Chapter 1: Plan Qualification Requirements

Question 2

A qualified plan may rely on operational compliance alone.

Answer 2

False. A plan is not qualified unless it satisfies the requirements of the law in both form (plan document) and operation.

Question 3

A plan sponsor is not required to submit the plan to the IRS for a letter of determination.

Answer 3

True.

Question 4

The consistent failure of a plan to make the required minimum distributions (RMDs) under IRC §401(a)(9) could disqualify a plan.

Answer 4

True.

Question 5

A qualified plan must accept a direct transfer of an eligible rollover distribution.

Answer 5

False. A qualified plan must permit employees to transfer eligible rollover distributions to a qualified plan. However, a qualified plan is not required to accept rollovers.

Question 6

A sponsoring organization must expect to have at least 30 employers adopting a basic plan document.

Answer 6

True.

Question 7

Form 5307 is used to request a determination letter for an individually designed plan.

Answer 7

False. Form 5300 is used for individually designed plans.

Question 8

An advisory letter is issued to the sponsoring organization of an M&P plan.

Answer 8

False. An advisory letter is issued for volume submitter plans.

Question 9

SCP may be used to correct a significant operational failure as long as it is corrected or substantially corrected within the two-year correction period.

Answer 9

True.

Question 10

The plan sponsor may use Audit CAP even if the plan is currently under IRS audit.

Answer 10

True.

Question 11

An SMM must be provided to each participant and each beneficiary who is receiving benefits under the plan no later than 210 days after the close of the plan year in which the amendment was adopted.

Answer 11

True.

Question 12

All of the following statements regarding plan qualifications are TRUE, EXCEPT:

A. Qualified plans must satisfy minimum coverage requirements.

B. Qualified plans must satisfy minimum vesting standards.

C. Qualified plans must provide RMDs.

D. Qualified plans must provide for assignment of benefits to creditors.

E. Qualified plans must impose a cap on compensation used for benefits.

Answer 12

D. A qualified plan is specifically prohibited from permitting the assignment of benefits to creditors.

Question 13

All of the following are advantages of having a qualified plan, EXCEPT:

A. Tax-deductible employer contributions.

B. Earnings on employer contributions are tax deductible to the employee.

C. Deferred taxation to the employee on employer contributions.

D. Most distributions are eligible for rollover.

E. Deferred taxation on trust earnings.

Answer 13

B. Taxation on earnings is deferred. It is not a deduction to be taken by plan participants.

Question 14

All of the following statements regarding plan documents are TRUE, EXCEPT:

A. An M&P plan consists of a basic plan document and a trust document.

B. An M&P plan must be maintained by a sponsoring organization.

C. A volume submitter plan consists of a specimen plan and optional provisions that may be used in that specimen plan.

D. A trust document may be separate from the plan document.

E. A trust document may be incorporated within the plan document.

Answer 14

A. An M&P plan document consists of a basic plan document and an adoption agreement.

Question 15

Which of the following statements regarding plan documents is/are TRUE?

I. An opinion letter is issued to a sponsoring organization of an M&P plan.

II. An advisory letter is issued to the sponsor of a volume submitter document.

III. A determination letter is issued to the plan sponsor of an individually designed plan.

A. I only

B. II only

C. I and III only

D. II and III only

E. I, II and III

Answer 15

E. All of the statements are true.

Question 16

All of the following statements regarding VCP are TRUE, EXCEPT:

A. VCP may be used to correct violations of form (plan document).

B. VCP may be used to correct violations of operation.

C. VCP may be used to correct egregious failures.

D. VCP may be used even if the plan does not have a determination letter.

E. VCP may be used by plans currently under examination.

Answer 16

E. To use VCP to correct a violation, the plan must not be under examination.

Question 17

Which of the following is/are potential disqualification issues addressed under EPCRS?

