3. All of the following statements concerning taxation of qualified pension plans are correct EXCEPT:

1. Employees do not have to report employer contributions for retirement benefits as taxable income until distributed.
2. If retirement plan payments are being made on a non-lifetime basis, each payment is multiplied by an exclusion ratio to determine tax-free and taxable amounts.
3. In determining the exclusion ratio, an employees cost basis will not be reduced in the form of payment indicates a refund feature.
4. Disability benefits will be taxed in accordance with the annuity rules of IRC Section 72.
5. If an employee has no cost basis in a plan, periodic retirement payments will be totally subject to tax as ordinary income.