AD Banker Comprehensive Practice Exam

The Lucrative Lozenge Company provides a monthly income to select retirees. This is an example of what type of plan?

1. Qualified plan

2. Nonqualified plan

3. 401(k)

4. Keogh Plan

The correct answer is: Nonqualified plan

The scenario describes the Lucrative Lozenge Company providing a monthly income to select retirees, which characterizes it as a nonqualified plan. Nonqualified plans are typically employer-sponsored retirement plans that do not meet the requirements set forth by the Internal Revenue Code for favorable tax treatment. These plans often allow an employer to provide richer benefits to select employees, including retirees, without the limitations that qualified plans have regarding contribution limits and participant eligibility. In this case, the provision of monthly income suggests that the company is offering a benefit that is more customized and can be designed to meet the particular needs of certain retirees rather than adhering to the stricter regulations that govern qualified plans. This flexibility is a hallmark of nonqualified plans, where you might find arrangements such as deferred compensation plans or supplemental retirement income plans tailored for specific individuals. The other options mentioned, such as qualified plans, a 401(k), and a Keogh plan, refer to specific types of retirement plans that follow particular IRS guidelines and tax benefits. However, the nature of the monthly income benefit provided to a select group points towards its classification as a nonqualified plan, which is designed for more discretionary and often exclusive use.