I. Plan document failures

II. Catastrophic failures

III. Demographic failures

A. I only

B. II only

C. I and III only

D. II and III only

E. I, II and III

Answer 17

C. The potential disqualification issues addressed by EPCRS include plan document failures, operational failures, demographic failures and employer eligibility failures.

Question 18

All of the following statements regarding notices to participants of plan provisions and amendments are TRUE, EXCEPT:

A. The SPD must be written in a manner that is reasonably expected to be understood by the average plan participant.

B. For an existing plan, a participant must receive the SPD no later than 30 days after he or she first becomes a participant.

C. For a new plan, a participant must be receive the SPD no later than 120 days after the earlier of the effective date or the adoption date of the plan.

D. A beneficiary is not required to receive an SPD until 90 days after he or she begins to receive benefits from the plan.

E. An SMM is required when there has been a material modification to the plan or when the information provided in the SPD has changed.

Answer 18

B. For an existing plan, a participant must receive the SPD no later than 90 days after he or she first becomes a participant.

Question 19

All of the following statements regarding plan qualifications are TRUE, EXCEPT:

A. Qualified plans must provide for participant loans.

B. Qualified plans must limit benefits or contributions under IRC §415.

C. Qualified plans must allow for eligible rollover distributions to another eligible retirement plan.

D. Qualified plans must contain provisions protecting benefits in the event of a merger with another plan.

E. Qualified plans must provide for RMDs under IRC §401(a)(9).

Answer 19

A. Although it is very common to allow for participant loans in a qualified plan, it is not a requirement.

Question 20

What does CAP stand for?

Answer 20

Closing Agreement Program, as in Audit Closing Agreement Program.

Question 21

What does DFVC stand for?

Answer 21

Delinquent Filer Voluntary Compliance Program.

Question 22

What does EPCRS stand for?

Answer 22

Employee Plans Compliance Resolution System.

Question 23

What does M&P stand for?

Answer 23

Master or prototype plan.

Question 24

What does SCP stand for?

Answer 24

Self-Correction Program.

Question 25

What does SMM stand for?

Answer 25

Summary of material modifications.

Question 26

What does SPD stand for?

Answer 26

Summary plan description.

Question 27

What does VFCP stand for?

Answer 27

Voluntary Fiduciary Compliance Program.

Question 28

What does VCP stand for?

Answer 28

Voluntary Correction with IRS Approval Program.

Question 29

All of the following statements regarding plan disqualification are TRUE, EXCEPT:

A. The employer loses its deduction for vested contributions only.

B. Participant distributions may not be eligible for rollover.

C. The statute of limitations is generally 3 years from the due date of a filed tax return.

D. To avoid disqualification, defects must be corrected for all affected years, even if they are closed tax years.

E. HCEs may be taxed on the entire vested account balance if the plan is disqualified solely due to a coverage violation.

Answer 29

A. If a plan is disqualified, the employer loses its deduction for nonvested contributions made to the plan for open tax years.

Question 30

Which of the following statements regarding requirements for a qualified plan to be able to correct a significant failure under SCP is/are TRUE?

I. The violation must not involve misuse or diversion of assets.

II. The plan document must be a pre-approved prototype document.

III. The plan must have a favorable determination letter or an opinion letter.

A. I only

B. II only

C. I and III only

D. II and III only

E. I, II and III

Answer 30

C. The Self-Correction Program (SCP) is a self-initiated correction program for resolving operational failures. Voluntary use of SCP may resolve significant violations and insignificant violations, but voluntary correction under SCP is available for only a limited period of time to fix a significant violation. SCP is also available for resolving insignificant operational failures that are discovered in an audit.

If a qualification failure involves the diversion or misuse of plan assets, relief under SCP is not available. Thus, statement I is true.

The plan document need not be a pre-approved prototype document to qualify for relief under SCP. However, a qualified plan must satisfy the favorable letter requirement if the operational failure is a significant violation. The favorable letter requirement is satisfied if the plan has a favorable opinion letter, advisory letter or
determination letter, depending upon the type of plan.

