Annuities✓ Verified · outline & fact-checked · Sep 2026Difficulty 2/5
Which statement accurately describes how annuities are commonly used by employers?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Defined benefit pension plans are frequently funded by group annuity contracts issued by life insurance companies. The employer purchases the group annuity contract, and individual certificates describe each employee's benefits under the master contract. Group annuities are also used to fund other employer retirement arrangements, including certain qualified plans and 403(b) programs for nonprofit organizations. The group contract pools retirement funding efficiently across the entire employee group.
Why the other options are wrong
- B) Annuities are expressly used to fund retirement obligations, both qualified and nonqualified, so no such prohibition exists.
- C) Qualified plans fund annuities with pre-tax dollars; annuities can be purchased with pre-tax or after-tax funds depending on the arrangement.
- D) A group annuity is a single master contract issued to the employer, with certificates, not separate policies, issued to employees.
Memory hook
Group annuity = one master contract from the employer plus certificates for employees: the pension plan's funding engine.