TREX 401(k) & Defined Benefit Plans 2 — Questions and Answers
Question 1: Under a traditional defined benefit plan, the investment risk is borne by whom?
- The employee
- The employer (Correct answer)
- A third-party insurer
- Both employer and employee equally
Correct answer: The employer
In a defined benefit plan, the employer bears all investment risk and is obligated to pay the promised benefit regardless of investment performance.
Question 2: What is the maximum annual addition to a participant's 401(k) account from all sources (employee + employer) in 2024?
- $23,000
- $46,000
- $69,000 (Correct answer)
- $76,500
Correct answer: $69,000
The 2024 IRC Section 415 limit for total annual additions to a defined contribution plan is $69,000 (or 100% of compensation if less).
Question 3: A 401(k) plan's 'actual deferral percentage' (ADP) test is designed to prevent what?
- Excessive employer matching
- Highly compensated employees from deferring disproportionately more than non-HCEs (Correct answer)
- Vesting schedules from favoring senior employees
- Plan assets from being invested too aggressively
Correct answer: Highly compensated employees from deferring disproportionately more than non-HCEs
The ADP test ensures that the average deferral rate of highly compensated employees does not exceed the average for non-highly compensated employees by more than a specified threshold.
Question 4: Which defined benefit plan formula bases the retirement benefit on the employee's average salary during the final years of employment?
- Flat-benefit formula
- Career-average formula
- Final-pay formula (Correct answer)
- Unit-credit formula
Correct answer: Final-pay formula
The final-pay formula calculates benefits based on average compensation in the last few years before retirement, which typically represents peak earnings.
Question 5: A 'safe harbor' 401(k) plan avoids ADP/ACP testing by requiring the employer to make what type of contribution?
- A discretionary profit-sharing contribution
- A mandatory nonelective or matching contribution that is immediately 100% vested (Correct answer)
- A contribution equal to the IRS annual deferral limit for every participant
- A contribution only for non-highly compensated employees
Correct answer: A mandatory nonelective or matching contribution that is immediately 100% vested
Safe harbor 401(k) plans require either a 3% nonelective contribution for all eligible employees or a specified matching formula, both of which must be immediately fully vested.
Question 6: Under ERISA, what is the maximum period for a 'graded vesting' schedule in a 401(k) plan's employer contributions?
- 3 years
- 5 years
- 6 years (Correct answer)
- 10 years
Correct answer: 6 years
ERISA requires that employer contributions vest under graded vesting no slower than 20% per year starting at year 2, reaching 100% by year 6.
Question 7: Which actuarial method determines the annual pension cost by spreading the present value of the projected benefit evenly over an employee's working career?
- Entry age normal method (Correct answer)
- Unit credit method
- Projected unit credit method
- Aggregate cost method
Correct answer: Entry age normal method
The entry age normal method allocates pension costs evenly as a percentage of pay from hire date to retirement, producing stable contribution rates over time.
TREX 401(k) & Defined Benefit Plans 2
Under a traditional defined benefit plan, the investment risk is borne by whom?