Under one type of retirement plan for small businesses, the employer contributes to an IRA established for each eligible employee. Under this type of plan, the contribution limits are significantly higher than they are for traditional IRAs and Roth IRAs. This type of plan, which requires little paperwork, is called a

1. A) simplified employee pension (SEP) plan.
2. B) defined benefit plan.
3. C) Keogh plan.
4. D) 403(b) plan.

Answer: A

In the context of employee benefits, the term "discrimination" refers to benefit comparisons between

1. A) male and female employees.
2. B) current employees and retirees.
3. C) highly compensated employees and non-highly compensated employees.
4. D) members of an under-represented group (by religious preference, race, or national origin) and the majority of employees.

Answer: C

Which of the following statements regarding minimum vesting standards for qualified defined benefit plans is (are) true?

1. The vesting standards apply to both employer and employee retirement contributions.
2. Employers may vest benefits more quickly than the minimum standards .
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: B

Which of the following statements about tax-deferred retirement plans in the U.S. is true?

1. Women, on average, receive lower employment-based retirement income than men.
2. One way to hedge against inflation is to invest lump-sum pension distributions in fixed-income investments.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: A

Which of the following is a common investment mistake that many retirement plan participants make?

1. A) not investing heavily enough in common stock issued by the employer
2. B) investing too heavily in common stock when close to retirement
3. C) participating in an employer-sponsored retirement plan to obtain matching employer contributions
4. D) participating in an employer-sponsored retirement plan and contributing the maximum amount allowed

Answer: B

Winslow Corporation has many long-term employees. The company has never had a pension plan. Recently, a new management team was hired. The new president said he would like to start a pension plan through which he could reward the long-term service provided by many employees. Which of the following types of plans should Winslow Corporation adopt?

1. A) section 403(b) plan
2. B) section 401(k) plan
3. C) money-purchase plan
4. D) defined benefit plan

Answer: D

Which of the following statements about Roth 401(k) plans is true?

1. Contributions to a Roth 401(k) plan are made with before-tax dollars.
2. Qualified distributions from a Roth 401(k) are received income-tax free.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: B

To encourage low- to moderate-income workers to save for retirement, a tax credit called the Saver’s Credit is available. Which statement about tax credits and tax deductions is true?

1. A) Tax deductions are more favorable than tax credit for most taxpayers.
2. B) Tax credits reduce taxes owed on a dollar-for-dollar basis.
3. C) Tax credits reduce taxable income.
4. D) Tax deductions reduce taxes owed on a dollar-for-dollar basis.

Answer: B

The tax credit available through the Saver’s Credit is equal to

1. A) the annual IRA contribution limit.
2. B) $2,000 regardless of income level and tax-filing status.
3. C) a percentage of the contribution made to a traditional IRA, Roth IRA, 401-k, SIMPLE plan, or 403(b) plan.
4. D) one-fourth of the Social Security taxes paid by the taxpayer.

Answer: C

Which statement is true with regard to problems and issues with tax-deferred retirement plans in the United States?

1. A) Inadequate participation in employer-sponsored retirement plans can create economic insecurity for retired employees.
2. B) Retirement benefits for women are higher than retirement benefits for men, reflecting the higher wages women are paid.
3. C) Employees do not invest sufficient amounts in the common stock issued by the companies where they work.
4. D) Pension benefits are too often indexed for inflation, burdening employers with high pension costs.

Answer: A