Exam Questions Flashcards

Question 1

Q

All of the following are HCEs within the meaning of IRC §414(q), EXCEPT:

A. A 25% owner in a C Corporation
B. A sole proprietor
C. The brother of a 40% owner in an S Corporation
D. A 50% partner in a partnership
E. The son of a 20% owner in a C Corporation

Answer

A

C - Ownership is not attributed to siblings. (Syllabus Topic 4)

Question 2

Q

Based on the following information, determine the participant’s vested percentage as of December 31, 2009:
• The participant’s date of birth is November 30, 1957.
• The participant’s date of hire is May 1, 2005.
• The participant has worked at least 40 hours/week since date of hire.
• The profit sharing plan was established on January 1, 2004, and is a calendar year plan.
• The plan provides for full vesting at early retirement (age 55).
• The plan uses the six-year graded vesting schedule and counts all years of service in which the participant worked at least 1000 hours.
• The plan is not top-heavy. The vesting computation period is the plan year.
A. 20%
B. 40%
C. 60%
D. 80%
E. 100%

Answer

A

D - The participant is age 52, so has not met the requirements for full vesting at normal or early retirement. The participant has 5 years of vesting service (2005, 2006, 2007, 2008 and 2009). A six-year graded vesting schedule is 80% vested after 5 years. (Syllabus Topic 9)

Question 3

Q

All of the following statements regarding plan disqualification are TRUE, EXCEPT:

A. The employer loses its deduction for vested contributions only.
B. Participant distributions may not be eligible for rollover.
C. The statute of limitations is generally 3 years from the due date of a filed tax return.
D. To avoid disqualification, defects must be corrected for all affected years, even if they are closed tax years.
E. HCEs may be taxed on the entire vested account balance if the plan is disqualified solely due to a coverage violation.

Answer

A

A - If a plan is disqualified, the employer loses its deduction for nonvested contributions made to the plan for open tax years. (Syllabus Topic 1)

Question 4

Q

Based on the following information, determine when Employee A will enter the plan:

The plan year begins on January 1 and ends on December 31.
The eligibility requirements are one year of service and the attainment of age 21.
The entry date is the earlier of the first day of the plan year or the first day of the seventh month of the plan year following the date the eligibility requirements are satisfied.
Employee A’s date of hire is November 15, 2006.
Employee A’s date of birth is March 15, 1986.
Employee A is a full-time employee.

A. January 1, 2007
B. July 1, 2007
C. January 1, 2008
D. July 1, 2008
E. January 1, 2009

Answer

A

C - Employee A attains age 21 on March 15, 2007 and one year of service on November 14, 2007. The entry dates are January 1 and July 1. Employee A enters the plan on January 1, 2008. (Syllabus Topic 3)

Question 5

Q

Which of the following statements regarding aggregation for top-heavy purposes is/are TRUE?

I. Plans that are not part of a required aggregation group must be tested separately for top-heavy purposes.
II. A required aggregation group includes any plan of the employer that enables each plan with key employees to satisfy coverage testing under IRC §410(b).
III. The top-heavy ratio for aggregated plans is calculated using values as of determination dates that fall within the same plan year.

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

Answer

A

B - Plans may be permissively aggregated, even if they are not required to be aggregated. The top-heavy ratio for aggregated plans is calculated using values for determination dates that fall within the same calendar year. (Syllabus Topic 5)

Question 6

Q

All of the following schedules satisfy minimum vesting standards, post-PPA, EXCEPT:

A. Seven-year graded (0% until year 3, then 20% each year thereafter)
B. Five-year graded (20% each year)
C. Two-year cliff (0% until year 2, then 100%)
D. Six-year graded (0% until year 2, then 20% each year thereafter)
E. Three-year cliff (0% until year 3, then 100%)

Answer

A

A - The seven-year graded schedule is no longer permissible in a defined contribution plan, post-PPA. (Syllabus Topic 9)

Question 7

Q

All of the following allocations may be used to satisfy the top-heavy minimum contribution requirement in a 401(k) plan, EXCEPT:

A. Safe harbor contributions
B. Employee elective deferrals
C. QNECs
D. Discretionary employer contributions
E. Reallocated forfeitures

Answer

A

B - Elective deferrals may not be used to satisfy minimum top-heavy contribution requirements. (Syllabus Topic 5)

