DC-3 Chapter Questions

Question 1

All of the following are conditions for an individual to be considered a leased employee, EXCEPT:
A. The recipient and leasing organization must have an agreement covering the services of the individual.
B. The individual must be providing services on a substantially full-time basis for at least oneyear.
C. The recipient must have primary direction or control over the individual’s services.
D. The leasing organization must be the common law employer of the individual.
E. The individual must be covered by the leasing organization’s plan.

Answer 1

The answer is E. There is no requirement that an individual be covered by a plan in order to be considered a leased employee.

Question 2

Which of the following statements regarding the treatment of leased employees in the recipient’s plan is/are TRUE?
I. They are treated as employees for purposes of applying the nondiscrimination tests under IRC §§401(a)(4), 401(k) and 401(m).
II. They are treated as employees for purposes of determining who are HCEs.
III. They may not participate in an employee stock ownership plan (ESOP).
A. I only
B. II only
C. I and II
D. II and III
E. I, II and III

Answer 2

The answer is E. Leased employees are treated similarly to employees for nondiscrimination purposes, but it appears to be the IRS’s view that leased employees may not participate in an ESOP maintained by the recipient company or any member of its controlled group.

Question 3

Which of the following statements regarding the leasing organization’s multiple employer plan is/are TRUE?
I. Only one Form 5500 is filed regardless of the number of recipients participating.
II. Contributions from both the leasing organization and the participating recipients are aggregated to determine the IRC §415 limit.
III. Contributions made by the leasing organization and the participating recipients are aggregated then prorated, based on the number of leased employees, to the organization for deduction purposes.

A. I only
B. II only
C. I and II
D. II and III
E. I, II and III

Answer 3

The answer is C. Statement I and II are true. Statement III is false. Each participating employer may deduct the amount contributed by such organization.

Question 4

All of the following are relevant factors in determining if the recipient has primary direction or control over services of a leased employee, EXCEPT:
A. Whether services must be performed by a particular person
B. Whether services must be performed in the order or sequence set by the recipient
C. Whether the individual is subject to supervision by the recipient
D. Whether the recipient has the right to hire or fire the individual
E. When the individual is to perform services

Answer 4

The answer is D. It is not relevant whether the recipient has the right to hire or fire the individual.

Question 5

All of the following statements regarding multiple employer plans are TRUE, EXCEPT:
A. The plan must apply the minimum age and service eligibility requirements as if each employer were participating in a single-employer plan.
B. The plan must consider each unrelated employer separately for purposes of coverage testing under IRC §410(b).
C. The plan must consider each unrelated employer separately for purposes of ADP testing.
D. Each employer must recognize service for vesting purposes without considering service performed for any other participating employer.
E. Annual additions attributable to all participating employers must be considered when determining an individual’s maximum annual addition.

Answer 5

The answer is D. In a multiple employer plan, service with all participating employers, even if unrelated, must be considered when determining a participant’s vested service.

Question 6

All of the following statements regarding business entity types are TRUE, EXCEPT:
A. A sole proprietorship is an unincorporated business owned by only one person.
B. A partnership is an unincorporated business owned by more than one individual.
C. An LLP must be treated as a partnership for federal tax purposes.
D. S corporation income flows to the shareholders and is taxed as if the shareholders were partners.
E. A C corporation is taxed as a corporation.

Answer 6

The answer is C. An LLP may elect to be taxed as a partnership or as a corporation.

Question 7

Based on the following information, determine the net earned income for Partner A:
• Partner A owns 30% of the partnership.
• The partnership has net income, before the profit sharing contribution, of $450,000.
• The partnership contributes $50,000 to the plan for nonpartner employees.
• Partner A’s self-employment tax is $9,000.
• Partner A receives a profit sharing allocation equal to 5% of compensation.
A. $105,714
B. $110,000
C. $114,286
D. $115,500
E. $120,000

Answer 7

The answer is B.
Partnership income $450,000
Less contribution to employees ($50,000)
Net income to partners $400,000
Partner A’s portion of income (30%) × .30
Partner A’s income $120,000
Less ½ of SE Tax for Partner A ($4,500)
Partner A’s income $115,500
Partner A receives a profit sharing allocation equal to 5 percent of compensation. The algebraicformula is:
x = .05($115,500 – x)
x = $5,775 – .05x
1.05x = $5,775
x = $5,500
Hence, Partner A’s net earned income = $115,500 - $5,500 = $110,000.

