Employee Benefit Planning

The ability to live comfortably without having to work for an income is referred to as:

Financial independence

Eleanor has estimated annual expenses of $220,000. According to the FIRE movement, how much should she accumulate for retirement to be financially independent?

$5,500,000

Which of the following acts was designed to encourage and make it easier for small business to establish and maintain retirement plans for their employees?

The Secure Every Community Up for Retirement Enhancement (SECURE) Act

Common disorders affecting one’s relationship with money may include:

All of the above

Employees need to realize the importance of planning for retirement through their own savings and investments mainly because:

All of the above

Which of the following is/are a common employer perspective of retirement plans?

Employers use employee benefits and retirement plans to recruit, hire, and retain qualified employees

Which of the following is/are common employee perspectives of retirement?

Employees view benefits as part of overall compensation

Which of the following is/are common government perspectives on retirement?

The government sponsors the Social Security and Medicare systems, which are to help provide a safety net for individual workers

According to the 2022 Retirement Confidence Survey, the average worker retires at age:

62

Whenever Joe is having negative feelings, he goes shopping, usually for electronics. This initially provides positive feedback for him, followed by feelings of stress and negativity. This common disorder related to his relationship with money is:

Compulsive buying disorder

Colin is 40 years old and wants to retire in 27 years. His family has a history of living well into their 90s. Therefore, he estimates that he will live to age 95. He currently has a salary of $150,000 and expects that he will need about 75% of that amount annually if he were retired. He can earn eight percent from his portfolio and expects inflation to continue at three percent. Some years ago, he worked for the government and expects to receive an annuity that will pay him $20,000 in today's dollars per year beginning at age 67. The annuity includes a cost-of-living adjustment, which is equal to inflation. Colin currently has $200,000 invested for his retirement. His Social Security benefit in today's dollars is $30,000 per year at normal age retirement of age 67. How much does he need to accumulate at age 67 to supplement the retirement income provided by his pension and Social Security benefits?

$2.2 million

Which of the following are generally correct about spending during retirement years?

Retirement spending tends to decline during the later part of retirement

Sonya will be retiring soon. All of the following expenditures could be eliminated in her retirement needs calculation except:

The $18,000 annual mortgage payment she makes that is scheduled to end seven years in retirement

Ralph, a 40 year old nurse who earns $80,000 a year, saves 14% of his annual gross income. Assume that Ralph wants to maintain his exact pre-retirement lifestyle. Calculate Ralph’s wage replacement ratio using the top-down approach and using pre-tax dollars.

78%

There have been significant changes in demographics over the last 20-25 years. Which of the following statements is correct?

The savings rate in the USA has been below the 1960s and 1970s rate for most of the succeeding 50 to 60 years

Jasmine is 53 years old and earns $115,000 per year. She saves 12% of her annual gross income for retirement. Jasmine will pay off her mortgage by the time she retires. Her monthly payment is $1950.21. Calculate Jasmine’s wage replacement ratio using the top-down approach and using pre-tax dollars (round to the nearest percent). Assume she wants to maintain her lifestyle.

60%

Parker is 50 and wants to retire in 15 years. His family has a history of living well into their 90s. Therefore, he estimates that he will live to age 95. He currently has a salary of $120,000 and expects that he will need about 65% of that amount annually if he were retired. He can earn nine percent in his portfolio while he is working.

However, he expects that he will only earn seven percent in his portfolio during retirement. He expects inflation to continue at three percent. Parker currently has $350,000 invested for his retirement. His Social Security benefit in today's dollars is $30,000 per year at normal age retirement of age 67. His Social Security benefit will be reduced by 6 2/3 percent for each year he begins collecting before full age retirement. How much does he need to save each year to meet his retirement goals?

$6,855

Jana is 58 and wants to retire by age 65. She expects that she will live to age 95. She currently has a salary of $140,000 and expects that she will need about 72% of that amount annually if she were retired. She can earn nine percent in her portfolio while she is working. However, she expects that she will only earn seven percent in her portfolio during retirement because she will adjust her asset allocation so that her portfolio is more conservative. She expects inflation to continue at three percent.

Jana currently has $800,000 invested for her retirement. Her Social Security benefit in today's dollars is $24,000 per year, assuming a retirement of age 65 (reduced from $27,692 at her full retirement age of 67 due to early retirement). She just calculated what she needs to save each year, and it is more than she can afford. Which of the following is her best alternative to achieve her retirement goals?

Delay her retirement by 2 years

Which of the following expenditures will most likely decrease during retirement?

Retirement savings

Jordan is 55 and wants to retire in 12 years. Her family has a history of living well into their 90s. Therefore, she estimates that she will live to age 97. She currently has a salary of $100,000 and expects that she will need about 82% of that amount annually if she were retired. She can earn nine percent on her portfolio and expects inflation to continue at three percent. Jordan currently has $325,000 invested for her retirement. Her SS benefit in today’s dollars is $30,000 per year at the normal retirement age of 67. How much does she need to save at the end of each year in order to meet her retirement goals?

$9,252

ABC Inc. sponsors a defined contribution plan. Seth, age 39, has compensation of $150,000 for the year. ABC has made a $20,000 profit sharing plan contribution for Seth and $5,000 of plan forfeitures were allocated to Seth’s profit sharing plan during the year. How much can Seth defer into his 401(k) plan for 2024?

$23,000

Which of the following vesting schedules may a top-heavy qualified cash balance plan use?

3 year cliff

Qualified plans must satisfy many tests to maintain qualified status. Which of the following is correct regarding coverage tests?

Stock bonus plans must satisfy one of three coverage tests only

Tidewater Company has 1,000 eligible employees and sponsors a defined benefit pension plan. The company is unsure if they are meeting all of their testing requirements. How many employees (the minimum) must be covered by the plan to conform with ERISA?