Question 31

All of the following statements regarding plan qualification under IRC §401(a) are TRUE, EXCEPT:

A. A contribution may be returned to the employer if it was made due to a mistake of fact.

B. A qualified plan must limit the compensation used to determine benefits, under IRC §401(a)(17).

C. Contributions to a profit sharing plan must be recurring and substantial.

D. A qualified plan must satisfy the minimum vesting standards under IRC §401(a)(7).

E. Contributions may be returned to the employer due to plan disqualification.

Answer 31

E. Plan disqualification does not result in a return of contributions to the employer.

Question 32

All of the following statements regarding plan documents are TRUE, EXCEPT:

A. An M&P plan consists of a basic plan document and a trust document.

B. A favorable determination letter provides assurance from the IRS that a plan document satisfies the qualification rules.

C. An individually designed plan is not required to obtain a favorable determination letter.

D. A volume submitter plan is not required to obtain a favorable determination letter.

E. An M&P plan is not required to obtain a favorable determination letter.

Answer 32

A. A master or prototype (M&P) plan made up of two parts: a basic plan document and an adoption agreement. A plan is never required to obtain a favorable determination letter, regardless of the plan document type, but it is recommended as a favorable determination letter provides assurance from the IRS that a plan document satisfies the qualification rules.

Question 33

All of the following statements regarding VCP are TRUE, EXCEPT:

A. VCP requires payment of a compliance fee to the IRS.

B. VCP users request a compliance statement from the IRS.

C. VCP may not be used to correct insignificant qualification violations.

D. An application under VCP may not be filed if the plan is under IRS audit.

E. Any VCP submission may be made as an anonymous submission.

Answer 33

C. The Voluntary Correction with IRS Approval Program (VCP) is a self-initiated program for fixing qualification failures. VCP may be used to correct both significant and insignificant failures regardless of how much time has passed since the violation occurred.

The program requires disclosure to the IRS and a payment to the IRS (called a VCP compliance fee). An application under VCP may not be filed if the plan is under IRS audit. Relief under VCP is in the form of a compliance statement from the IRS, which addresses the failures identified, the terms of correction and the time period within which proposed corrections must be made. If desired, a VCP submission may be made as an anonymous submission, regardless of the type of plan or the type of failure.

Question 34

Which of the following statements regarding Audit CAP is/are TRUE?

I. The employer must agree to correct the violation.

II. The employer must pay a sanction.

III. The employer must sign a closing agreement with the IRS.

A. I only

B. III only

C. I and II only

D. II and III only

E. I, II and III

Answer 34

E. All three statements are true. The Audit Closing Agreement Program (Audit CAP) arises when qualification failures are found in an IRS examination of the plan, and the violation is not an insignificant operational failure that is eligible for relief under SCP. The IRS examination may arise as part of either an audit or a review in connection with a favorable determination letter application. To obtain relief under Audit CAP, the employer must agree to correct the violation, pay a sanction, and sign a closing agreement with the IRS.

Question 35

All of the following statements regarding the IRS submission process are TRUE, EXCEPT:

A. The submission cycle for individually designed plans is once every seven years.

B. Form 2848 must be included in the submission process unless the submitting individual is the plan sponsor.

C. The IRS issues a Revenue Procedure each year outlining the determination letter process.

D. CPAs qualify as designated representatives on Form 2848.

E. The submission cycle for pre-approved plans is once every six years.

Answer 35

A. The submission cycle for individually designed plans and pre-approved plans is once every six years. If the submitting individual is not the plan sponsor, a signed Power of Attorney (Form 2848) must be included. Only attorneys, CPAs, enrolled agents, enrolled actuaries and enrolled retirement plan agents (ERPAs) may be designated as representatives under Form 2848.

The IRS issues a Revenue Procedure each year outlining the determination letter process. Revenue Procedure XXXX-8 (where the first four digits are the year of issuance) is updated annually to reflect current user fees.