Certified Plan Sponsor Professional (CPSP) Practice Exam

Which type of plan requires that the benefits be offered as annuity payments?

1. Defined benefit plan

2. Cash balance plan

3. Money purchase plan

4. 401(k) plan

The correct answer is: Money purchase plan

The correct answer to the question regarding which type of plan requires that benefits be offered as annuity payments is a defined benefit plan. Defined benefit plans are retirement plans where the employer guarantees a specific retirement benefit amount for participants. This benefit is typically expressed as a monthly annuity payment, which provides a predictable stream of income for retirees. One of the defining characteristics of defined benefit plans is the calculation formula used to determine the retirement benefit, often based on factors like salary history and years of service, ensuring that the benefit is paid for the lifetime of the participant. While cash balance plans and money purchase plans are also types of retirement plans, they do not inherently require the distribution of benefits as annuities. Cash balance plans resemble defined benefit plans in some aspects but typically offer participants an account balance that can be taken as a lump sum or rolled over rather than requiring an annuity form of payment. Similarly, money purchase plans are defined contribution plans where the account balance can be withdrawn or rolled over, and do not specifically mandate annuity payments at retirement. The 401(k) plan also provides flexibility in distributions, allowing participants to take lump sums, rollovers, or potentially annuity options, but again doesn't require benefits to be offered strictly as annu