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Terms in this set (42)
In ways are target benefit pension plans similar to money purchase pension plans?
The employee bears the investment risk.
Each employee has an individual account.
PBGC insurance is not available for target benefit or money purchase pension plans.
Also, the actual dollar retirement benefit is not guaranteed in either of these plans
True about cash balance pension plans
The selection of a cash balance pension plan is generally motivated by two factors: wanting a benefit design that which employees can more easily understand, and implementing a cost-savings measure when compared to a traditional defined benefit pension plan.
Which of the following is an advantage of fully insured (Section 412(e)(3)) plans?
Benefits from the plan are guaranteed by the insurance company with the employer transferring all investment risk to the third party.
The investment return is derived solely from the fixed, guaranteed cash value rates in the insurance or annuity policies.
Participant loans are not available and annual plan funding is mandatory, not discretionary.
Janice is 52 years old and just started a new job with ABC Industries. She is concerned about having enough income during her retirement that should begin when she attains age 65. Janice recently left XYZ Industries, her former employer, because XYZ did not sponsor a defined benefit pension plan. ABC Industries does sponsor a defined benefit pension plan, and Janice has come to you asking for information about these types of retirement plans. Which of the following statements regarding traditional defined benefit pension plans is (are) CORRECT?
Traditional defined benefit pension plans generally tend to favor older employee participants.
Traditional defined benefit pension plans require an actuary on an annual basis.
Traditional defined benefit pension plans are insured by the Pension Benefit Guaranty Corporation (PBGC).
Traditional defined benefit pension plans have mandatory (not discretionary) contribution formulas, require an actuary, and require PBGC insurance. Additionally these plans tend to favor older participants.
Which of the following events would increase the employer's annual contribution to a traditional defined benefit pension plan using a percentage of salary for each year of service formula?
Forfeitures are lower than expected.
Salary increases are higher than expected.
Investment returns are less than expected.
Ross, age 75, works for Financial Strategies, Inc. The company has a long-established retirement plan. The plan has never required an actuary or PBGC insurance, but the employer is required to make annual mandatory contributions to each employee's account. What type of retirement plan was established by Financial Strategies?
Money purchase pension plan
A money purchase pension plan requires annual mandatory employer contributions to each employee's account, does not require an actuary, and does not require PBGC insurance.
Which of the following statements regarding money purchase pension plans is (are) CORRECT?
The plan sponsor's costs are predictable, and the plan is easily administered.
The plan participant can easily understand the plan's simple design, and contributions are based on the participant's salary for each year of his career, rather than on salary at retirement.
Annual additions to each employee's account are limited to the lesser of 100% of compensation or $56,000 (2019).
Generally, employer securities held by the plan cannot exceed 10% of the FMV of the plan assets at the times the securities are purchased.
A target benefit pension plan provides:
Lower contributions for younger employees.
Lower contributions for lower-paid employees.
Higher contribution levels for older plan participants
A traditional defined benefit pension plan would probably be most appropriate for which of the following companies?
An established company with stable cash flows, a predominately older workforce, and key executives age 50 or older.
Defined benefit pension plans are suitable for companies with stable cash flows because annual contributions are mandatory.
These plans also tend to maximize the amount of tax-deferred savings for older, well-paid employees, but they are not simple to administer nor are they inexpensive to maintain.
Which of the following is a characteristic of defined benefit pension plans?
Defined benefit pension plans are complex in operation and design.
The employer is subject to a recurring annual mandatory funding obligation, regardless of profit or loss.
Participants who terminate employment prior to the normal retirement date may receive little benefit from the plan.
Due to actuarial and PBGC requirements, defined benefit pension plans result in higher installation and administration costs than defined contribution plans.
All of the following are characteristics of traditional defined benefit pension plans
The employer is required to make annual contributions.
They are complex to design and operate.
Limited benefits are guaranteed by the Pension Benefit Guaranty Corporation (PBGC).
Which of the following are disadvantages to the participant in cash balance pension plans?
The employer bears the investment risk.
The investment return is guaranteed to the participant.
Retirement benefits may be inadequate for older plan participants.
