CPS Investment Strategies 3 — Questions and Answers
Question 1: Under ERISA, what is the maximum vesting period allowed for cliff vesting in a 401(k) employer match?
- 2 years
- 3 years (Correct answer)
- 5 years
- 7 years
Correct answer: 3 years
ERISA requires cliff vesting for employer matching contributions to be fully vested after no more than 3 years of service.
Question 2: A payroll specialist processes a hardship withdrawal from a 401(k) for an employee under age 59½. What penalty applies in addition to ordinary income tax?
- 5% early withdrawal penalty
- 10% early withdrawal penalty (Correct answer)
- 15% early withdrawal penalty
- No penalty if hardship-qualified
Correct answer: 10% early withdrawal penalty
Distributions from a 401(k) before age 59½ are generally subject to a 10% early withdrawal penalty on top of ordinary income taxes.
Question 3: Which plan type is most appropriate for a self-employed individual who wants to contribute up to 25% of net self-employment income?
- SIMPLE IRA
- SEP IRA (Correct answer)
- Roth IRA
- 403(b) plan
Correct answer: SEP IRA
A SEP IRA allows self-employed individuals to contribute up to 25% of net self-employment earnings, up to the annual IRS maximum.
Question 4: An employee leaves a company and wants to move their 401(k) balance to a new employer's plan without tax consequences. This transaction is called a:
- Distribution
- Direct rollover (Correct answer)
- Hardship withdrawal
- QDRO transfer
Correct answer: Direct rollover
A direct rollover transfers funds from one qualified plan to another without triggering taxes or penalties.
Question 5: What is the primary distinction between a money market fund and a stable value fund in a 401(k) plan?
- Money market funds are FDIC insured; stable value funds are not
- Stable value funds typically offer higher returns with similar low risk due to insurance contracts (Correct answer)
- Money market funds are only available in Roth accounts
- Stable value funds invest exclusively in government bonds
Correct answer: Stable value funds typically offer higher returns with similar low risk due to insurance contracts
Stable value funds use insurance contracts (book value accounting) to offer higher yields than money market funds at comparable risk levels.
Question 6: Which federal law governs the fiduciary responsibilities of retirement plan administrators and investment managers?
- FLSA
- ERISA (Correct answer)
- IRC Section 125
- HIPAA
Correct answer: ERISA
ERISA (Employee Retirement Income Security Act) sets fiduciary standards for those managing employee benefit and retirement plans.
Question 7: An employee exercises non-qualified stock options (NQSOs). When is the spread subject to payroll taxes?
- At grant date
- At vesting date
- At exercise date (Correct answer)
- At sale date
Correct answer: At exercise date
With NQSOs, the spread between exercise price and fair market value is treated as ordinary compensation income subject to payroll taxes at exercise.
CPS Investment Strategies 3
Under ERISA, what is the maximum vesting period allowed for cliff vesting in a 401(k) employer match?