Module 3

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  1. An important tax benefit of a qualified plan is the ability to roll over the benefit into an IRA at the time when employment ends.

    a) True
    b) False
    a) True
  2. Qualified plans enjoy tax benefits in exchange for satisfying a large number of qualification requirements.

    a) True
    b) False
    a) True
  3. A qualified plan that covers both highly compensated employees and 50 percent of the nonhighly compensated will typically satisfy the minimum-coverage requirements.

    a) True
    b) False
    b) False

    This plan most likely does not satisfy the minimum-coverage requirements. It does not satisfy the ratio test because under the ratio test, if all highly compensated employees are covered, then 70 percent of the nonhighly compensated employees must be covered.
  4. As the percentage of highly compensated employees who are covered under a qualified plan decreases, the percentage of nonhighly compensated employees who must be covered increases.

    a) True
    b) False
    b) False

    The opposite is true. Under the ratio test, as the percentage of highly compensated employees covered decreases, the percentage of nonhighly compensated employees who must be covered also decreases.
  5. The nondiscrimination rules require that all participants receive a benefit that is the same percentage of compensation.

    a) True
    b) False
    b) False

    This method would generally satisfy the nondiscrimination requirements, but it is definitely not the only way to design a benefit structure.
  6. A participant loan program can limit participation to only the highly compensated employees.

    a) True
    b) False
    b) False

    A participant loan program must be reasonably available to all participants.
  7. Owners can typically take qualified plan assets and use them to defray bona fide expenses of the company.

    a) True
    b) False
    b) False

    A small business owner may want to do this, but once contributions have been made to the plan, they are owned by the trust and must be used exclusively for the benefit of participants or to pay reasonable administrative expenses.
  8. Participants in a defined-benefit pension plan may take benefits prior to termination of employment, while participants in a profit-sharing plan may not take withdrawals prior to termination of employment.

    a) True
    b) False
    b) False

    The opposite is true. Plans in the pension category (including traditional defined-benefit, cash-balance, and money-purchase plans) cannot allow in-service withdrawals.
  9. In a defined-benefit plan, up to 25 percent of the plan's assets can be invested in the sponsoring company's stock.

    a) True
    b) False
    b) False

    In a defined-benefit plan (as well as in other plans in the pension category), only 10 percent of the plan's assets can be invested in employer securities.
  10. Cash-balance plans are covered by PBGC insurance.

    a) True
    b) False
    a) True
  11. A typical defined-benefit plan with a unit-benefit formula provides a benefit based on years of service and final-average compensation.

    a) True
    b) False
    a) True
  12. Important elements in a defined-benefit formula include the form of payment, the age at which benefits begin, the definition of compensation, and the definition of years of service.

    a) True
    b) False
    a) True
  13. A traditional defined-benefit plan amended into a cash-balance plan can have adverse consequences for older employees unless the plan has a grandfathering provision.

    a) True
    b) False
    a) True
  14. A money-purchase pension plan is a form of a defined-contribution plan in which the employer promises to contribute a specified amount for each eligible employee.

    a) True
    b) False
    a) True
  15. Profit-sharing plans can be designed to allocate contributions in a number of different ways.

    a) True
    b) False
    a) True
  16. The law requires that once an ESOP participant attains age 55 and completes at least 10 years of participation, the participant must be given the opportunity to diversify the retirement benefit by moving a portion of his or her account balance into other investments.

    a) True
    b) False
    a) True
  17. Distributions of employer stock from an ESOP can be extremely disadvantageous to the retiree if the stock is not readily tradable (illiquid).

    a) True
    b) False
    b) False

    ESOP distributions are never illiquid because the employer is required to offer a repurchase option (put option) when the stock is not readily tradable.
  18. A participant’s maximum salary deferral allowed in a 401(k) plan is reduced by salary deferral contributions made to SIMPLEs and 403(b) plans.