The participant is not credited with actual returns for years in which the actual return exceeds the guaranteed return.
Disadvantages:
Retirement benefits may be inadequate for older plan participants.
The participant is not credited with actual returns for years in which the actual return exceeds the guaranteed return.
For 2019, the maximum annual contribution under a money purchase pension plan on behalf of a participant is the lesser of 100% of the employee's covered compensation or:
$56,000
A money purchase pension plan is a defined contribution plan in which:
the employer typically contributes a fixed percentage of participant compensation each year.
The employer does receive a tax deduction for the amount of contribution to the plan.
No guaranteed retirement benefit is provided in a defined contribution plan. The contribution is defined, not the benefit.
Only defined benefit pension plans provide guaranteed retirement benefits.
David Co. implemented a traditional defined benefit plan several years ago. In accordance with the plan document, the employer must contribute an annual amount that will provide the employees with a specified benefit at retirement. Which of the following events would be expected to decrease the employer's annual contribution to a traditional defined benefit pension plan using a percentage for each year of service benefit formula?
Forfeitures are higher than anticipated.
Inflation is higher than expected.
The investment returns of the plan are greater than expected.
Benefits are cost of living adjusted.
Correct 1 and 3
Defined benefit pension plan contributions decrease because of:
Forfeitures are higher than anticipated.
Inflation is higher than expected.
Not 2 or 4
Inflation would likely cause salaries and plan expenses to increase, thereby causing contributions to increase.
Likewise, benefits that are adjusted for the cost of living would result in greater employer contributions, not less.
Which of the following defined contribution plans require mandatory contributions?
Profit-sharing plan.
Target benefit pension plan.
Money purchase pension plan.
Section 401(k) plan without a match.
Target benefit pension plan AND Money purchase pension plan.
Profit-sharing plans and Section 401(k) plans without a match do not have mandatory contributions
Be My Cash Target
B - benefit in defined benefit plan.
M - money purchase plans.
Cash - cash balance plans.
Target - target benefit plans
Annual Contributions are MANDATORY
In which of the following retirement plans can forfeitures be reallocated to increase account balances of plan participants?
1. Defined benefit pension plans.
2. Profit-sharing plans.
3. Money
purchase pension plans.
4. SEP plans.
2. Profit-sharing plans.
3. Money purchase pension plans.
Statement 1 is incorrect because defined benefit pension plan forfeitures must be used to reduce plan costs and are not reallocated among remaining plan participants.
Statement 4 is incorrect because SEP plans require 100% immediate vesting and therefore cannot ever have a forfeiture to reallocate.
Which of the following events would increase the employer's annual contribution to a traditional defined benefit pension plan using a percentage of salary for each year of service formula?
Forfeitures are lower than expected.
Salary increases are higher than expected.
Investment returns are less than expected.
Benefits are cost of living adjusted as expected.
Forfeitures are lower than expected.
Salary increases are higher than expected.
Investment returns are less than expected.
When non-vested or partially-vested participants in a qualified defined benefit pension plan terminate employment with the sponsoring employer, how must the plan handle the unvested portion of their benefits?
Use them to reduce future employer contributions.
Which of the following statements regarding a target benefit pension plan are CORRECT?
It requires actuarial assumptions.
The employee's final benefit is not guaranteed by the employer.
The maximum annual additions limit is the lesser of 100% of covered compensation or $56,000 (2019).
The maximum deductible contribution is 25% of total covered payroll.
Traditional defined benefit pension plans favor ______ employees.
older
Target benefit pension plans typically favor ________ employees.
older
Money purchase pension plans favor _________ employees.
younger
Cash balance pension plans favor _____employees.
younger
XYZ Corp has a defined benefit pension plan with no lump-sum distribution payout option. Which of the following defined benefit assumptions will impact this plan's funding, assuming they are each different from what was expected by XYZ Corp.?
Mortality rate of plan participants.
Employee turnover.
Inflation.
Expected rate of return on plan investments.
Changes in salary levels.
Bill's employer maintains a target benefit pension plan. Bill is age 59. The plan was originally designed to benefit a 38-year-old key employee. There is also substantial turnover at Bill's company. Which of the following statements is (are) CORRECT?