Question 8

Q

Based on the following information, determine the top-heavy ratio as of December 31, 2009:
Part, Key, 12/31/09 Bal, Term, Dist,Year Paid

A, Yes, $270,000, none, $30,000, 2003
B, No, $60,000, none, $0, none
C, Yes, $30,000, none, $0, none
D, No, $0, 10/15/2008, $15,000, 2009
E, No, $27,000, none, $0, none
F, No, $13,000, 08/01/2009, $0, none

A. $300,000 / $400,000
B. $300,000 / $415,000
C. $300,000 / $445,000
D. $330,000 / $430,000
E. $330,000 / $445,000

Answer

A

A - First determine the participants included - those with at least one hour of service in the determination year (2009). Participant D is not included. Second determine which distributions need to be included – none, since the in-service distribution to Participant A occurred more than 5 years ago. The numerator is the key employee balances (270,000 + 30,000) and the denominator is all employees (270,000 + 60,000 + 30,000 + 27,000 + 13,000). The top-heavy ratio is ($300,000 / $400,000). (Syllabus Topic 5)

Question 9

Q

Which of the following statements regarding correcting an IRC §410(b) coverage failure is/are TRUE?

I. An employer may correct a coverage failure by adopting a corrective amendment up to 9½ months after the close of the plan year.
II. In a defined contribution plan, contribution amounts that have already been allocated can be adjusted and the contribution amount reallocated after a coverage failure has been identified.
III. One way to correct a coverage failure is to expand the group of NHCEs who benefit under the plan.

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

Answer

A

D - Corrective amendments for coverage failures may be made up to 9½ months after the close of the plan year. This is sometimes called an 11(g) amendment. The ways to correct coverage issues are to expand the group of NHCEs benefiting, or to increase allocations to NHCEs, not to redistribute allocations already made. (Syllabus Topic 6)

Question 10

Q

All of the following statements regarding a break in service for eligibility purposes are TRUE, EXCEPT:

A. A plan may define a break in service to be based on more than 12 consecutive months.
B. A break in service is determined by the period of severance when using the elapsed time method.
C. A plan may define a break in service to be 300 or fewer hours in an eligibility computation period.
D. A break in service is determined based on the hours credited during an eligibility computation period when using the counting-hours method.
E. Hours of service credited during certain unpaid leaves of absence are included in determining whether the employee has incurred a break in service.

Answer

A

A - A plan may not define a break in service on a period of more than 12 consecutive months. (Syllabus Topic 3)

Question 11

Q

All of the following statements regarding vesting rules are TRUE, EXCEPT:

A. Actual years of service for vesting purposes are irrelevant if the minimum service requirement for participation is more than one year of service.
B. Years of service during which a participant declined to make elective deferrals may be disregarded for vesting purposes.
C. Immediate vesting always satisfies minimum vesting schedules.
D. It is easier for part-time employees to accrue vesting service using the elapsed time method.
E. The elapsed time method measures vesting periods of service instead of vesting computation periods.

Answer

A

B - Years of service for vesting purposes are not based on whether an employee was making elective deferrals. (Syllabus Topic 9)

Question 12

Q

Based on the following information, determine the number of nonexcludable employees in the coverage testing group:

Plan requires six months of service for eligibility, immediate entry.
Each employee category below is mutually exclusive.
Total employees during the year is 60

Employees with less than six months service - 14
Nonbenefiting terminated participants with less than 500 hours - 8
Employees excluded by job description - 5
Nonbenefiting active participants with less than 1000 hours - 3

A. 33
B. 38
C. 46
D. 52
E. 60

Answer

A

B - The number of nonexcludable employees in the testing group is determined by the number in the workforce (60) less employees who do not satisfy the age/service (14) less employees who are nonbenefiting who terminate before year end with 500 or fewer hours (8) equals 38. (Syllabus Topic 6)

Question 13

Q

Which of the following statements regarding forfeitures in a defined contribution plan is/are TRUE?

I. Forfeitures allocated on the basis of account balances may be discriminatory.
II. Forfeitures can not be reallocated to other participants until a one-year break in service has occurred.
III. Forfeitures that are reallocated are deductible as an employer contribution each plan year.

