RPA 1 Exam Questions with correct Answers

Of the factors in the Black-Scholes option pricing model, which one is generally deemed to have the most relative impact on the value of the option? - Answer- The expected volatility of the underlying stock's market price A theory of income taxation that imposes current tax liability on taxpayers who receive something of reasonable value is known as the doctrine of: - Answer- Economic benefit Key employees, for purposes of the top-heavy rules, include all: - Answer- One percent owners receiving annual compensation in excess of $150,000 For all defined contribution plans, there is a uniform employer deduction limit of: - Answer- 25% of compensation Federal law defines normal retirement age to be the age specified in the plan, but it cannot occur beyond the later of: - Answer- Age 65 or the fifth anniversary of the participant's date of initial participation Which plan is used in conjunction with debt financing? - Answer- An employee stock ownership plan The Supreme Court ruled in Arizona Governing Committee v. Norris that: - Answer- Life annuities under an employer-sponsored defined contribution plan must be provided on a uniform basis. Under the Employee Retirement Income Security Act of 1974 (ERISA), a fiduciary shall discharge his (or her) duties with respect to an employee benefit plan solely in the interest of - Answer- The plan's participants and beneficiaries. To receive tax-preferred treatment under an ineligible Section 457 plan, amounts deferred must be: - Answer- Subject to a substantial risk of forfeiture. What statement describes the tax treatment of nonqualified stock options for the employer? - Answer- The employer gets a corporate income tax deduction for the amount of compensation income the employee realizes at the exercise of the option. How did the Pension Protection Act of 2006 change requirements for investment advice provided to individual retirement account (IRA) owners? - Answer- The Act requires that fees for such advice not be contingent on the investment option chosen. The vesting provision of executive retirement arrangements: - Answer- Varies depending on the intent of the executive arrangement An employee with four years of service participates in a retirement plan. The vesting schedule in this plan is changed by plan amendment. Under tax law, this plan participant: - Answer- Must be given the election to remain under the pre-amendment vesting schedule for both pre- and post-amendment benefit accruals. Contributions to a profit sharing plan must be made on: - Answer- A substantial and recurring basis Under what situations are premature distributions from individual retirement accounts (IRAs) exempt from the early distribution penalty tax? - Answer- Distributions because of an Internal Revenue Service levy on the account to pay taxes. Under certain conditions, a nonworking spouse may establish an individual retirement account (IRA) using which of the following types of payments as the basis for eligibility to make contributions? - Answer- Earned income of a working spouse In 1948 the National Labor Relations Board (NLRB) found that the provisions of retirement plans affect conditions of employment and that retirement benefits constitute: - Answer- Wages Under a technique known as a wage-related formula, the impact of postretirement inflation on pension income is: - Answer- Measured on the basis of current wage measures to adjust benefits For a distribution from a Roth IRA account to receive favorable tax treatment as a qualified distribution, how long must contributions be in the account? - Answer- 5 years Which Internal Revenue Code Section generally mandates that, except for certain exceptions that meet specific requirements, income from deferred compensation arrangements may no longer be deferred beyond the year in which such compensation is earned? - Answer- Section 409A Under a percentage of earnings per year of service formula, the typical range for the percentage of earnings credited is: - Answer- 1% to 1.25% In addition to current income taxation, any excess contribution to an individual retirement account (IRA) is subject to a nondeductible excise tax of: - Answer- 6 percent Under the Pension Protection Act of 2006, a benefit statement must be provided to a plan participant of a defined contribution plan entitled to direct plan investments: - Answer- Once a quarter Which of the following are types of eligible Section 457 plans that must be unfunded? - Answer- Plans maintained by nongovernmental tax-exempt organizations The limitation on exclusions for elective deferrals under 401(k) plans is: - Answer- Indexed in increments established by the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) If you knew that a vendor servicing a 401(k) plan was clearing trades internally and not using an outside directed trustee, you generally could conclude that: - Answer- The vendor was providing plan services as a bundled service provider. The most frequently used criterion to establish participation in a supplemental executive retirement plan (SERP) is: - Answer- Position and management status Those questioning the validity of the human depreciation concept of private pensions would argue that the employer should be held responsible only for the increase in the rate of aging caused by: - Answer- Occupational hazards Employees withdrawing contributions from a savings incentive match plan for employees (SIMPLE plan) individual retirement account (IRA) during the two-year period beginning on the date of initial participation are subject to a penalty tax of: - Answer- 25 percent A retirement plan that is unfunded and maintained by an employer primarily for the purpose of providing deferred compensation for a "select group of management or highly compensated employees" is called a: - Answer- Top-hat plan In general, the aggregate amount of employer contribution allocated to a younger employee under a defined contribution