Chapter 6: Nondiscrimination Flashcards
If contributions, benefits, or availability of BRFs are discriminatory, a corrective amendment may be adopted within 9½ months after the close of the plan year.
True or False?
True
A uniform points plan is the only type of nondesign-based safe harbor defined contribution plan.
True or False?
True
A rate group consists of a single HCE and each NHCE who has an equal or greater allocation rate or accrual rate.
True or False?
False. A rate group is established for each HCE. However, there may be more than one HCE in a rate group if the HCE (not being tested) has an equal or greater allocation rate or accrual rate than the HCE being tested. The rate group consists of the HCE and each participant (HCE and NHCE) who has an equal or greater allocation rate or accrual rate.
If plans are aggregated to satisfy the coverage tests under IRC §410(b), they must be aggregated to satisfy the nondiscrimination tests under IRC §401(a)(4).
True or False?
True
If two or more plans are permissively aggregated for nondiscrimination testing, then the nondiscriminatory classification tests must be applied as if the plans were a single plan.
True or False?
True
For purposes of satisfying the gateway contribution test, each NHCE who benefits under the plan must receive an allocation of at least 5 percent of IRC §415 compensation.
True or False?
False. The lowest allocation rate for any NHCE who benefits under the plan must be at least equal to the lesser of one-third of the highest allocation rate for any HCE or 5 percent of IRC §415 compensation.
Age-based plans automatically satisfy nondiscrimination testing since every participant has the same EBAR.
True or False?
False. Age-based plans are designed to satisfy nondiscrimination purposes under this premise, but the plans do not automatically pass. For example, participant EBARs could vary due to IRC §415 limitations or top-heavy minimum contributions.
Cross-tested defined contribution plans may not use the safe harbor approach to satisfying nondiscrimination under IRC §401(a)(4).
True or False?
True
A plan must benefit at least one NHCE to satisfy nondiscrimination requirements.
True or False?
False. An employer with only HCEs, or where the NHCEs are excludable for coverage testing, may still satisfy nondiscrimination requirements.
Rate groups must satisfy the average benefit test.
True or False?
False. Rate groups can satisfy either the ratio percentage test or the average benefit test.
Which of the following statements regarding nondiscrimination testing under IRC §401(a)(4) is NOT TRUE?
A. A design-based safe harbor plan is deemed to be nondiscriminatory.
B. A plan that provides an allocation that is a uniform percentage of compensation is a design-based safe harbor plan.
C. A plan that provides an allocation that is a uniform dollar amount to each participant is a nondesign-based safe harbor plan.
D. Design-based safe harbor plans must use a definition of compensation for allocation purposes that satisfies IRC §414(s).
C. A plan that allocates a uniform dollar amount to each participant is a design-based safe harbor plan and is deemed to be nondiscriminatory.
Which of the following provisions affect a plan’s ability to rely on the IRC §401(a)(4) safe harbors?
A. Multiple entry dates
B. Imposing a last day requirement for allocation purposes
C. Imposing an hours of service requirement for allocation purposes
D. Limiting allocations to a total of $5,000
D. A plan that provides for a lower allocation to one or more HCEs may still rely on the IRC §401(a)(4) safe harbors, but not one that does the same for NHCEs.
Which of the following statements regarding general testing is NOT TRUE?
A. Rate groups that satisfy the coverage tests of IRC §410(b) are nondiscriminatory under IRC §401(a)(4).
B. Rate groups can be tested by converting the employer contributions into allocation rates.
C. Rate groups can be tested by converting the employer contributions into EBARs.
D. Determining whether a defined contribution plan satisfies nondiscrimination requirements on a benefits basis is a type of safe harbor and avoids general testing.
D. General testing, or rate group testing, is performed when a plan cannot satisfy the nondiscrimination requirements under the safe harbor approach. Cross-testing, which uses defined benefit principles to demonstrate nondiscrimination in a defined contribution plan (or vice versa), is a type of general testing.
Based on the following information, determine the EBAR for the following employee:
Annual Compensation $160,000
Allocation $35,000
Actuarial Factor .006877
A. 3.18%
B. 6.64%
C. 31.81%
D. 66.47%
C. The EBAR is $35,000 / (.006877 * $160,000) = 31.81%
Which of the following statements regarding EBARs is NOT TRUE?
A. EBARs may be expressed as percentages of average annual compensation.
B. The testing age used to normalize the benefits must be the Social Security retirement age.
C. EBARs may be expressed as dollar amounts.
D. The allocations used in the EBAR calculation may be based on the current plan year.
B. The testing age must be a uniform normal retirement age and is usually the normal retirement age specified in the plan.
Which of the following statements regarding gateway requirements is NOT TRUE?
A. The one-third test must be determined on the basis of IRC §415 compensation.
B. The one-third test is satisfied if the lowest permissible allocation rate for any NHCE who benefits under the plan is 2%, and the highest allocation rate for any HCE who benefits under the plan is 5%.
C. The 5 percent test is satisfied if each NHCE receives an allocation of 6% of IRC §415 compensation.
D. The one-third test is satisfied if the lowest permissible allocation rate for any NHCE who benefits under the plan is 3%, and the highest allocation rate for any HCE who benefits under the plan is 9%.
A. The one-third test is based on allocation rates. Allocation rates are determined based on plan compensation that satisfies IRC §414(s), which may or may not satisfy IRC §415.
Which of the following statements regarding nondiscrimination testing is NOT TRUE?
A. Plans cannot be aggregated for coverage and tested separately for nondiscrimination.
B. Plans cannot be permissively aggregated unless they have the same plan year.
C. Elective deferrals can be general tested to satisfy nondiscrimination requirements.
D. A plan may permissively disaggregate otherwise excludable employees for nondiscrimination purposes.
C. The ADP test is the only method available for elective deferrals to satisfy the nondiscrimination requirements.
Which of the following statements regarding BRFs is NOT TRUE?
A. Life insurance is considered an ancillary benefit.
B. A lump sum distribution is an optional form of benefit.
C. Participant-direction of investments is a right or feature subject to nondiscrimination requirements.
D. A BRF is considered nondiscriminatory if it satisfies either the current availability test or the effective availability test.
D. Both tests (current and effective availability) must be satisfied for BRFs to be considered nondiscriminatory.