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

Answer

A

A - Depending on plan document provisions, forfeitures may be reallocated as soon as the participant is cashed-out their vested balance. Reallocated forfeitures are not deductible contributions for the employer at the time of reallocation, as they were likely deductible at the time of the original contribution. (Syllabus Topic 9)

Question 14

Q

All of the following statements regarding plan qualification under IRC §401(a) are TRUE, EXCEPT:

A. A contribution may be returned to the employer if it was made due to a mistake of fact.
B. A qualified plan must limit the compensation used to determine benefits, under IRC §401(a)(17).
C. Contributions to a profit sharing plan must be recurring and substantial.
D. A qualified plan must satisfy the minimum vesting standards under IRC §401(a)(7).
E. Contributions may be returned to the employer due to plan disqualification.

Answer

A

E - Plan disqualification does not result in a return of contributions to the employer. (Syllabus Topic 1)

Question 15

Q

All of the following statements regarding break in service rules for vesting purposes are TRUE, EXCEPT:

A. Service to avoid a break in service must be credited for employees on unpaid paternity leave.
B. Service to avoid a break in service must be credited for employees on Family and Medical Leave.
C. Service to avoid a break in service must be credited for employees on unpaid maternity leave.
D. Service for paid leave is counted to determine if a break in service has occurred.
E. Service to avoid a break in service must be credited for employees suspended due to misconduct.

Answer

A

E - Employees suspended due to misconduct need not be credited with hours necessary to avoid a break in service. (Syllabus Topic 9)

Question 16

Q

Which of the following definitions of compensation is/are subject to additional nondiscrimination testing?

I. IRC §415 compensation, excluding commissions
II. IRC §415 compensation, excluding pre-entry compensation
III. IRC §415 compensation, including elective deferrals

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

Answer

A

A - Excluding pre-entry compensation or including elective deferrals do not take IRC §415 compensation out of safe harbor status. Excluding commissions does take IRC §415 compensation out of safe harbor status, requiring additional nondiscrimination testing. (Syllabus Topic 7)

Question 17

Q

All of the following statements regarding money purchase pension plans are TRUE, EXCEPT:

A. The IRS imposes a nondeductible excise tax on the employer for failure to make the required contribution under IRC §412.
B. The formula for determining the amount of the contribution and the formula for allocating the contribution may be different.
C. The annual contribution must be determined by a formula specified in the plan document.
D. Participant loans may be permitted.
E. Hardship withdrawals may be permitted.

Answer

A

E - Pension plans (e.g., money purchase pension plans) do not permit hardship withdrawals. (Syllabus Topic 2)

Question 18

Q

All of the following statements regarding excess annual additions are TRUE, EXCEPT:

A. Failing to limit annual additions may disqualify a plan.
B. Excess annual additions may be refunded to the extent they are vested employer profit sharing contributions.
C. Excess annual additions may be reallocated to other participants.
D. Excess annual additions may not remain in the participant’s account.
E. Excess annual additions may be allocated to a suspense account.

Answer

A

B - Failure to limit annual additions is a plan disqualification defect. The correction methods regarding excess annual additions are outlined in EPCRS and include reallocation to other participants or to a suspense account. They may not remain in a participants account for future allocations and they may not be refunded to the employer. (Syllabus Topic 7)

Question 19

Q

Which of the following employees is/are excludable under the top-paid group limitation?

I. Employees who normally work less than 17½ hours per week
II. Employees who are less than age 21
III. Employees who normally work less than six months per year

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

Answer

A

E - All of these employees may be excluded when determining the top paid group. (Syllabus Topic 4)

Question 20

Q

Which of the following is/are events that require full vesting of a participant’s benefit?

I. Plan entry after satisfying a 15-month eligibility requirement
II. Attaining the plan’s normal retirement age
III. Merging of the plan with another plan of the employer

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

Answer

A

C - Plan mergers do not usually require full vesting of account balances. (Syllabus Topic 9)

Question 21

Q

All of the following statements regarding the rule of parity with respect to eligibility are TRUE, EXCEPT:

A. A plan may not apply the rule of parity to a partially vested participant.
B. The employee must incur a period of severance that totals at least 60 months if the plan uses the elapsed time method.
C. The employee must have at least five consecutive eligibility computation periods with a break in service if the plan uses the counting-hours method.
D. A plan may apply the rule of parity to employees who have not met the eligibility requirements.
E. If the rule of parity applies, an employee may lose credit for prior service permanently.