    a) True
    b) False
    a) True
  19. A 401(k) plan does not have to perform the ADP test for the year if the employer makes a safe-harbor contribution.

    a) True
    b) False
    a) True
  20. The only types of contributions allowed in a 401(k) plan are salary deferral contributions and employer matching contributions.

    a) True
    b) False
    b) False

    A 401(k) plan can also allow for employer profit-sharing contributions, which are allocated to all eligible participants, not just those who make salary deferral contributions.
  21. A 403(b) plan can be funded only with annuity contracts or mutual funds.

    a) True
    b) False
    a) True
  22. A SEP is a retirement plan that uses individual retirement accounts for each participant as the receptacle for contributions.

    a) True
    b) False
    a) True
  23. A savings incentive match plan for employees (SIMPLE) can allow participants the option to borrow from the plan.

    a) True
    b) False
    b) False

    SIMPLEs are funded with IRAs. Like SEPs, such plans cannot provide for participant loans. Other IRA rules apply as well, such as immediate vesting and no investments in life insurance or collectibles.
  24. An employer can sponsor both a SIMPLE and a money-purchase pension plan.

    a) True
    b) False
    b) False

    What makes the SIMPLE different from all other types of tax-advantaged retirement plans is that a sponsor cannot maintain any other type of tax-advantaged plan at the same time it sponsors a SIMPLE.
  25. The employer can make both the 3 percent matching contribution and the 2 percent nonelective contribution to a SIMPLE.

    a) True
    b) False
    b) False

    The contribution requirements for the SIMPLE are quite rigid. The employer can make either the 3 percent matching contribution or the 2 percent nonelective contribution, but not both.
  26. If your client’s qualified retirement plan is terminated while he or she is still employed, your client will immediately be 100 percent vested in his or her account balance or accrued benefit.

    a) True
    b) False
    a) True
  27. The PBGC will pay all lost benefits if a client’s defined-benefit plan is terminated and the plan is underfunded.

    a) True
    b) False
    b) False

    The PBGC only replaces up to a maximum benefit of approximately $4,500 a month.
  28. Clients who take early retirement in a defined-benefit plan have lost the inflation protection offered by increasing salaries, thus extending their inflation exposure during retirement.

    a) True
    b) False
    a) True
  29. If a client in a defined-contribution plan works beyond normal retirement age, the employer is not required to continue making contributions on the employee's behalf.

    a) True
    b) False
    b) False

    An employer must continue making contributions to the defined-contribution plan on an employee's behalf regardless of the employee's age.
  30. Clients in a defined-benefit plan may experience an increase in their benefit if they opt for deferred payment.

    a) True
    b) False
    a) True
  31. A sponsor may choose a profit-sharing plan instead of a SEP because of the ability to allocate contributions in a more flexible way.

    a) True
    b) False
    a) True
  32. A SIMPLE is both easier to administer and more flexible than a 401(k) plan.

    a) True
    b) False
    b) False

    A SIMPLE is definitely easier to administer than a 401(k) plan, but it is much less flexible.
  33. A young self-employed doctor with a number of older employees is a good candidate for a traditional defined-benefit plan.

    a) True
    b) False
    b) False

    An older business owner with several young employees would be the type of employer who may want to consider a defined-benefit plan.
  34. The summary plan description supplies the retirement planner with a description of procedures for presenting claims for benefits under the plan and remedies for benefits denied under the plan.

    a) True
    b) False
    a) True
  35. Which of the following statements concerning salary deferral contributions in a 401(k) plan is correct?

    A) If the plan allows it, a participant aged 50 or older can make an additional catch-up salary deferral contribution.
    B) Salary deferral contributions can be subject to 3-year cliff vesting.
    C) Salary deferral contributions can be withdrawn at any time.
    D) A participant may be able to make a Roth election on employer matching contributions but not on salary deferrals.
    A) If the plan allows it, a participant aged 50 or older can make an additional catch-up salary deferral contribution.