50

Which of the following people would be considered a highly compensated employee for 2024?

1. Sloane, a 2% owner whose salary last year was $165,000.

2. Ferris, a 6% owner whose salary was $23,500 for the last five years.

3. Jeanie, an officer, who earned $115,000 last year and is the sixth highest paid employee of 96 employees.

4. Cameron, a 0.5% owner who earned $151,000 last year and is in the top 20% of paid employees.

1, 2, and 4

Qualified plan documents can be written to accommodate plan forfeitures in different ways. Which of the following statements is correct?

Plans following the 2 year eligibility rule never allocate plan forfeitures to participants’ accounts

Axe company sponsors a 401(k)-profit sharing plan with no employer match, but the company did make noncontributory employer contributions because the plan was top-heavy. Greta quit today after six years working for Axe and has come to you to determine how much of her retirement balance, she can take with her. The plan uses the least generous graduated vesting schedule available. What is Greta's vested account balance if she has been a participant for 57 months?

Employer Employee

Contributions $9,000 $12,000

Earnings $4,000 $5,000

$30,000

Haley, age 25, and her spouse, who is active-duty military, recently moved to Fayetteville, NC due to a military permanent change of station (PCS). Haley is excited to begin her new job working for a small employer who offers a defined contribution profit sharing plan. The plan follows the standard eligibility rules with a three-year cliff vesting schedule and has elected to follow the new SECURE 2,0 Act rules for accelerated eligibility and vesting for military spouses. Haley's salary will be $130,000. Which of the following can Haley's financial planner correctly advise her regarding her eligibility to participate and vesting in the DC plan?

Haley will be eligible to participate 2 months after her date of hire and will be immediately vested

Urban ELC sponsors a profit-sharing plan that requires employees to complete one year of service and be 21 years old before entering the plan. The plan also excludes all commissioned salespeople and all other allowable exclusions allowed under the IRC. Which of the following employees could be excluded?

1. Jax, age 20, who works in administration and has been with the company for 32 months.

2. Gemma, a commissioned salesperson working in the Houston office. She is 37 years old and has been with the company for 3 years.

3. Clay works as the lead foreman in the company factory. He is 39 and has been with the company for 12 years and is covered under a collective bargaining agreement.

1, 2, and 3

XYZ covered the following employees under its qualified plan.

1. Rob, a 4% owner and employee with compensation of $32,000.

2. Rochelle, Rob's cousin, a commissioned salesperson with compensation of $195,000 last year (the highest paid employee). Rochelle owns 2% of the company stock.

3. Randi, the chief operating officer, who had compensation of $160,000 last year, but was not in the top 20% of paid employees.

Assuming the company made the 20% election when determining who is highly compensated, which of the following statements is correct?

Rochelle is a key employee, but Rob is not

Nicki is a highly skilled salesperson at Byberry, which is a 30-year-old company that has grown significantly in terms of revenue and product offerings. It sponsors a pension plan that provides a benefit of 2% times the years of service times the average of the final three years of salary. Nicki has worked for Byberry for the last 30 years and earned $200,000 two years ago, $150,000 last year, and $250,000 this year. If she is retiring this year, how much should she expect to receive as a pension benefit?

$120,000

Which of the following plans needs an actuary on an ongoing basis?

Cash balance plan

Alfred has worked for CJD, a large manufacturer, for the last 20 years and is a participant in CJD's defined benefit plan. Alfred is concerned about the company's financial difficulties and is worried that management at CJD might modify his future benefits and cause his expected benefits at retirement to be reduced. Which of the following laws is designed to prevent that from occurring?

There are no laws that prevent an employer from modifying future benefits, even in a defined benefit plan

Defined benefit plans and cash balance plans are both pension plans. However, they are significantly different plans. Which of the following statements is true?

Both plans can provide for lump-sum benefits upon termination and/or full retirement age

Drake has worked for GT for the last 20 years and been a participant in its defined benefit plan. In the last ten years, his salary has increased significantly. Over the last ten years, his compensation was $300,000, $145,000, $200,000, $400,000, $225,000, $240,000, $233,000, $210,000, $150,000, and $290,000, respectively. In 2024, what is the most that he could receive as a pension payment?

275,000 (take three highest paying consecutive years) then divide by 3 so, 400,000, 225,000 240,000 then you get 283,333 but due to irc 415b the cap is 275,000.

Halley has worked for GT for the last 20 years and been a participant in its defined benefit plan. In the last ten years, her salary has increased significantly. Over the last ten years, her compensation was $290,000, $100,000, $120,000, $100,000, $240,000, $200,000, $160,000, $180,000, $150,000, and $210,000. In 2024, what is the most that she could receive as a pension payment?

200,000 take three highest divide by 3

Which of the following is a characteristic of pension plans that does not apply to profit sharing plans?

Mandatory funding

Jacob is a participant in JJ's defined benefit plan. Jacob is 37 years old and earns $160,000. He has 4 years of service for purposes of the plan and has worked at the firm for 5 years. The plan provides a benefit of 1.5% for each year of participation.

The plan has the least generous vesting schedule possible. Almost 70 percent of the accrued benefits are attributable to the fifteen equal owners, who have all been working at the company for decades. If Jacob were to leave today, what percent of his salary (as defined by the plan) could he expect to receive at normal retirement age?

4.8%

Which of the following is the most common defined benefit plan funding formula for large companies?

Unit credit formula

Marleen is a 52-year-old participant in the XYZ cash balance plan. She has been a participant in the plan for the last twenty years. XYZ, which has over 10,000 employees, is having financial difficulty and Marleen is concerned about the security of her pension. Which of the following is correct?

Termination of the plan may affect vesting for some employees, but Marleen’s vesting will not be impacted