plan compared to that under a defined benefit plan is: - Answer- A higher amount If a contribution to a profit sharing plan exceeds the maximum deductible contribution limit, the employer can carryover the excess contribution to the succeeding year, but will be subject to an excise tax on the excess contribution of: - Answer- 10 percent An example of a sponsor of a 403(b) plan is: - Answer- A public college The annual limit on deferral amounts for an ineligible Section 457 plan is: - Answer- Unlimited In special cases, an amount above the annual 402(g) limit may be contributed by employees (even those under age 50) to a 403(b) plan under a salary reduction agreement. Which of the following statements regarding these special cases is (are) correct? I. In these cases the employee must have a minimum of 15 years of service with the organization. II. In no event may the employee contribute more than an additional $3,000 above the 402(g) limit in a single year. III. An eligible employee can contribute a maximum of $5,000 in additional aggregate contributions. - Answer- I and II only Which of the following is (are) characteristics of Section 423 employee stock purchase plans? I. They can favor highly paid executives. II. Their purchase price must equal the stock's fair market value when the option is granted or when the option is exercised. III. Employees who agree to have an estimated amount withheld from their pay to provide the funds with which to exercise their options at the end of an option period can decide not to exercise the option and have the amounts withheld refunded to them. - Answer- III only In order for a computer model to be used to provide personally tailored investment advice to 401(k) plan participants, which of the following conditions must be met? I. The model must be certified by an independent investment expert. II. The model must meet specified audit requirements. III. The model must be provided free of charge or at a de minimus fee to plan participants. - Answer- I and II only Which of the following tax-deferred retirement savings vehicles could receive a tax-free rollover from a Keogh plan? I. Another Keogh plan II. An individual retirement account (IRA) III. An employer-sponsored retirement plan - Answer- I, II and III Which of the following would be considered generally accepted investment theories? I. Alternate cycle investing II. Modern portfolio theory III. Strategic asset allocation - Answer- II and III only Which of the following statements is (are) correct for individual retirement accounts (IRAs)? I. Tax filing status and level of income affect contribution amounts. II. Contributions can be made on a deductible and non-deductible basis. III. Their provisions have remained unchanged since the accounts were created by the Employee Retirement Income Security Act. - Answer- I and II only Which of the following statements describe the typical advantages of a final pay defined benefit plan? I. This type of plan is usually less expensive than one that bases benefits on career average earnings. II. A final pay plan generally produces more favorable results for key employees than the career average approach. III. The employee's initial benefit keeps pace with preretirement inflation - Answer- II and III only Generally most profit sharing plans do not have difficulties passing the nondiscrimination-in-contributions requirements for which of the following reasons? I. Profit sharing plans must have a definite predetermined contribution formula. II. Vesting schedules favor lower paid employees. III. The definition for breaks-in-service is more stringent than the one used for pension plans. - Answer- None Provided it is allowable under the contract, which of the following actions could be taken by the owner of a 403(b) annuity? I. Elect a reduced paid-up annuity. II. Exchange the contract for a reduced annuity with an earlier maturity date. III. Surrender the contract in order to transfer the proceeds to another issuer if certain conditions are met. - Answer- I, II and III Which of the following is (are) advantage(s) of a defined contribution plan? I. Its administrative costs are typically less than those of a defined benefit plan. II. Its design can achieve greater employee identification with the company than that of a defined benefit plan. III. Its design has the potential to enhance employee productivity. - Answer- I, II and III Which of the following statements regarding Section 457 plans is (are) correct? I. They can be offered on a discriminatory basis. II. They must be offered to at least five employees of the organization. III. They are not required to satisfy minimum coverage requirements. - Answer- I and III only Which of the following is (are) correct statements about Social Security "integration"? I. It is a form of discrimination unintentionally allowable by the Internal Revenue Code. II. It recognizes that the relative value of Social Security benefits decreases as pay goes up. III. It refers to a plan design (when using a defined contribution plan) that provides a higher level of employer contributions for employee earnings above a specified amount than for those earnings below the specified amount. - Answer- II and III only Which of the following employers could permit a loan from a Section 457 plan? I. An organization exempt from tax under Internal Revenue Code (IRC) Section 501 II. A corporation III. A state government - Answer- III only Which of the following services generally would be provided by a directed trustee to a 401(k) plan under an unbundled service arrangement when the directed trustee is not performing recordkeeping services for a 401(k) plan? I. Tracking incoming plan contributions and the allocation of funds among specific individual participant accounts. II. Approving individual participant loan and hardship requests. III. Performing the actual deferral percentage (ADP) test for the overall plan. - Answer- None Under which of the fol