    A participant may be able to make a Roth election on salary deferrals but not on employer matching contributions.

    If the plan allows it, the participant may make a Roth election on salary deferrals, not employer matching contributions.

    Salary deferral contributions must be fully vested at all times.

    Salary deferral contributions can only be distributed upon termination of employment, attainment of age 59½, or financial hardship.
    (this multiple choice question has been scrambled)
  36. In which of the following plans is the promised benefit typically expressed as a percentage of the participant’s final-average compensation?

    A) Sec. 401(k) plan
    B) profit-sharing plan
    C) defined-benefit pension plan
    D) money-purchase pension plan
    C) defined-benefit pension plan

    Defined-benefit pension plans typically define the benefit as a specified percentage of the participant’s final-average salary. This approach gives the participant a much clearer picture of how much retirement income he or she will have than in a defined-contribution plan.

    The plans in the remaining answers are incorrect because they are defined-contribution plans under which the participant’s benefit is based on the individual’s accumulated account balance.
    (this multiple choice question has been scrambled)
  37. Business owners older than age 50 who are seeking to maximize tax-sheltered contributions in a plan are more likely to establish what type of qualified plan?

    A) ESOP
    B) profit-sharing plan
    C) defined-benefit pension plan
    D) money-purchase pension plan
    C) defined-benefit pension plan

    Only defined-benefit pension plans allow for contributions for an individual that exceed $49,000 (the 2009 Code Sec. 415(c) limit). The older the owner, the larger the potential contributions-since the funding period prior to retirement is shorter. For the owner older than age 50, it is likely that a plan design can support annual contributions well in excess of the defined-contribution limit.

    The other plans are incorrect because they are defined-contribution plans subject to the $49,000 (for 2009) annual limit.
    (this multiple choice question has been scrambled)
  38. Which of the following statements concerning defined-benefit plans is (are) correct?

    I. The long-service employee typically receives a benefit that predictably replaces a portion of his or her preretirement income.

    II. The benefit is typically seen as more portable than a benefit from a defined-contribution plan.

    A) I only
    B) II only
    C) Both I and II
    D) Neither I nor II
    A) I only

    II is incorrect because the benefit from a defined-benefit plan does not accrue ratably over the participant’s period of service as it does in a defined-contribution plan.
    (this multiple choice question has been scrambled)
  39. The DL, Inc., profit-sharing plan excludes all employees who have not attained age 21 or completed a year of service. The plan covers 2 of the 5 highly compensated employees and 12 of the 20 nonhighly compensated employees. Which of the following statements concerning the coverage requirements as they apply to this plan is (are) correct?

    I. The plan covers enough of the nonhighly compensated employees to satisfy the ratio test.

    II. The plan may have coverage problems since it excludes those employees who have not attained age 21 or completed a year of service.

    A) Both I and II
    B) I only
    C) II only
    D) Neither I nor II
    B) I only

    I is correct since the plan only has to cover 28 percent of the nonhighly compensated employees (40% x 70%). This plan covers 60% of them. II is incorrect because a plan is always allowed to exclude employees who have not attained age 21 or earned a year of service.
    (this multiple choice question has been scrambled)
  40. Qualified retirement plans must meet all the following requirements EXCEPT

    A) The plan must be maintained for the exclusive benefit of the company’s owners.
    B) The plan must satisfy the top-heavy requirements.
    C) The plan must satisfy the minimum-coverage requirements.
    D) The plan must meet vesting requirements.
    A) The plan must be maintained for the exclusive benefit of the company’s owners.

