Chapter 5: Key Employees and Top-Heavy Plans Flashcards
An officer earning more than $165,000 in 2012 may be considered a key employee.
True.
Related rollovers between plans maintained by the same employer are included only in the recipient plan for top-heavy determination.
True.
Catch-up contributions are disregarded when determining a key employee’s allocation rate.
True.
A plan may be part of a permissive aggregation group if it satisfies coverage and nondiscrimination requirements when considered together with a required aggregation group.
True.
An employee with annual compensation in excess of $80,000 (as indexed) is a key employee in 2012.
False. The employee’s compensation level alone will not make the employee a key employee. Do not confuse HCE determination with key employee determination.
Employer matching contributions may be used to satisfy top-heavy minimum requirements.
True.
In a new plan, the determination date is the last day of the first plan year.
True.
A plan that has 25 percent vesting at one year of service, 50 percent vesting at two years of service and 100 percent vesting at three years of service satisfies the topheavy minimum vesting requirements.
True.
All of the following statements regarding top-heavy requirements are TRUE, EXCEPT:
A. Distributions due to death made in the five-year period ending on the determination date are included in the top-heavy ratio.
B. A safe harbor 401(k) plan that consists solely of contributions that satisfy the safe harbor requirements is deemed not top-heavy.
C. Top-heavy defined contribution plans have minimum allocation requirements.
D. Rollovers between plans of umelated employers are included only in the distributing plan’s top-heavy testing.
E. Top-heavy plans have minimum vesting requirements.
A. Only certain in-service withdrawals made in the five-year period are included in the top-heavy ratio. A distribution due to death would only be included if made
in the one-year period ending on the determination date and the deceased participant had at least one hour of service in that same period.
Based on the following information, determine the minimum top-heavy allocation to Participant A:
- Participant A is a non-key employee.
- Participant A’s IRC §415 compensation for the plan year is $40,000.
- Participant A’s plan compensation for the plan year is $20,000 since he
- entered the plan mid-year.
- The highest allocation rate for a key employee for the plan year is 4%.
- The plan is top-heavy for the current plan year.
A. $0
B. $600
C. $800
D. $1,200
E. $1,600
D. The top-heavy minimum contribution is the lesser of 3 percent of compensation or the highest allocation rate for any key employee. Since the highest allocation
rate for a key employee was 4 percent, the top-heavy minimum contribution is 3 percent of compensation. Compensation for purposes of determining top-heavy
minimum allocations is IRC §415 compensation, which is $40,000 for Participant A. 3 percent of $40,000 is $1,200.
Based on the following information, determine the top-heavy ratio for 2012:
PP-12/31/2010-12/31/2011-Term-Dist Amount-Dist
A- Non-key $44,000 $47,000 {Blank} {Blank} {Blank}
B -Non-key $62,000 $68,000 {Blank} {Blank} {Blank}
C-Non-key $30,000 $35,000 {Blank} {Blank} {Blank}
D-Key $80,000 $90,000 {Blank} {Blank} {Blank}
E -Non-key $10,000 $12,000 {Blank} {Blank} {Blank}
F -Key $25,000 $16,000 {Blank} $10,000 07/31/2011
G-Key $0 $0 12/01/2007 $10,000 12/15/2007
H-Key $0 $0 01/15/2007 $5,000 12/10/2007
I - Non-key $7,500 $0 06/15/2009 $8,000 11/20/2011
J- Non-key $900 $0 09/12/2011 $1,000 11/20/2011
A. 39.55%
B. 40.56%
C. 41.58%
D. 41.73%
E. 43.38%
C. The determination date is 12/31/2011. The top-heavy ratio is determined by taking account balances as of 12/31/2011 and adjusting them for 1) distributions made in the one-year period ending on the determination date for participants with one hour of service in that period (Participant J), and 2) certain in-service withdrawals made in the five-year period ending on the determination date
(Participant F).
The top-heavy ratio is the key employees’ includible account balances and distributions ($90,000 + $16,000 + $10,000 = $116,000) divided by the includible account balances and distributions for both key and non-key employees ($47,000 + $68,000 + $35,000 + $90,000 + $12,000 + $16,000 + $10,000 + $1,000 = $279,000). $116,000/ $279,000 = 41.58%
All of the following statements regarding top-heavy requirements are TRUE, EXCEPT:
A. A plan is top-heavy if more than 60 percent of the benefits are attributable to key employees.
B. After-tax employee contributions are included in calculating the top-heavy ratio.
C. A top-heavy minimum contribution is required for all plan participants.
D. Catch-up contributions made in the year in which the determination date falls are included in calculating the top-heavy ratio.
E. In-service withdrawals made during the five-year period ending on the determination date are included in calculating the top-heavy ratio.
C. If a top-heavy minimum contribution is required, it need only be allocated to non-key employees who are employed on the last day of the plan year, not all employees.
All of the following are key employees for 2012, EXCEPT:
A. The spouse of a sole proprietor
B. The mother (who earns $50,000) of a 2 percent owner (who earns $200,000)
C. The son of a 50 percent owner
D. An includible officer earning $175,000
E. A 10 percent partner in a partnership
B. The stock ownership (2 percent) is attributed to the mother, but she does not have enough compensation to be considered a key employee.
Which of the following statements top-heavy plans is/are TRUE?
I. A plan termination distribution from a plan in a required aggregation group is included in the top-heavy determination.
II. Forfeitures are considered employer contributions for determining top-heavy minimum allocation requirements.
III. Plans are permissively aggregated only when to do so will cause the group not to be top-heavy.
A. I only
B. II only
C. I and III only
D. II and III only
E. 1, II and III
E. All of the statements are true.
Based on the following information, determine which of the employees is/are key employees as of December 31, 2012:
- The company employs 38 people.
- This is the first year of the company’s operation.
- None of the employees are related.
Employee Ownership Officer Compensation
A 10% Yes $210,000
B 8% Yes $180,000
C 4% Yes $100,000
D 2% Yes $100,000
E 0% Yes $96,000
A. Employee A only
B. Employees A and B only
C. Employees A, Band Conly
D. Employees A, B, C and D only
E. Employees A, B, C, D and E
B. Key employees would be those who 1) own more than 5 percent, 2) own more than 1 percent and earn more than $150,000, or 3) are officers who earn more than $165,000. Employees A and B are both more than 5 percent owners.