Question 8

All of the following statements regarding self-employed individuals are TRUE, EXCEPT:
A. A qualified plan may cover a self-employed owner as if that individual were an employee.
B. Compensation for plan purposes is W-2 wages.
C. Pre-tax elective contributions are included in compensation in determining the maximum
deductible employer contribution under IRC §404.
D. A limited partner will not necessarily derive any earned income from a partnership.
E. Earned income is not treated as currently available until the end of the taxable year.

Answer 8

The answer is B. Plan compensation for a self-employed individual is earned income, not W-2 wages.

Question 9

All of the following safe harbor tests may be used to satisfy the QSLOB administrative scrutiny test, EXCEPT:
A. Mergers and acquisitions
B. ADP
C. Maximum or minimum benefits
D. Statutory
E. Industry segment

Answer 9

The answer is B. The ADP safe harbor is not a QSLOB safe harbor. There are six QSLOB safe harbors. The additional two are the different industries safe harbor and average benefits safe harbor.

Question 10

All of the following statements regarding QSLOBs are TRUE, EXCEPT:
A. They are treated as a single employer for vesting.
B. They are treated as a separate line of business for coverage.
C. They are treated as a single employer for eligibility.
D. They are treated as a separate line of business for nondiscrimination.
E. They are treated as a separate line of business for IRC §415.

Answer 10

The answer is E. Testing for IRC §415 is performed as a single employer not on a QSLOB basis.

Question 11

1. Based on the following information, determine brother-sister controlled group status:
   • The individuals listed are not related.

Individual W Corporation X Corporation Y Corporation
A 50% 40% 56%
B 0% 19% 17%
C 50% 16% 11%
D 0% 25% 16%
Total 100% 100% 100%

A. None
B. W and X only
C. W and Y only
D. X and Y only
E. W and X, X and Y only

Answer 11

The answer is D. Corporations W and X have common ownership of 56 percent and, therefore, donot satisfy the common control test even though they satisfy the effective control test (56 percent). Corporations X and Y have common ownership of 100 percent and effective control of 84 percent so the controlled group requirements are satisfied. Corporations W and Y have common ownership of 67 percent and, therefore, do not satisfy the common control test, even though they satisfy the effective control test (61 percent).

Question 12

All of the following conditions are necessary to avoid spousal attribution for controlled group purposes,
EXCEPT:
A. The spouse must not have any direct ownership in the business.
B. The spouse must not be a director or employee of the business.
C. The spouse must not participate in the management of the business.
D. The spouse must not inherit the business upon death of the business owner.
E. No more than 50 percent of the business’ gross income may be derived from passive investments.

Answer 12

The answer is D. The business owner’s interest cannot be subject to legal restrictions on sale or transfer without the approval of the spouse (for example, an option to buy the business owner’s interest or a right of first refusal under which the spouse gets the first opportunity to buy the interest before it is sold to anyone else). However, this does not mean that the spouse cannot inherit the business.

Question 13

All of the following statements regarding attribution for controlled group purposes are TRUE, EXCEPT:
A. Ownership is attributed from husband to wife unless the business is wholly owned by the husband and certain requirements are met.
B. Ownership is attributed from a minor child to a parent.
C. Ownership is attributed from an adult child to a parent if the parent owns more than 50 percent of the corporation.
D. Ownership is attributed from a grandparent to a grandchild if the grandchild owns more than 50 percent of the corporation.
E. Ownership is attributed from a father-in-law to a son-in-law.

Answer 13

The answer is E. Ownership may be attributed from a father to a daughter but would not be attributed to the daughter’s husband.

Question 14

All of the following IRC sections consider controlled group members as a single-employer, EXCEPT:
A. Eligibility and coverage (IRC §410)
B. Deduction (IRC §404)
C. Top-heavy (IRC §416)
D. Vesting (IRC §411)
E. Annual additions (IRC §415)

Answer 14

The answer is B. Generally, for deductibility purposes, controlled group members are not treated as a single-employer. If the members participate in the same plan, they may be treated as a single-employer.

Question 15

All of the following statements regarding affiliated service groups are TRUE, EXCEPT:
A. An FSO can be part of both an A-Org group and a B-Org group.
B. An FSO of an A-Org group must be a professional service organization.
C. An A-Organization must be a service organization.
D. A B-Organization need not be a service organization.
E. An A-Organization must have some ownership in the FSO.

Answer 15

The answer is B. FSOs in an A-Org group must be professional service organizations only if they are corporations. If the FSO is a partnership or a sole proprietorship, this rule does not apply.