Answer

A

D - Under the rule of parity, an employee loses credit for prior service permanently following the break-in-service period. For the rule of parity to apply, the employee must be a participant, must incur five consecutive breaks in service and must be 0% vested. (Syllabus Topic 3)

Question 22

Q

All of the following are considered key employees, EXCEPT:

A. A more than 5% owner of a company with annual compensation of $120,000
B. An officer of a company with annual compensation of $175,000
C. A company salesman with annual compensation, including commissions, of $225,000
D. The son of a company’s sole owner, with annual compensation of $25,000
E. A 4% owner of a company with annual compensation of $185,000

Answer

A

C - An employee is a key employee if they are a more than 5% owner, if they are a more than 1% owner and have compensation in excess of $150,000, or if they are an includible officer satisfying the compensation test. (Syllabus Topic 5)

Question 23

Q

All of the following statements regarding top-heavy plans are TRUE, EXCEPT:

A. All employers of a controlled group are considered when determining key employees.
B. In-service distributions from a plan during the five-year period ending on the determination date are included in the top-heavy determination.
C. The determination date for a profit sharing plan is always the last day of the preceding plan year, except for the first plan year.
D. All rollover accounts are included in the top-heavy determination.
E. The ratio of the accrued benefit of key employees to the accrued benefit of all employees included in the top-heavy test must exceed 60% for the plan to be top-heavy.

Answer

A

D - Only related rollovers are included in top-heavy determinations. Unrelated rollovers are not part of the top-heavy ratio. (Syllabus Topic 5)

Question 24

Q

All of the following groups of employees can be excluded by statute for coverage testing under IRC §410(b), EXCEPT:

A. Seasonal employees who work only 6 months each year
B. Nonresident aliens with no earned income from sources within the United States
C. Employees covered by a collective bargaining agreement where retirement benefits are the subject of good faith bargaining
D. Employees who do not satisfy the age and service requirements of the plan
E. Leased employees, where the leased employees represent only five percent of the workforce and are covered by a safe harbor plan maintained by the leasing company

Answer

A

A - Excludable employees are those that do not satisfy the plan’s age and service requirements, are not benefiting and terminate with 500 or fewer hours of service, are collectively bargained or are nonresident aliens. Seasonal employees are not excludable specifically by statute. (Syllabus Topic 6)

Question 25

Q

Based on the following information, determine the minimum number of NHCEs who must benefit under the plan in order to satisfy the ratio percentage test under IRC §410(b):

XYZ Company has 2 Divisions, M and N, and wants to establish a profit sharing plan covering only employees of Division M.
All HCEs at Division M will benefit under the plan.
No employees work for both Division M and Division N.

The employees in the table are nonexcludable.

         Division M             Division N  HCE              20                           40  NHCE           50                            80

A. 12
B. 29
C. 31
D. 35
E. 49

Answer

A

C - The ratio percentage is satisfied if the NHCE ratio divided by the HCE ratio is at least 70%. The NHCE ratio is the number of NHCEs benefiting (x) / the total number of NHCEs (130). The HCE ratio is the number of HCEs benefiting (20) / the total number of HCEs (60). (x / 130) / (20 / 60) >= .7. X >= 30.33, X = 31. (Syllabus Topic 6)

Question 26

Q

Based on the following information, determine the forfeiture allocation for Participant D for the 2009 plan year:

The plan is a calendar year profit sharing plan and is the only plan of the employer.
Forfeitures are allocated in proportion to compensation to participants who worked at least 1000 hours in the plan year.
Participant B terminated on August 15, 2009 and was 20% vested.
Participant B received a lump sum distribution of $1,000 in November, 2009.
The forfeiture reallocation totals $4,000.
The plan is not top-heavy and satisfies coverage requirements.
The IRC §401(a)(17) limit for 2009 is $245,000.