    The plan must be maintained for the exclusive benefit of the plan participants, not the business’s owners.
    (this multiple choice question has been scrambled)
  41. All the following statements concerning comparisons between retirement plans are correct EXCEPT

    A) In the right circumstances the contribution for a participant in a defined-benefit plan could exceed the $49,000 limit (for 2009) that applies to defined-contribution plans.
    B) The SEP has fewer administrative responsibilities than a profit-sharing plan.
    C) A 401(k) plan has more design flexibility than a SIMPLE.
    D) The maximum deductible contribution for a money-purchase pension plan is larger than for a profit-sharing plan.
    D) The maximum deductible contribution for a money-purchase pension plan is larger than for a profit-sharing plan.

    The maximum deductible contribution for all types of defined-contribution plans is 25 percent of covered payroll. This same limit applies to SEPs as well.
    (this multiple choice question has been scrambled)
  42. All the following are characteristic of a profit-sharing plan EXCEPT

    A) Any allocation method can be used as long as the plan can satisfy the nondiscrimination rules.
    B) Only 10 percent of the plan’s assets can be invested in employer securities.
    C) Employees may make in-service withdrawals without disqualification of the plan.
    D) Employers are not required to make contributions every year.
    B) Only 10 percent of the plan’s assets can be invested in employer securities.

    Up to 100 percent of the plan’s assets can be invested in employer securities.
    (this multiple choice question has been scrambled)
  43. All the following statements concerning types of qualified retirement plans are correct EXCEPT

    A) The risk of the plan’s investment experience falls on the participant in a profit-sharing plan
    B) A cash-balance plan can allow for discretionary employer contributions.
    C) The money-purchase pension plan has a specified contribution formula.
    D) The cash-balance plan is subject to the PBGC insurance program.
    B) A cash-balance plan can allow for discretionary employer contributions.

    All plans in the pension category (including defined-benefit, cash-balance, and money-purchase pension plans) have required contributions.
    (this multiple choice question has been scrambled)
  44. All of the following are requirements of qualified plans EXCEPT:

    A) The plan must be permanent, and not amended or terminated.
    B) The plan must satisfy top heavy rules that will apply if more than 60% of the contributionsbenefit key employees.
    C) The plan must be operated for the exclusive benefit of employees and their beneficiaries.
    D) The plan cannot provide benefits that discriminate in favor of highly compensated employees.
    A) The plan must be permanent, and not amended or terminated.

    Although the plan must be permanent, it can be amended and even terminated in certain situations.
    (this multiple choice question has been scrambled)
  45. Which of the following statements is/are correct regarding nondiscrimination rules applicable toqualified plans?

    I. Under the nondiscrimination rules of Section 401(a)(4), a plan will be deemed non-discriminatory if the contributions bear a uniform relationship to compensation.

    II. If a plan provides a higher benefit for highly compensated employees than for non-highlycompensated employees, the plan will be considered discriminatory.

    A) Neither I nor II.
    B) Only II.
    C) Only I.
    D) Both I and II.
    C) Only I.

    II is incorrect. Nondiscriminatory methods are available for providing larger benefits to highlycompensated employees, such as integration with Social Security.
    (this multiple choice question has been scrambled)
  46. Which of the following statements is/are correct regarding the rules applicable to qualified plans?

    I. As the percentage of covered highly compensated employees increases, the percentage ofnon-highly compensated employees that must be covered decreases.

    II. For benefits to be considered nondiscriminatory, all plan participants must receive a benefitfrom the plan based on an equal percentage of compensation.

    A) Only II.
    B) Only I.
    C) Both I and II.
    D) Neither I nor II.
    D) Neither I nor II.

    I is incorrect. As the percentage of covered highly compensated employees increases, the percentage ofnon-highly compensated employees that must be covered increases.II is incorrect. There are several methods of providing benefits to participants that would satisfy thenondiscrimination tests. Although an “equal percentage of compensation” for all employees would benondiscriminatory, it is not the only benefit structure that would be considered nondiscriminatory.
    (this multiple choice question has been scrambled)
  47. Which of the following statements is correct regarding the qualified plan nondiscrimination tests?