Question 16

All of the following are effects of being an affiliated service group, EXCEPT:
A. An employee’s service with all group members is credited when determining plan eligibility.
B. Plans must satisfy coverage requirements considering all employees in the affiliated service group.
C. HCE status is determined by looking at the ownership in each entity separately.
D. Annual additions for all plans in the group are aggregated to determine if the IRC §415 limits have been exceeded.
E. An employee’s service with all group members is credited when determining vesting percentages.

Answer 16

The answer is C. HCE status is determined by treating the affiliated service group members as a single-employer.

Question 17

All of the following statements regarding attribution in determining affiliated service groups are
TRUE, EXCEPT:
A. Ownership interest is attributed between spouses.
B. Ownership interest is attributed from parent to adult child only if the parent owns more than 50 percent of the company.
C. Ownership interest is not attributed between siblings.
D. Ownership interest is attributed from grandchild to grandparent.
E. Ownership interest is not attributed from grandparent to grandchild.

Answer 17

The answer is B. Ownership is attributed from parent to child no matter the age—the adult reference in the answer was a red herring. Do not confuse the attribution under IRC §318 used for the affiliated service group rules with that of IRC §1563 used for controlled group determinations.

Question 18

All of the following activities would be considered management functions, EXCEPT:
A. Supervisory roles
B. Hiring employees
C. Investing 401(k) plan assets
D. Setting employee compensation
E. Business planning

Answer 18

The answer is C. The law does not define management functions. However, the term should be interpreted under common business practices. Investing 401(k) assets would not be a management function. It would be a role for the plan trustee.

Question 19

All of the following statements regarding IRC §414(s) compensation are TRUE, EXCEPT:
A. A plan using a safe harbor definition of IRC §414(s) compensation for nondiscrimination testing need not perform the compensation ratio test.
B. A plan using a nonsafe harbor definition of IRC §414(s) compensation for nondiscrimination testing must apply such definition consistently for all participants.
C. A plan may meet the safe harbor definition of IRC §414(s) compensation by including 401(k) elective deferrals and excluding 125 plan elective deferrals.
D. A plan may use a 12-month period other than the plan year for purposes of determining IRC §414(s) compensation.
E. A plan may use a rate-of-pay definition of compensation for IRC §414(s) purposes.

Answer 19

The answer is C. The treatment of deferrals (including those for 401(k) and 125 plans) must be consistent, either all included or all excluded, for the definition to meet the safe harbor requirements.

Question 20

All of the following exclusions are deemed reasonable for defining IRC §414(s) compensation, EXCEPT:
A. 20 percent of regular compensation
B. Bonuses
C. Overtime
D. Expense allowances
E. Fringe benefits

Answer 20

The answer is A. Percentages of compensation are not deemed reasonable exclusions for IRC §414(s) purposes.

Question 21

All of the following are included in compensation under IRC §415, EXCEPT:
A. Elective deferral
B. Expense reimbursements paid under an accountable plan
C. Bonuses
D. Overtime
E. Commissions

Answer 21

The answer is B. Expense reimbursements paid under an accountable plan are excluded form IRC §415 compensation.

Question 22

Based on the following information, determine the participant’s IRC §415 compensation:
• The employer sponsors a 401(k) plan that allows designated Roth contributions.
• The plan excludes overtime for allocation purposes.
• The participant’s taxable income, not including elective deferrals, is $58,000.
• The participant defers $4,000 as pre-tax elective deferrals and $4,000 as designated Roth contributions.
• The participant defers $500 into the employer’s IRC §125 plan.
• The participant’s overtime compensation totals $3,000.
A. $58,000
B. $59,500
C. $62,500
D. $66,500
E. $69,500

Answer 22

The answer is C. The participant’s taxable income of $58,000 plus 401(k) elective deferrals of $4,000 and 125 plan elective deferrals of $500 equals $62,500. The designated Roth contributions would already be included in the $58,000 reported on the W-2.

Question 23

Which of the following statements regarding the calculation of the employer deduction is/are TRUE?
I. In the case of a short taxable year, the deduction limit for a defined contribution plan is applied to aggregate participant compensation paid for the short period.
II. A short taxable year results in a prorated compensation dollar limit under IRC §401(a)(17).
III. A short plan year does not directly affect the defined contribution deduction limit because that deduction limit is based on participant compensation for the employer’s taxable year.
A. I only
B. II only
C. I and II only
D. II and III only
E. I, II and III

Answer 23

The answer is E. The definition of compensation used by a plan for allocation purposes is irrelevant in determining compensation for deduction purposes. For example, even if a profit sharing plan excluded bonuses to determine a participant’s share of employer contributions, the bonuses are still included in compensation to calculate the employer’s deduction limit.

