Retirement Plans: Qualified vs. Non-Qualified

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What factors do actuaries consider when estimating annual pension contributions for a defined benefit plan?

Investment return rate and tax liabilities

Salary levels and mortality assumptions (correct)

Employee productivity and company revenue

Market trends and industry standards

Do defined benefit plans operate with separate accounts for each employee?

No, there are no separate accounts (correct)

Yes, individual accounts are mandatory

Yes, but only for high-income employees

No, but employees can choose their investments

In a defined benefit pension plan, who typically bears the longevity risk?

The employees who retire

The employer who contributes (correct)

The actuary who estimates liabilities

The insurance company insuring the plan

Which group of employees does a defined benefit pension plan generally benefit the most?

Older employees who are closer to retirement Signup and view all the answers

Is a defined benefit pension plan generally insured?

Yes, there is mandatory insurance coverage Signup and view all the answers

Which of the following assumptions does not influence an actuary's estimate for pension contributions?

National political stability Signup and view all the answers

What are the primary advantages of using annuities in retirement planning?

Guaranteed income for life and tax-free growth Signup and view all the answers

Which of the following is a disadvantage of annuities?

Potentially high fees and surrender charges Signup and view all the answers

What is a primary characteristic of a qualified retirement plan?

Employer contributions are deductible as a business expense Signup and view all the answers

In a defined benefit (DB) plan, who bears the risk of investment?

The employer Signup and view all the answers

Which of the following is a feature of a defined contribution (DC) plan?

Fixed contributions with variable retirement benefits Signup and view all the answers

What distinguishes non-qualified plans from qualified plans?

Employer contributions can only be treated as compensation in non-qualified plans Signup and view all the answers

Which of the following statements is true regarding traditional IRAs?

Tax deductions may be available for contribution amounts Signup and view all the answers

What is an advantage of a 401(k) plan compared to an IRA?

Higher annual contribution limits Signup and view all the answers

Which plan type guarantees a specified benefit amount at retirement?

Defined benefit (DB) plan Signup and view all the answers

What is a cash balance plan categorized as?

A hybrid of defined benefit and defined contribution plans Signup and view all the answers

Study Notes

Qualified vs. Non-Qualified Plans

Qualified plans are deductible as business expenses and not taxable income to the employee until received as benefits.
Non-qualified plans do not allow employer funding contributions to be deducted as business expenses unless classified as compensation to the employee.

Retirement Plan Types

Defined Contribution (DC) plans: Contribution amount is defined, but the benefit amount at retirement varies.
Defined Benefit (DB) plans: Assure a certain amount at retirement, with the employer bearing the risk of meeting the commitment. Accumulated funds are managed in one account (e.g., Traditional Defined Benefit, Cash Balance).

Plan Characteristics Comparison

Feature	Defined Benefit Plan	Defined Contribution Plan
Investment Risk	Employer	Employee
Actuarial Complexity	Annual pension contributions and plan liabilities must be estimated by an actuary; factors impacting the estimate include salary levels, retirement age, current employee ages, mortality, turnover, investment earnings, administrative expenses, and salary adjustments for inflation.	None

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

This quiz explores the differences between qualified and non-qualified retirement plans, including the implications for tax and employer funding. Additionally, you will learn about defined contribution and defined benefit plans and their unique characteristics. Test your knowledge on retirement planning and the responsibilities associated with these plans.