    A) A defined contribution plan must cover the lesser of 50 employees or 40% of the employer’s eligible employees.
    B) Under the ratio test, if a plan covers 70% of the non-highly compensated employees, the planmust also cover 70% of the highly compensated employees.
    C) When performing the ratio test, part time employees working less than 1,000 hours can be excluded.
    D) If two companies are part of a controlled group, only employees of the company sponsoringthe qualified plan must be counted for the minimum-coverage tests.
    C) When performing the ratio test, part time employees working less than 1,000 hours can be excluded.

    The minimum participation (50/40) test only applies to defined benefit plans.

    Under the ratio test, the percentage of non-highly compensated employees must be atleast 70% of the ratio of covered highly compensated employees. Therefore, if 70% of the non-highlycompensated employees are covered, the ratio test will automatically be satisfied, regardless of thenumber of highly compensated employees that are covered.

    If two companies are part of a controlled group of corporations, all employees of bothcompanies must be counted when determining whether a qualified plan satisfies the minimum-coveragerequirements.
    (this multiple choice question has been scrambled)
  48. Which of the following is/are a valid vesting schedule for a profit sharing plan that is not top heavy?

    I. 0% vested for the first 8 years, 100% vested after 8 years.

    II. 0% vested for first 5 years, 50% vested after 6 years, 75% vested after 7 years, 100% vestedafter 8 years.

    a) Only I.
    b) Only II.
    C. Both I and II.
    d) Neither I nor II.
    d) Neither I nor II.

    A profit sharing plan that is not top heavy must vest at least as rapidly as 3-year cliff vesting or 2-6 year graded vesting.
  49. All of the following statements are correct regarding loans from a qualified plan EXCEPT:

    A) From a participant’s point of view, loans are typically more attractive than a plan distribution.
    B) Loans must be available to all participants on a reasonably equivalent basis.
    C) Loans are only allowed in hardship situations.
    D) Loans must typically be repaid within five years, unless used to purchase a residence.
    C) Loans are only allowed in hardship situations.

    If loan provisions are permitted in a plan, the loans can be taken by the participant in any situation.
    (this multiple choice question has been scrambled)
  50. Which of the following statements is correct regarding the duties of a plan fiduciary?

    A) A fiduciary can deviate from the documents that govern the plan without risk of personal liability.
    B) To satisfy the prudent fiduciary requirement, a fiduciary cannot invest in risky investments.
    C) A fiduciary has a duty to diversify the plan investments to minimize the risk of large losses.
    D) Under the prudent fiduciary rule, the fiduciary must act exclusively for the benefit of planparticipants.
    C) A fiduciary has a duty to diversify the plan investments to minimize the risk of large losses.

    Under the exclusive benefit rule, the fiduciary must act exclusively for the benefit of planparticipants.

    A prudent fiduciary can invest in risky investments, so long as the return is commensuratewith the risk and the investments are appropriate for the particular plan.

    A fiduciary should follow plan documents, and may be held personally liable if they make investments decisions without carefully considering these documents.
    (this multiple choice question has been scrambled)
  51. Which of the following plans is insured by the Pension Benefit Guarantee Corporation (PBGC)?

    A) Money purchase plan.
    B) Cash balance plan.
    C) 401(k) plan.
    D) Profit sharing plan.
    B) Cash balance plan.

    Defined benefit plans are covered by the Pension Benefit Guarantee Corporation. There are two types ofdefined benefit plans:-Defined benefit plans-Cash balance plans

    A profit sharing plan is a type of defined contribution plan. Defined contribution plans arenot covered by the PBGC.

    A 401(k) plan is a type of defined contribution plan. Defined contribution plans are notcovered by the PBGC.

    A money purchase plan is a type of defined contribution plan. Defined contribution plansare not covered by the PBGC.
    (this multiple choice question has been scrambled)
  52. Which of the following statements is correct regarding cash balance plans?

