Chapter 5: Average Benefits Test and Special Rules Flashcards
To be excludable under the annual coverage testing method, an employee must be excludable for the entire plan year.
True or False?
True
A plan passes the nondiscriminatory classification test if it passes either the reasonable classification test or the nondiscriminatory classification ratio test.
True or False?
False. To pass the nondiscriminatory classification test, a plan must pass both the reasonable classification test and the nondiscriminatory classification ratio test.
A plan with an NHCE concentration percentage of 70 percent will have a higher safe harbor percentage than a plan with an NHCE concentration percentage of 80 percent.
True or False?
True
A plan with a coverage ratio percentage that is less than the safe harbor percentage fails the nondiscriminatory classification ratio test.
True or False?
False. This type of plan could still pass the nondiscriminatory classification test if the coverage ratio percentage satisfies the unsafe harbor percentage, and the plan passes the facts and circumstances test.
When calculating the ABP, both employer contributions and elective deferrals are included.
True or False?
True
Permissive aggregation might be used when one plan fails coverage on its own but could pass when aggregated with another plan.
True or False?
True
If an employee is part of two or more disaggregated groups during a plan year, each group must take into account all allocations made to the employee’s account during the plan year.
True or False?
False. Each disaggregated group generally takes into account only benefits accrued or allocations made while the employee is a member of that group.
A plan must satisfy either the nondiscriminatory classification test or the ABP test to satisfy the average benefit test.
True or False?
False. A plan must satisfy both of these tests in order to pass the average benefit test.
If NHCEs are excluded from the plan, the plan is deemed to satisfy coverage requirements.
True or False?
False. If there are no NHCEs in the coverage testing group, the plan is deemed to satisfy coverage requirements. This is different from excluding NHCEs from participating in the plan altogether.
Leased employees are part of the recipient employer’s workforce for coverage testing purposes.
True or False?
True
Which of the following is not a reasonable classification with respect to the average benefit test?
A. Hourly paid employees
B. Salary paid employees
C. Janitors
D. Employees named Joe Smith
D. Naming individual employees is not a reasonable classification for purposes of the average benefit test.
Which of the following statements regarding the ABP test is NOT TRUE?
A. The NHCE actual benefit percentage is the average of the employee benefit percentages for each NHCE in the coverage testing group.
B. Only employees who are benefiting are considered when determining the employee benefit percentages.
C. Elective deferrals are considered employer contributions and are, thus, included when determining employee benefit percentages.
D. The employee benefit percentages may be determined based on allocation rates or benefit rates.
B. All employees in the coverage testing group are considered, not just those that are benefiting.
Which of the following statements regarding permissive aggregation for coverage testing is NOT TRUE?
A. Plans must have the same plan year to be permissively aggregated.
B. A plan may not be included in more than one group of aggregated plans for coverage testing purposes.
C. A qualified plan under IRC §401(a) is not allowed to take into account a SEP to demonstrate that it passes coverage.
D. An employee must meet the minimum age and service requirements for all plans in a permissively aggregated group to be considered a nonexcludable employee.
D. If the plans being aggregated have different age and/or service requirements, the excludable employees are determined based on the lowest age and service requirement.
Based on the following information, determine the maximum number of HCEs that may benefit to pass the ABP test.
*The coverage testing group consists of 70 NHCEs and 30 HCEs.
*Of the 70 NHCEs, 50 have a benefit percentage of 9 percent, ten have a benefit percentage of 4 percent and the other ten do not benefit under the plan.
*Each HCE either has a benefit percentage of 15 percent or does not benefit under the plan.
A. 10
B. 12
C. 20
D. 24
C. The NHCE benefit percentage is [(50 x 9%) + (10 x 4%) + (10 x 0%)] / 70 = 7%. The NHCE benefit percentage must be no less than 70% of the HCE benefit percentage. Therefore, the maximum HCE benefit percentage is 10%. The aggregate benefit percentage for all 30 HCEs cannot exceed 10% x 30 = 300%. Thus, the maximum number of HCEs that may benefit is 300% / 15% = 20.
Which of the following statements regarding testing otherwise excludable employees separately for coverage purposes is NOT TRUE?
A. Separate testing may be done on a year-to-year basis.
B. If the average benefit test is used for statutory employees, it must also be used for the otherwise excludable employees.
C. Employees with more than one year of service are not considered otherwise excludable employees in plans with a two-year eligibility condition, unless they are not age 21.
D. The 401(k) component of the plan may use the otherwise excludable option even if the 401(m) component of the plan does not.
B. Statutory employees may be tested using the ratio percentage test while otherwise excludable employees may be tested using the average benefit test and vice versa.
