Chapter 6: Requirements for Coverage Flashcards
Based on the following information, determine the maximum number of NHCEs who could be excluded from participation and still have the plan satisfy the ratio percentage test of IRC §410(b):
- X Corporation has 46 employees, of which 45 satisfy the plan’s age and
- service requirements.
- Out of the 45 participants, five are HCEs who benefit under the plan and 40
- are NHCEs who benefit under the plan.
- The company wishes to exclude a division from participation in the plan.
- Excluding this division would exclude one HCE.
A. l
B. 10
C. 17
D. 22
E. 23
C. The percentage of benefiting HCEs is 80% (4/5). The percentage of benefiting NHCEs must be at least 70% of this number, or 56% of the NHCEs. There are 40
NHCEs and at least 56%, or 23, of them must benefit. Therefore, 17 NHCEs can be excluded and the plan will satisfy coverage testing. To double-check this
result, calculate the ratio percentage test as follows:
HCE = 4/5 = 80%
NHCE = 23/40 = 57.5%
Ratio Percentage = 71.88%
All of the following are excludable employees for coverage testing under IRC §410(b), EXCEPT:
A. Union employees
B. Hourly employees
C. Terminated participants with 500 or fewer hours of service who are not benefiting
D. Nonresident aliens with no US income
E. Employees who have not met the plan’s age and service requirements
B. Hourly employees may be excluded from the plan but they are not considered excludable employees for coverage testing under IRC §410(b).
Based on the following information, determine the number of employees in the benefiting group for coverage testing under IRC §410(b):
- The plan is a calendar year profit sharing plan.
- The profit sharing contribution for the year is $50,000.
- Participants must be employed on the last day of the plan year to receive an
- allocation.
- Participants must work 1,000 hours during the plan year to receive an
- allocation.
Total nonexcludable employees - 100
Nonexcludable active employees working 1,000 or more hours of service - 65
Nonexcludable active employees working less
than 1,000 hours of service - 10
Nonexcludable employees who terminated with
500 or more hours of service - 20
Nonexcludable employees excluded by class - 5
A. 65
B. 75
C. 80
D.85
E. 100
A. Only the nonexcludable active employees working 1,000 or more hours of service met the allocation requirements and are considered benefiting.
All of the following plans satisfy coverage testing under IRC §41O(b), EXCEPT:
A. Plans that benefit all NHCEs and exclude HCEs
B. Plans that satisfy the ratio percentage test
C. Plans that benefit only collectively bargained employees
D. Plans that benefit only HCEs and exclude NHCEs
E. Plans that benefit 50 percent of the NHCEs and exclude HCEs
D. A plan that excludes all of the employer’s NHCEs will not satisfy the minimum coverage requirements.
All of the following statements regarding coverage testing under IRC §410(b) are TRUE, EXCEPT:
A. In the average benefit test, the plan must satisfy the nondiscriminatory classification test.
B. A plan that fails coverage testing may be amended within 9V2 months after the end of the plan year to comply with IRC §410(b) retroactively.
C. A plan that includes a fail-safe provision may not be able to satisfy coverage testing using the average benefit test.
D. In the average benefit test, the plan must satisfy the average benefit percentage test.
E. In order to pass the ratio percentage test, 70 percent of the nonexcludable employees must be considered benefiting.
E. In order to pass the ratio percentage test, the percentage of NHCEs who benefit under the plan must be at least 70 percent of the percentage of HCEs that benefit under the plan.
Which of the following is/are permissible options for correcting a ratio percentage test failure under IRC §41O(b)?
I. Allocate a contribution to vested employees who terminated employment.
II. Expand the group of HCEs who benefit under the plan.
III. Expand the group of NHCEs who benefit under the plan.
A. I only
B. II only
C. I and III only
D. II and III only
E. I, II and III
C. Expanding the group of HCEs who benefit under the plan will not correct a ratio percentage test failure.
Based on the following information, determine the ratio percentage under IRC §41O(b):
- The plan is a calendar year plan ending December 31, 2012.
- Participants must work 1,000 hours during the plan year and be employed on
- the last day of the plan year to share in the contribution allocation.
- All employees are listed below and all have met the eligibility requirements
- of the plan.
Participant HCE Hours Termination Date
A Yes 2,080
B Yes 1,000 5/31/2012
C No 2,080
D No 425 3/15/2012
E No 1,250 10/1/2012
A. 33.33%
B. 40.00%
C. 50.00%
D.66.67%
E. 100.00%
E.
A. Workforce of the employer 5
B. Ineligible due to age/service 0
C. Terminated with 500 or fewer hours of service and not benefiting 1 (Participant D)
D. Coverage testing group 4
E. NHCEs in coverage testing group 2
F. HCEs in coverage testing group 2
G. Benefiting group 2 (Participants A and C)
H. NHCEs benefiting 1
1. HCEs benefiting 1
J. NHCE ratio (H/E) 50%
K. HCE ratio (I/F) 50%
L. Ratio percentage (J/K) 100%
5
a
1 (Participant D)
4
2
2
2 (Participants A and C)
1
1
50%
50%
100%
Which of the following conditions placed on plan participants is/are going to negatively impact coverage testing under IRC §41O(b)?
I. Participants must be employed on the last day to receive a profit sharing contribution.
II. Participants must work at least 1,000 hours during the plan year to receive a profit sharing contribution.
III. Employees of Division A are not eligible for the plan.
A. I only
B. III only
C. I and II only
D. II and III only
E. I, II and III
E. If the plan includes a last day employed condition or requires 1,000 hours to be eligible for a contribution, it is likely that not all nonexcludable employees will
be benefiting and this affects coverage testing results. In addition, excluding a division of employees from participation also affects coverage testing, resulting
in less than 100 percent coverage of nonexcludable employees.