    A) Many of these plans were traditional defined benefit plans that have been converted.
    B) Benefits are based on final-average salary, and are inflation adjusted up to the time benefitsbegin.
    C) They permit the employer to make discretionary contributions.
    D) They are not covered by the Pension Benefit Guarantee Corporation.
    A) Many of these plans were traditional defined benefit plans that have been converted.

    Many current cash balance plans were originally traditional defined benefit plans that were converted tocash balance plans. This conversion may have an adverse affect for older employees, unless the planhas grandfathering provisions.

    A cash balance plan is a type of pension plan. Pension plans are subject to minimumfunding standards.B is incorrect. Cash balance plans are covered by the PBGC.

    The benefit is based on the participant’s account balance, not on final salary.
    (this multiple choice question has been scrambled)
  53. Which of the following statements is/are correct regarding a money purchase plan?

    I. If inflation rises sharply in the years prior to retirement, the chances of an employee receivingan adequate income-replacement ratio during retirement are increased.

    II. They are preferred by participants because they are easy to understand and offer PensionBenefit Guarantee Corporation (PBGC) insurance.

    A) Both I and II.
    B) Neither I nor II.
    C) Only II.
    D) Only I.
    B) Neither I nor II.

    I is incorrect. If inflation rises sharply in the years prior to retirement, the chances of an employeereceiving an adequate income-replacement ratio during retirement will decrease because thecontributions to a money purchase plan are based on salary over the employee’s career (not salary atretirement).

    II is incorrect. Although money purchase plans are easy to understand, they do not offer PBGC coverage.Only defined benefit plans offer this type of coverage.
    (this multiple choice question has been scrambled)
  54. Which of the following statements is correct regarding pension and profit sharing plans?

    A) Profit sharing plans are not permitted to invest more than 10% of the plan assets in employerstock.
    B) The vesting and nondiscrimination requirements of pension plans are more restrictive than the requirements for profit sharing plans.
    C) Pension plans are permitted to offer in-service withdrawals to participants in hardshipconditions.
    D) The employer is legally required to make annual contributions to a pension plan.
    D) The employer is legally required to make annual contributions to a pension plan.

    Profit sharing plans can offer hardship withdrawals.

    Pension plans are not permitted to invest more than 10% of the plan assets in employerstock.

    The vesting and nondiscrimination requirements are generally the same for pension andprofit sharing plans.
    (this multiple choice question has been scrambled)
  55. Which of the following statements is/are correct regarding defined contribution vs. defined benefitplans?

    I. Defined contribution plans provide employees with a variable benefit, and have apredetermined cost to the employer.

    II. Defined benefit plans provide employees with a fixed predetermined benefit, and have anuncertain cost to the employer.

    A) Both I and II.
    B) Only I.
    C) Neither I nor II.
    D) Only II.
    A) Both I and II.
    (this multiple choice question has been scrambled)
  56. All of the following statements regarding traditional defined benefit plans are correct EXCEPT:

    A) They are typically more portable than defined contribution plans.
    B) They are classified as qualified pension plans.
    C) They may be appropriate for older business owners who are seeking to maximize taxshelteredcontributions.
    D) They typically use a unit-benefit formula to determine employee benefits.
    A) They are typically more portable than defined contribution plans.

    Defined contribution plans, which have a separate account balance for each participant, are moreportable than defined benefit plans.
    (this multiple choice question has been scrambled)
  57. Which of the following statements is/are correct regarding a cash balance pension plan?

    I. It may be appropriate to consider a cash balance plan benefit as a conservative fixed income component of the participant’s retirement portfolio.

    II. Unlike a traditional defined benefit plan, a cash balance plan cannot provide contributions orinterest credits for past years of service.

    A) Only I.
    B) Neither I nor II.
    C) Both I and II.
    D) Only II.
    A) Only I.