Question 24

Based on the following information, which of the following statements regarding the compensation
ratio is/are TRUE?
PPT Total Comp Bonus Comp Less Bonus Comp %
HCE 1 $200,000 $40,000 $160,000 80%
HCE 2 $180,000 $30,000 $150,000 83%
NHCE 1 $100,000 $20,000 $80,000 80%
NHCE 2 $75,000 $0 $75,000 100%
NHCE 3 $50,000 $0 $50,000 100%

I. The plan passes the compensation ratio test.
II. The compensation ratio for the HCEs is 81.5%.
III. The compensation ratio for the NHCEs is 93.3%.
A. I only
B. II only
C. I and II only
D. II and III only
E. I, II and III

Answer 24

The answer is E. The NHCE’s compensation ratio is higher than the HCE’s compensation ratio, therefore the plan passes the compensation ratio test. The HCE’s ratio is 81.5% ((80+83)/2) and the NHCE’s ratio is 93.9% ((80+100+100)/3).

Question 25

Which of the following describe when a plan’s definition of compensation is subject to nondiscrimination testing, EXCEPT:
A. The plan defines IRC §414(s) compensation as IRC §415 compensation excluding elective deferrals to a cafeteria plan and including elective deferrals to a 401(k) plan.
B. The plan defines IRC §414(s) compensation as IRC §415 compensation excluding commissions for HCEs only.
C. The plan defines IRC §414(s) compensation as IRC §415 compensation excluding overtime.
D. The plan defines IRC §414(s) compensation as IRC §415 compensation excluding bonuses.
E. The plan defines IRC §414(s) compensation as IRC §415 compensation excluding commissions.

Answer 25

The answer is B. A plan may use IRC §415 compensation and exclude an item of compensation that applies only to HCEs when it defines compensation for IRC §414(s) nondiscrimination purposes.

Question 26

Based on the following information, determine the combined plan deduction:
• The employer sponsors a profit sharing and a defined benefit plan.
• The defined benefit plan is not covered by the PBGC.
• The employer makes a contribution to the defined benefit plan in the amount of $250,000 which meets the minimum funding requirements.
• The employer makes a contribution to the profit sharing plan of $30,000.
• Compensation for all eligible employees is $600,000.
A. $30,000
B. $36,000
C. $150,000
D. $250,000
E. $280,000

Answer 26

The answer is E. An employer who sponsors a defined benefit plan, not covered by the PBGC, and a defined contribution plan is subject to the combined plan limit if the amount contributed to the defined contribution plan is more than 6% of aggregate compensation. In this question, the amount contributed to the defined contribution plan is less than 6% ($600,000 *.06 = $36,000) thus the combined plan limit does not apply. The deduction amount is $280,000 ($250,000 for the defined benefit plan + $30,000 for the profit sharing plan.)

Question 27

All of the following are reasonable classifications with respect to the average benefit test, EXCEPT:
A. Hourly paid employees
B. Salary paid employees
C. Janitors
D. Employees named Joe Smith
E. Employees working in Maryland

Answer 27

The answer is D. Naming individual employees is not a reasonable classification for purposes of the average benefit test.

Question 28

All of the following statements regarding the ABP test are TRUE, EXCEPT:
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.
E. Compensation used to determine employee benefit percentages must satisfy IRC §414(s).

Answer 28

The answer to this question is B. All employees in the coverage testing group are considered, not just those that are benefiting.

Question 29

Based on the following information, determine the minimum number of NHCEs that must benefit in order for the plan to pass the nondiscriminatory classification ratio test.
• HCEs benefit under the plan.
• The classification of covered employee is considered to be nondiscriminatory under the relevant facts and circumstances.
• The safe harbor perct.is 38.75 if the NHCE concentration perct.is 75%.
• The unsafe harbor perct.is 28.75 if the NHCE concentration perct.is 75%.
• The safe harbor perct.is 35.00 if the NHCE concentration perct.is 80%.
• The unsafe harbor perct.is 25.00 if the NHCE concentration perct.is 80%.

