RPA1 Exam Questions with correct Answers

Three-legged stool - Answer- A company pension, Social Security, and savings Economic problems of old age - Answer- Longevity, medical expenses, lack of work, inflation Reverse annuity - Answer- An arrangement with a bank where the bank pays the homeowner a monthly amount for equity in the house. Tax advantages of qualified retirement plans - Answer- Earnings are not taxed until distribution, Company contributions are current business expenses and tax-deductible, Employee contributions can be made without current taxation Reasons for growth of private retirement plans - Answer- Competitive pressures, Wage freeze during WWII, Union demands Business expediency - Answer- The theory that it's in the best interest of a business to have a retirement plan Human depreciation concept - Answer- The theory that as workers get older, their ability to work declines and companies should pay for this "depreciation" by funding a pension plan. Deferred wage concept - Answer- The theory that retirement plans are actually earnings of the employees that are deferred until retirement. Employee Retirement Income Security Act (ERISA) - Answer- The bedrock law of benefits passed in 1974 Tax Equity and Fiscal Responsibility Act (TEFRA) - Answer- Passed in 1982 [top-heavy plans] [reduced maximum benefit and contributions][equity between corporate and self-employed plans] Tax Reform Act (TRA'86) - Answer- [coverage tests] [accelerated vesting] Economic Growth and Tax Relief Act (EGTRRA) - Answer- Passed in 2001, this act led to major changes in all areas. Pension Protection Act (PPA) - Answer- Passed in 2006, this led to new funding rules for DB plans. Defined benefit (DB) Plan - Answer- The document defines the benefit at retirement. The employer has the investment risk. Defined contribution (DC) Plan - Answer- The document defines how the contribution is allocated to participants. Participants have the investment risk. Qualified retirement plan - Answer- A plan that meets the requirements of ERISA, as amended. Section 415 compensation - Answer- Compensation used for the purposes of the plan. HCE/NHCE - Answer- "Highly Compensated Employees: - 5% owner & family, an employee earning $120,000 or more & family, Non‐Highly Compensated Employees: Everyone else" Key requirements of an ERISA qualified plan - Answer- Plan assets can't be diverted/Plan is for exclusive benefit of employees and beneficiaries/ Permanency requirement Sec. 410(b) tests - Answer- Non‐discrimination testing and coverage tests ERISA disclosure and reporting - Answer- SPD, SMM, Form 5500, SAR Vesting - Answer- The right a person has to the plan benefits after a certain period of service. "Sec. 401(a)(17) limit on includable compensation" - Answer- "$270,000 in 2017 $275,000 in 2018" Section 415 limits - Answer- "DC - Individual limit: $54,000/100% of pay, Company limit: 25% of covered payroll, DB - Individual benefit: $220,000 annual benefit for 2018/100% of 3 year avg" Joint and survivor annuity - Answer- A benefit form required to be offered to married individual in a pension plan. Minimum distribution requirements - Answer- Lifetime benefits must begin no later than age 70 1/2 unless a person is still working. SECURE Act: Changed to age 72 Top‐heavy plans - Answer- When more than 60% of plan benefits go to key employees Key employees - Answer- A 5% owner and anyone earning over $150,000 Basic features of DB plans - Answer- Eligibility; death/disability benefits; vesting; form of benefits; early retirement benefits Advantages of a contributory DB plan - Answer- Employees are responsible for their own financial security, employees are encouraged to save, and employees may better appreciate retirement benefits from the employer "Disadvantages of a contributory DB plan" - Answer- Employee earnings that are contributed are taxed, employees dislike deductions to their earnings, enough employees might not enroll, more complicated plan admin and recordkeeping Normal retirement age - Answer- The age when full retirement benefits are available, generally age 65 "Early retirement benefits" - Answer- The availability of benefits prior to normal retirement age Income replacement ratios - Answer- For a career employee, this is the level of income replacement the plan should provide "Money purchase formula" - Answer- A DC plan with pension features. There is a set contribution rate (often 10%) required to be made by employer every year. DB formula - Answer- This determines the retirement benefit in DB plans Final pay plan - Answer- This type of DB plan uses the last 3 or 5 year average pay to calculate the benefit Career average pay plan - Answer- This type of DB plan uses the full history of pay with that company to determine the benefit Flat amount formula - Answer- A set dollar amount regardless of service or pay Flat percentage of earnings formula - Answer- Benefit= a certain % x earnings Flat amount per year of service formula - Answer- Benefit= a certain dollar amount x years of service Percentage of earnings per year of service formula - Answer- Benefit= a certain % of pay x years of service "Variable benefit formula" - Answer- Factors change based on the length of service SS integration rules -- DB - Answer- Not suitable for flashcard Excess plans - Answer- Base benefit is calculated and then, an additional amount is added as SS integration Offset plans - Answer- The benefit is calculated and then, reduced by a portion for SS benefits the person is expected to receive "Incidental death benefits" - Answer- Benefits from the pension plan for deceased employees who did not retire Disability benefits - Answer- Benefits from the pension plan for disabled employees who did not retire "Pre-retirement inflation" - Answer- Inflation that occurs prior to retirement. Plans based on career pay reflect this kind of inflation. "Post-retirement inflation" - Answer- Inflation that occurs after retirement. Plans based on the CPI or rates of return on an investment fund reflect this kind of inflation. Investment risk in a DC plan - Answer- The employee bears this in a DC plan Impact of inflation - Answer- This has a greater effect on DC plans than DB plans. Concept of matching - Answer- When a company makes a contribution equal to a percentage of the employee's deferral (often 50%) Social Security integration --DC - Answer- Way to recognize a company's contribution towards SS benefits and to give more to employees who earn over the SS wage base Permitted disparity - Answer- SS Integration Limit on annual contributions for DC plans - Answer- "$54,000 100% of pay" Employer deduction limit - Answer- 25% of covered payroll "Money purchase pension plans" - Answer- A DC plan with pension features and a set contribution rate (often 10%) required to be made by the employer every year. Profit-sharing plan - Answer- No fixed contribution rate is set in the plan document. It can range from 0% to 25%. Stock ownership plans - Answer- Plans designed to have more than 10% of plan assets in company stock Section 401(k) plans - Answer- Plans that are designed to have employees defer part of their salary into the plan Section 403(b) plans - Answer- Plans for 501(c)(3) organizations and public schools that permit employees to defer part of their salary into the plan