    II is incorrect. Cash balance plans can provide credit for past service.
    (this multiple choice question has been scrambled)
  58. All of the following statements are correct regarding a profit sharing plan EXCEPT:

    A) Cross-tested profit sharing plans provide larger relative contributions for older employees.
    B) If a profit sharing plan is integrated with Social Security, plan participants will receive a higherpercentage contribution if their compensation is higher than the Social Security wage base.
    C) The IRS can terminate a profit sharing plan if contributions are not “substantial and recurring.”
    D) An employer is not permitted to contribute to a profit sharing plan unless the sponsoringcompany has shown a profit in the current tax year.
    D) An employer is not permitted to contribute to a profit sharing plan unless the sponsoringcompany has shown a profit in the current tax year.

    An employer can contribute to a profit sharing plan, even if the corporation is not profitable.
    (this multiple choice question has been scrambled)
  59. Tommy is a participant in his company’s Employee Stock Ownership Plan (ESOP). The company originally transferred $5,000 worth of company stock to his account. Years later, when the stock wasvalued at $10,000, Tommy retired and took a lump sum in-kind distribution. Three years afterretirement, Tommy sold the stock for $14,000. What are the tax consequences of this series ofevents?

    A) Tommy will recognize $10,000 of ordinary income at the time of the lump sum distribution, andwill have a $4,000 capital gain at the time of the stock sale.
    B) Tommy will recognize $5,000 of ordinary income at the time of the lump sum distribution, andwill have a $9,000 capital gain at the time of the stock sale.
    C) Tommy will recognize $14,000 of ordinary income at the time of the stock sale.
    c) Tommy will have a $14,000 capital gain at the time of the stock sale.
    B) Tommy will recognize $5,000 of ordinary income at the time of the lump sum distribution, andwill have a $9,000 capital gain at the time of the stock sale.

    Tommy will only be required to report the original cost of the stock ($5,000) as ordinary income at thetime of distribution.Therefore, after the distribution, his tax basis in the stock will be $5,000. When he sells the stock threeyears later, his long-term capital gain will be $9,000 ($14,000 sales price less $5,000 basis).
    (this multiple choice question has been scrambled)
  60. Which of the following statements is/are correct regarding a cash or deferred arrangement?

    I. If an employer chooses to make safe harbor contributions to the plan, the employer will avoid application of the actual deferral percentage (ADP) test.

    II. Salary reduction contributions made to the plan are immediately 100% vested to the employee.

    A) Both I and II.
    B) Neither I nor II.
    C) Only I.
    D) Only II.
    A) Both I and II.
    (this multiple choice question has been scrambled)
  61. All the following types of organizations typically qualify to have a 403(b) plan EXCEPT:

    A) Universities.
    B) Churches.
    C). Hospitals.
    D) Advertising firms.
    D) Advertising firms.

    Only tax-exempt organizations are permitted to have 403(b) plans.
    (this multiple choice question has been scrambled)
  62. Which of the following statements is correct regarding a profit sharing plan?

    A) In-service withdrawals by employees are prohibited.
    B) The plan can provide for past service.
    C) The employer can contribute and deduct up to 25% of covered compensation.
    D) The plan can invest up to 10% in employer stock.
    C) The employer can contribute and deduct up to 25% of covered compensation.

    A profit-sharing plan permits in-service withdrawals, typically after two years of participationor in hardship situations.

    A profit sharing plan can conceivably invest up to 100% of the plan’s assets in employerstock.

    Profit sharing plans cannot provide for past service.
    (this multiple choice question has been scrambled)
  63. An employee may be allowed to receive a distribution from a 401(k) plan under certain hardshipsituations. All of the following represent hardship situations under the safe harbor rules EXCEPT:

    A) Payment of participant’s medical expenses.
    B) Payment to prevent foreclosure on a vacation home mortgage.
    C) College tuition costs for the participant’s dependent child.
    D) Funeral expenses for the participant’s deceased mother.
    B) Payment to prevent foreclosure on a vacation home mortgage.