HCEs NHCEs Total
Total employees 20 80 100
Excludable employees 0 20 20

A. 15
B. 18
C. 20
D. 21
E. 24

Answer 29

The answer is B. The NHCE concentration percentage is the ratio of the number of nonexcludable NHCEs to the total number of nonexcludable employees (60/80 = 75 percent). Since the classification of covered employees is nondiscriminatory under the facts and circumstances, the plan need only satisfy the unsafe harbor percentage of 28.75 percent. Therefore, at least 28.75 percent of the 60 NHCEs must benefit under the plan.

Question 30

All of the following statements regarding permissive aggregation for coverage testing are TRUE,
EXCEPT:
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.
E. Plans that are permissively aggregated for coverage must be aggregated for nondiscrimination purposes.

Answer 30

The answer is 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.

Question 31

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
E. 30

Answer 31

The answer is 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.

Question 32

All of the following statements regarding testing otherwise excludable employees separately for coverage purposes are TRUE, EXCEPT:
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.
E. Plans that use the otherwise excludable option for coverage purposes must also use it for nondiscrimination testing.

Answer 32

The answer is 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.

Question 33

All of the following statements regarding nondiscrimination testing under IRC §401(a)(4) are
TRUE, EXCEPT:
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).
E. A uniform points plan is a nondesign-based safe harbor plan.

Answer 33

The answer is 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.

Question 34

None of the following provisions affect a plan’s ability to rely on the IRC §401(a)(4) safe harbors,
EXCEPT:
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
E. Lower allocations for one or more NHCEs

Answer 34

The answer is E. 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.

Question 35

All of the following statements regarding general testing are TRUE, EXCEPT:
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.
E. Elective deferrals are included when determining rate groups for the average benefits portion of the general test.

Answer 35

The answer is D. General testing, or rate group testing, is performed when a plan cannot satisfy thenondiscrimination 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.

Question 36

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%
E. 664.74%

Answer 36

The answer is C. The EBAR is $35,000 / (.006877 * $160,000) = 31.81%

Question 37

All of the following statements regarding EBARs are TRUE, EXCEPT:
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.

E. The allocations used in the EBAR calculation may be based on the current plan year and all prior years.

Answer 37

The answer is B. The testing age must be a uniform normal retirement age and is usually the normal retirement age specified in the plan.

Question 38

All of the following statements regarding gateway requirements are TRUE, EXCEPT:
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%.
E. Compensation from date of participation may be used in the one-third test and the 5 percent test.

Answer 38

The answer is 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.

Question 39

All of the following statements regarding nondiscrimination testing are TRUE, EXCEPT:
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.
E. Permissive disaggregation of certain portions of a plan into component parts for nondiscrimination testing is known as restructuring.

Answer 39

The answer is C. The ADP test is the only method available for elective deferrals to satisfy the nondiscrimination requirements.

Question 40

All of the following statements regarding BRFs are TRUE, EXCEPT:
A. Participant loans are a right or feature subject to nondiscrimination requirements.
B. Life insurance is considered an ancillary benefit.
C. A lump sum distribution is an optional form of benefit.
D. Participant-direction of investments is a right or feature subject to nondiscrimination requirements.
E. A BRF is considered nondiscriminatory if it satisfies either the current availability test or the effective availability test.

Answer 40

The answer is E. Both tests (current and effective availability) must be satisfied for BRFs to be considered nondiscriminatory.

Question 41

All of the following statements regarding ESOPs are TRUE, EXCEPT:
A. A money purchase pension plan can include an ESOP provision.
B. A 401(k) plan can include an ESOP provision.
C. An ESOP can allocate contributions using permitted disparity.
D. The deduction limit may exceed 25 percent of compensation in some ESOPs.
E. IRC §415 limits may be higher in ESOPs than in other defined contribution plans.

Answer 41

The answer is C. ESOPs may not use permitted disparity in their allocation formulas.

Question 42

All of the following statements regarding ESOP diversification under IRC §401(a)(28) are TRUE, EXCEPT:
A. The right to diversify must be provided annually for six years.
B. Qualified participants must be able to diversify a total of 25 percent of their account balance for five years, and 50 percent in the sixth year.
C. Diversification must be provided at age 55 and ten years of service.
D. In the final election year, the participant must be able to diversify 50 percent of his or her account balance invested in employer stock.
E. Diversification is based on the number of shares, not on the value of those shares.

Answer 42

The answer is C. Diversification is available to participants age 55 with ten years of participation, not service.