Bill knows exactly what retirement benefit to expect.
Bill's retirement benefit is funded through elective deferrals.
Forfeitures are likely to be allocated equally to Bill and the 38-year-old employee.
Contributions to the plan are mandatory.
Contributions to the plan are mandatory.
Why 1,2,3 are wrong
Benefits depend on such plan's account balances and the final benefit amount is not guaranteed.
Target benefit pension plans are funded by the employer, not through employee elective deferrals.
Forfeitures in such plan are likely to be unequal as a result of unequal compensation.
Which of the following facts and assumptions are used by an actuary to determine the employer contributions to a defined benefit pension plan?
Each participant's age, expected compensation, and length of service.
Plan expected investment results.
Plan expected administrative expenses.
The benefit formula specified in the plan.
In a money purchase pension plan, forfeitures:
Revert back to the plan.
May be used to reduce future employer contributions.
Can be reallocated among the remaining plan participants
Forfeitures count against the remaining participants' annual additions limits.
Joe, age 46, has owned his company for 18 years and wishes to retire at age 70. All of Joe's employees are older than he is and have an average length of service with the company of 8 years. Joe would like to adopt a qualified retirement plan that would favor him and reward employees who have rendered long service. Joe has selected a traditional defined benefit pension plan with a unit benefit formula. Which of the following statements regarding Joe's traditional defined benefit pension plan is (are) CORRECT?
A traditional defined benefit pension plan will maximize Joe's benefits and reward long-term employees based on length of service.
Which of the following statements regarding money purchase pension plans is CORRECT?
Money purchase plans favor younger employees.
Money purchase pension plans have known funding costs, mandatory annual contributions,
limit the amount of company stock to a maximum of 10%.
Which qualified plans is the investment risk generally borne by the employer?
Defined Benefit Pension Plan
Which qualified plan typically require the use of the 3 highest consecutive years' earnings for purposes of determining the maximum benefit that is promised?
Traditional defined benefit pension plan
Cheryl is an executive with Chandler Corporation where she has been employed for the past 24 years. Her current salary is $300,000. Chandler's defined benefit plan provides participants with 25 years of service an 85% of salary annual retirement benefit. Assuming Cheryl's salary remains at $300,000, what will be the amount of her annual retirement benefit?
$225,000
On the basis of years of service and salary, Cheryl would be entitled to a retirement benefit of $255,000 using only the first $280,000 of employee compensation; however, the defined benefit pension plan benefit limit for 2019 is $225,000.
Which of the following is a traditional defined benefit pension plan benefit formula?
Flat percentage formula.
Unit benefit formula.
Flat amount formula.
The maximum annual benefit under a defined benefit plan is ___________ in 2019.
$225,000
The maximum amount of compensation that may be used in calculating benefits is _________
$280,000
Your client has a retirement plan with separate participant accounts and 40% of covered compensation as a projected retirement benefit. Which of the following type of plans does your client most likely have?
This is most likely a target benefit pension plan because of the individual account (DC) and projected (targeted) retirement benefit.
Tax implications of cash balance pension plans include:
Employer contributions on behalf of employees grow tax deferred.
Employer contributions to the plan are deductible when made.
Which of the following statements regarding the characteristics of a defined benefit pension plan is (are) CORRECT?
The plan is more costly to administer than defined contribution plans and it specifies the final benefit an employee receives.
Defined benefit pension plans assign the risk of preretirement inflation, investment performance, and adequacy of retirement income to the employer.
Which of the following is one of the differences between defined benefit pension plans and defined contribution plans?
Investment risk is borne by the employer in a defined benefit pension plan, whereas the employee bears the risk in a defined contribution plan.
A defined benefit pension plan has a benefit limit, whereas a defined contribution plan has a contribution limit.
A guaranteed retirement benefit is the goal of a defined benefit pension plan, while a guaranteed contribution is the focus of a defined contribution plan.
The employer contribution allowed by a money purchase plan is usually a very positive characteristic from an employer's tax planning perspective. Why would an employer NOT want to install this type of plan?
The contribution percentage is fixed and mandatory.
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Verified questions
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