Special Webinar Question: Types of Retirement Plans

Posted by Mike Long, CFP®, ChFC®, CLU®

May 21, 2020

This question is a part of BIF's Special Webinar series which was created to help students affected by the July 2020 CFP® Exam postponement to September 2020.


Debra, age 50, is an executive with a small but very successful consulting firm. Her salary is $300,000. The company sponsors a money purchase pension plan with a 25% contribution. What will be the contribution made on Debra's behalf this year?

  1. $75,000
  2. $19,500
  3. $57,000
  4. $71,250

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Correct answer: C. $57,000


Instructor insight:

The maximum covered compensation in any qualified plan benefit formula for 2020 is $285,000. A 25% plan contribution based on $285,000 of covered compensation is $71,250. This, however, exceeds the annual additions limit applicable to all defined contribution plans of $57,000 for 2020.


CFP® Exam insight:

This question requires application of two areas of knowledge about qualified plans. The covered compensation limit of $285,000 (2020) for benefit formulas applies to all qualified plans. A money purchase pension plan is a defined contribution plan, subject to the annual additions limit.

Be mindful of the various rules in play for a given type of plan, but remember knowing whether a plan is a defined contribution plan or a defined benefit plan is critical in solving this type of application question.

 

Topics: Practice Questions