Question 43

Based on the following information, determine the number of shares currently available for diversification.
• Participant A’s account contains 20,000 shares valued at $2 per share.
• Participant A is age 59 with 20 years of participation.
• Two years ago, Participant A diversified 1,500 shares valued at $4 per share.
A. 2,750
B. 3,500
C. 3,875
D. 5,000
E. 5,375

Answer 43

The answer is C. Participant A is eligible to diversify a total of 25 percent of the account balance. The total balance is the current balance of 20,000 shares plus the 1,500 shares that were diversified two years ago for a total of 21,500 shares. 25 percent of 21,500 shares is 5,375, less the 1,500 already diversified, leaves 3,875 available for diversification.

Question 44

All of the following statements regarding leveraged ESOPs are TRUE, EXCEPT:
A. ESOP loans may be back-to-back loans.
B. The shares purchased by the ESOP are security for the loan.
C. Loan proceeds may be used to repay another exempt loan.
D. Employer securities that are used as collateral are allocated to eligible participants.
E. Dividends may be used to repay the loan.

Answer 44

The answer is D. Employer securities that are used as collateral must be held in a suspense account and are not allocated securities.

Question 45

All of the following statements regarding calculating net unrealized appreciation (NUA) on a stock
distribution are TRUE, EXCEPT:
A. It is the difference between the value of the employer stock at the time of distribution minus the plan’s cost basis in the stock.
B. If the employer stock is rolled over to another qualified plan, the recipient plan’s cost basis is equal to the value of the employer stock at the date of rollover.
C. A participant who received a lump sum distribution that includes employer stock, may elect to exclude from gross income the entire NUA.
D. A participant who receives a distribution prior to age 59½ and includes employer stock will be subject to the 10% tax on early distribution on the NUA portion that is excluded from income.
E. If the value of the employer stock at the time of distributions is less than the plan’s cost basis, the NUA is zero.

Answer 45

The answer is D. The participant is not subject to the 10% tax on early distribution on the NUA that is excluded from income. The penalty only applies to the taxable portion of the distribution.

Question 46

All of the following individuals are fiduciaries with respect to a plan, EXCEPT:
A. An individual who exercises discretionary authority over the plan’s participant loan program.
B. An individual who exercises control over the purchase and sale of plan assets.
C. An individual who provides investment advice for a fee with respect to plan funds.
D. An individual who prepares audited financial statements of the plan assets.
E. An individual who determines which participants are eligible to receive benefits and authorizes the payment of such benefits.

Answer 46

The answer is D. The preparation of financial statements by the plan’s auditor is not a fiduciary function.

Question 47

All of the following statements regarding fiduciary liability are TRUE, EXCEPT:
A. Any agreement containing exculpatory provisions that attempt to relieve a fiduciary from liability is void under ERISA.
B. A fiduciary that approves a limitation of liability clause in a service provider contract is personally liable for any losses that exceed the liability limitations.
C. A plan may purchase insurance that will reimburse the plan for any losses suffered as a result of a fiduciary breach.
D. An employer or other party may indemnify a fiduciary, provided the fiduciary remains responsible for any breaches committed as a fiduciary.
E. A fiduciary may purchase liability insurance with his or her own funds.

Answer 47

The answer is B. A fiduciary must consider the liability limitation in a service provider contract in the context of all other factors in determining the reasonableness of the agreement and the potential risks to participants. If the liability limitation is reasonable, then the fiduciary is not necessarily liable for losses in excess of the liability limitation.

Question 48

All of the following are fiduciary functions, EXCEPT:
A. Determining eligibility for the plan
B. Reviewing claims for plan benefits
C. Paying PBGC premiums
D. Maintaining plan records according to ERISA requirements
E. Hiring an investment manager

Answer 48

The answer is C. Paying PBGC premiums is a settlor function, not a fiduciary function.

Question 49

All of the following statements regarding consequences of fiduciary breaches are TRUE, EXCEPT:
A. Fiduciaries must restore losses incurred by the plan due to a failure to diversify investments.
B. A fiduciary will not be held liable for a breach made by the investment manager.
C. A fiduciary’s account balance in the plan may be used to offset damages to the plan if necessary.
D. A fiduciary may be required to pay any profits earned in a breach to the plan.
E. Fiduciaries must restore losses incurred by the plan due to mismanagement of the plan.

Answer 49

The answer is B. A fiduciary may be subject to co-fiduciary liability with respect to an investment manager’s breach of fiduciary duties if the fiduciary hired said investment manager and did not monitor the investment manager’s activities.