    Although a payment to prevent foreclosure on a mortgage for a principal residence would be considereda safe harbor hardship, the payment to prevent a foreclosure on a mortgage for a vacation home wouldnot.
    (this multiple choice question has been scrambled)
  64. All of the following statements are correct regarding a 403(b) plan EXCEPT:

    A) A 403(b) plan that features employer contributions must satisfy ERISA requirements.
    B) Plan investments are limited to mutual funds and annuities.
    C) Loans and “catch-up” contributions may be permitted in a 403(b) plan.
    D) Salary deferral contributions are subject to nondiscrimination requirements.
    D) Salary deferral contributions are subject to nondiscrimination requirements.

    Salary deferral contributions are NOT subject to nondiscrimination requirements. Therefore, highly compensated employees can contribute the maximum to a 403(b) plan, regardless of the contributionsmade by the non-highly compensated employees.
    (this multiple choice question has been scrambled)
  65. Which of the following statements is correct regarding a SIMPLE IRA plan?

    a) An employer can sponsor both a SIMPLE IRA and a profit sharing plan.
    b) Highly compensated employees can make salary deferral contributions without regard to the contributions of the non-highly compensated employees.
    c) The plan can offer loans to participants, provided that the loan bears a reasonable rate ofinterest and is repaid within five years.
    d) To sponsor a SIMPLE IRA, an employer must have 75 or fewer employees.
    • b) Highly compensated employees can make salary deferral contributions without regard to the contributions of the non-highly compensated
    • employees.

    An employer sponsoring a SIMPLE plan is not permitted to sponsor any other type of taxadvantaged plan.

    SIMPLE IRAs do not allow loans.

    To sponsor a SIMPLE IRA, an employer has to have 100 or fewer employees.
  66. Which of the following is a correct statement regarding a simplified employee pension (SEP)?

    A) The employee can take a loan from a SEP, within limits.
    B) The reporting and disclosure requirements of a SEP are more stringent than a qualified plan.
    C) Participants in a SEP have immediate access to their funds at any time.
    D) The maximum contribution is $5,000 for an employee under age 50.
    C) Participants in a SEP have immediate access to their funds at any time.

    The maximum contribution is the lesser of 25% of compensation or $49,000 (for 2010).

    Qualified plan reporting and disclosure requirements are more stringent.

    A SEP is a type of IRA, and therefore loans are not permitted.
    (this multiple choice question has been scrambled)
  67. A company with 45 employees wants to provide its managers with a way to defer income forretirement. The company is willing to contribute a small amount to the plan each year. None of theregular workers are interested in contributing. Which plan would be the most appropriate for thiscompany?

    A) Defined benefit plan.
    B) Simplified employee pension.
    C) 401(k) plan.
    D) SIMPLE plan.
    D) SIMPLE plan.

    A SIMPLE plan would be the best answer. The SIMPLE plan would allow employee pre-taxcontributions, and does not require ADP testing.

    A 401(k) would require ADP testing, which would limit the amount that the managers couldcontribute (since the regular workers would not contribute).

    Defined benefit plans are not appropriate when the employer only wants to contribute asmall amount.

    SEPs don’t allow employee contributions. Only SARSEPs allow employee contributions,and they are no longer allowed.
    (this multiple choice question has been scrambled)
  68. Marissa has owned her own company for 20 years. She is now 52 and wishes to retire at 62. Sheemploys three people, mostly younger. If she wanted to establish a retirement plan with the highestbenefit for her, assuming adequate cash flow, what would be the most appropriate plan?

    A) Money purchase plan.
    B) Cash balance plan.
    C) Defined benefit plan.
    D) Stock bonus plan.
    C) Defined benefit plan.

    A defined benefit would be the most appropriate, since she has adequate cash flow. A defined benefit plan would allow the maximum possible contribution for an older employee.
    (this multiple choice question has been scrambled)

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