Life & Health Insurance Exam (National Portion)Life InsuranceMedium
A business wants to offer a retirement plan that allows employees to contribute a portion of their salary on a pre-tax basis, with employer matching contributions, and investment options chosen by the employee. What type of plan is this most likely to be?
- ADefined Benefit Pension Plan
- BNon-Qualified Executive Bonus Plan
- CSimplified Employee Pension (SEP) IRA
- D401(k) Plan
Show answer & explanationAnswer & explanation
Correct answer: D. 401(k) Plan
A 401(k) plan is a common employer-sponsored retirement plan that allows employees to make pre-tax contributions, often includes employer matching, and offers various investment options.
Why the other options are wrong
- A. Defined Benefit plans promise a specific future payout and do not involve employee contributions or investment choice.
- B. Executive Bonus Plans are non-qualified and typically involve employer-paid premiums for life insurance, not a retirement savings plan with employee contributions.
- C. SEP IRAs are primarily funded by employer contributions, with no employee salary deferral option.
401(k) Plan
An employer-sponsored qualified retirement plan allowing employees to make pre-tax contributions, often matched by the employer, with tax-deferred growth.
- Employee salary deferrals (pre-tax)
- Employer matching contributions common
- Investment choice by employee
Memory trick: These plans are like different gears in a retirement engine; the 401(k) is the most common, versatile gear.