Question 50

All of the following factors should be considered when choosing a service provider, EXCEPT:
A. Fees charged for services to be performed
B. Qualifications of the service provider
C. Quality of the services to be performed
D. Litigation or enforcement action taken against the service provider
E. Design of the service provider’s office

Answer 50

The answer is E. The design of the service provider’s office is not a factor to consider in choosing a service provider.

Question 51

All of the following are disqualified persons under IRC §4975, EXCEPT:
A. An accountant who prepares Form 5500 for a plan
B. A brother of a 45 percent owner of the plan sponsor
C. A plan trustee’s father
D. A member of the board of directors of the plan sponsor
E. A union whose members are covered by the plan

Answer 51

The answer is B. A brother is not considered a family member under the attribution rules applicable to PTs. A family member would be included as a disqualified person under IRC §4975 only if the relative’s ownership is at least 50 percent.

Question 52

All of the following transactions are exemptions from the PT rules, EXCEPT:
A. The purchase by the plan of the building in which the sponsor conducts his or her business
B. Reasonable compensation paid for necessary accounting services for the plan
C. The sale of life insurance to a participant from the plan
D. The investment of assets of the plan in a bank that is also the plan’s trustee
E. A loan to a leveraged ESOP from the plan sponsor to purchase employer stock

Answer 52

The answer is A. If the sponsor owns the building, this would be a sale of property between the sponsor and the plan. If a third party owns the building, the sale to the plan would then violate the use of plan assets for the sponsor’s benefit. Both are PTs

Question 53

Which of the following statements regarding consequences of PTs is/are TRUE?
I. Form 5330 is used to transmit the applicable excise tax to the IRS.
II. EPCRS is available to correct PTs.
III. The initial excise tax is 15 percent of the amount involved.
A. I only
B. II only
C. I and II only
D. I and III only
E. I, II and III

Answer 53

The answer is D. EPCRS is not currently available to correct PTs.

Question 54

All of the following are covered service providers under the fiduciary fee disclosure regulations,
EXCEPT:
A. Registered investment advisor compensated by plan assets
B. Investment platform provider whose fee is paid by the plan
C. Trustee who is paid a percentage of the plan assets from the plan
D. Third-party administrator paid partly through 12b-1 fees generated by plan investments
E. Plan auditor paid by the plan sponsor

Answer 54

The answer is E. If the service provider’s fees are paid by the plan sponsor rather than the plan, the disclosure fee disclosure rules do not apply to the service provider.

Question 55

Which of the following statements regarding consequences of failing to comply with the required fiduciary fee disclosures is/are TRUE?
I. The PT exemption will not apply to the covered service provider.
II. The covered service provider will be liable for a 15% excise tax on the amount of fees charged.
III. The IRS may require the service provider to return to the plan any fees that have been paid.
A. I only
B. II only
C. I and III only
D. II and III only
E. I, II and III

Answer 55

The answer is E. All statements are True

Question 56

All of the following information must be provided to a participant prior to receiving a distribution due to termination of employment, EXCEPT:
A. Loan procedures
B. Taxation issues
C. Information about how a distribution will be taxed
D. The optional forms of payment available
E. The right to delay payment until normal retirement age

Answer 56

The answer is A. The loan policy is not a notice that must be given at the time of distribution.

Question 57

Which notice must be provided to the participant?
• The plan is a target benefit plan.
• The participant is age 35 and terminates employment.
• The participant has a vested account balance of $750.
• The plan will make involuntary cash out of benefits.
A. Waiver of the QJSA notice
B. Optional forms of benefit notice
C. Right to delay distribution to NRA notice
D. Rollover notice
E. Spouse’s consent rights regarding a waiver of the QJSA

Answer 57

The answer is D. A participant with an account balance of less than $5,000 is only required to receive the rollover notice when an involuntary distribution is made.

Question 58

All of the following are affected by the Court’s invalidation of DOMA §3, EXCEPT:
A. Definition of spouse
B. Rules for family attribution
C. Application of QPSA and QJSA
D. Rollover to spousal IRA
E. Allocation of participant’s contribution

Answer 58

The answer to this question is E. Employer and employee contribution allocations are not affected by DOMA.

Question 59

Which of the following statements regarding life insurance in defined contribution plans is/are TRUE?
I. The participant is required to pay taxes on the term cost of the insurance each year.
II. Net insurance proceeds paid to the beneficiary are not taxable.
III. Incidental life insurance can remain in the plan post-retirement until the participant elects a distribution.
A. I only
B. III only
C. I and II only
D. II and III only
E. I, II and III

Answer 59

The answer is C. A life insurance policy must be converted to retirement income or distributed to the participant no later than the normal retirement date under the plan in order to satisfy the incidental life insurance requirements.

Question 60

Which of the following statements regarding the incidental life insurance benefit limit is/are TRUE?
I. The limit for a term life insurance policy is 25% of the aggregate contributions.
II. The limit for a whole life insurance policy is less than 50% of the aggregate contributions.
III. The limit for a universal life insurance policy is less than 50% of the aggregate contributions.
A. I only
B. III only
C. I and II only
D. II and III only
E. I, II and III

Answer 60

The answer is C. A universal life insurance policy is treated as if it is a term insurance policy for purposes of the incidental benefit limit.

Question 61

All of the following statements are violations of ARA’s Code of Professional Conduct, EXCEPT:
A. Advertising that the Member is a CPC when the member has not received the designation from ARA.
B. Advertising that the Member’s firm employs only QKAs to do administration on 401(k) plans when the firm has other individuals administering the plans without the designation.
C. Orally informing a potential client that the Member’s firm administers 1,500 401(k) plans when in reality it administers only 300.
D. On the Member firm’s website advertising that the firm is qualified to administer ESOP plans when the firm has never administered one.
E. Providing a potential client written material that indicates any potential income it may receive from investment products that are purchased by the plan.

Answer 61

The answer is E. Providing information regarding income a firm receives from investments or from relationships it may have with other service providers is not a violation of the ARA Code of Professional Conduct.

Question 62

All of the following statements are violations of ARA’s Code of Professional Conduct, EXCEPT:
A. After attending a client’s confidential board meeting, you inform a friend that the client will merge with another firm so the friend can sell the company stock.
B. Your client requests that you provide another service provider participant account balance details and you do so electronically based on the new service provider’s specifications.
C. You discuss your client’s salary information with a friend interested in working for the client.
D. The President of the company you administer a profit sharing plan for, notified you that the he would be informing the board next week that he is retiring and you repeat the information today to a shareholder.
E. The client has not paid your invoices so you tell the new administration firm that the client has a poor credit rating.

Answer 62

The answer is B. It is not a violation of the ARA Code of Professional Conduct to provide information that a client has requested that you provide.

Question 63

Which of the following statements regarding conflict of interest requirements under ARA’s Code of Professional Conduct is/are TRUE?
I. The Member shall fully disclose any actual conflict of interest to a client.
II. The Member’s ability to act fairly must be unimpaired.
III. The Client must expressly agree to the services that are provided by the Member.
A. I only
B. II only
C. I and III only
D. II and III only
E. I, II and III

Answer 63

The answer is E. All statements are True.

Question 64

All of the following statements regarding ARA’s Code of Professional Conduct are TRUE, EXCEPT:
A. An ARA Member shall render opinions or advice only when qualified to do so based on education, training and experience.
B. An ARA Member must adhere to the high standards of conduct, practice and qualification.
C. An ARA Member must abide by the ARA Code of Professional Conduct regardless of other laws.
D. An ARA Member shall take reasonable steps to ensure that services rendered under the Member’s supervision are performed with honesty, integrity, skill and care.
E. An ARA Member shall perform services with courtesy and shall cooperate with others in the client’s interest.

Answer 64

The answer is C. Laws may impose binding obligations on a Member. The ARA Code of Professional Conduct is not intended to contradict or supersede the law.

Question 65

Which of the following statements is/are violations of ARA’s Code of Professional Conduct?
• Your client has informed you that they are having cash flow issues and are not going to deposit employee 401(k) contributions into their 401(k) plan for six months so that they can use the funds to help meet their payroll obligations.
• There are 50 participants in their 401(k) plan.
I. You advise the client that this will result in a loan from the plan to the plan sponsor and is a prohibited transaction.
II. You advise the client that the employee contributions must be deposited to the plan within seven business days from when they would have been paid to the participants.
III. You listen to the client’s concern with empathy, discuss how difficult it is for a small business to comply with the additional expenses generated by the new health care laws and concur with their course of action to solve their cash flow issues.
A. I only
B. III only
C. I and II only
D. II and III only
E. I, II and III

Answer 65

The answer is B. Statement I and II are True. Statement III is false since the course of action the client has discussed would be violation of the law an ARA Member would want to avoid approving the action of the client.