Part Hrs Worked Comp
A 1500 $180,000
B 900 $40,000
C 1500 $30,000
D 1500 $25,000
E 1500 $24,000

A. $97
B. $334
C. $386
D. $418
E. $483

Answer

A

C - Participant B is not eligible for an allocation. The remaining compensation totals $259,000 ($180,000 + $30,000 + $25,000 + $24,000). The allocation to Participant D is $4,000/$259,000*$25,000 = $386 (Syllabus Topic 9)

Question 27

Q

Which of the following statements regarding eligibility computation periods is/are TRUE?

I. The eligibility computation period must be a period of 12 consecutive months.
II. A plan may use a short plan year as an eligibility computation period.
III. The initial eligibility computation period must begin on an employee’s employment commencement date.

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

Answer

A

C - An eligibility computation period is the period during which an employee’s hours are examined to determine whether a year of service has been completed. The eligibility computation period must be a period of 12 consecutive months. (Syllabus Topic 3)

Question 28

Q

All of the following statements regarding plan compensation used for a profit sharing allocation are TRUE, EXCEPT:

A. The definition of compensation may be IRC §415 compensation.
B. The definition of compensation may exclude commissions.
C. The definition of compensation may be IRC §414(s) compensation.
D. The definition of compensation must be the same as that used for calculating employer matching contributions.
E. The definition of compensation must be included in the plan document if the allocation is based on compensation.

Answer

A

D - The plan may use different definitions of compensation for different plan purposes (e.g., matching allocations and profit sharing allocations). (Syllabus Topic 7)

Question 29

Q

Based on the following information, determine how many of the following employees satisfy the eligibility requirements as of December 31, 2009:

The eligibility requirements are age 21 and one year of service.
A year of service is a 12-month period during which an employee worked 1000 hours of service.

Emp DOB DOH Hrs Worked
A 03/05/1986 01/15/2007 1500
B 12/07/1987 05/01/2006 1500
C 02/22/1966 06/01/2008 750
D 07/01/1987 12/15/2007 1500

A. None
B. One
C. Two
D. Three
E. Four

Answer

A

D - All employees are age 21 in 2009. Employee C has not had one year of service (only worked 750 hours) so the remaining three employees have satisfied the eligibility conditions. (Syllabus Topic 3)

Question 30

Q

All of the following statements regarding deduction deadlines are TRUE, EXCEPT:

A. A calendar year corporation’s initial deduction deadline is March 15th.
B. A calendar year sole proprietor’s initial deduction deadline is April 15th.
C. A calendar year sole proprietor may extend the deduction deadline to December 31st.
D. A calendar year corporation may extend the deduction deadline to September 15th.
E. A calendar year partnership’s intial deduction deadline is April 15th.

Answer

A

C - The extended deadline for a sole proprietor is October 15 for a calendar year filer. (Syllabus Topic 8)

Question 31

Q

Which of the following statements regarding remedial amendment periods is/are TRUE?

I. The remedial amendment period allows practitioners a period of time to update the plan document to reflect current plan operations due to law changes.
II. Amendments that are required by law may be made retroactively during the remedial amendment period.
III. Remedial amendment periods do not apply to a newly established plan.

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

Answer

A

C - The remedial amendment period is a period of time when a plan document language may not yet conform to new qualification rules. Remedial amendment periods do apply when a new plan is adopted or amended. (Syllabus Topic 10)

Question 32

Q

All of the following statements regarding HCEs within the meaning of IRC §414(q) are TRUE, EXCEPT:

A. An employee’s compensation in the current plan year is not considered when determining HCE status.
B. The indexed dollar amount used in the compensation test is based on the calendar year in which the lookback year begins.
C. Compensation is not considered when applying the ownership test.
D. An employee’s ownership in the current plan year is considered when determining HCE status.
E. An employee must satisfy both the ownership test and the compensation test to be considered an HCE.

Answer

A

E - An employee is considered an HCE if they satisfy either the ownership test or the compensation test - the employee need not satisfy both. (Syllabus Topic 4)

Question 33

Q

Based on the following information, determine the ratio percentage under IRC §410(b):

Status HCE NHCE

Employed 10 100

Excludable 1 10

Cov Grp 9 90

Benefiting 9 80

A. 70.00%
B. 80.00%
C. 80.91%
D. 88.89%
E. 100.00%

Answer

A

D - The ratio percentage is the NHCE ratio (80 / 90) / the HCE ratio (9 / 9) = 88.89%. (Syllabus Topic 6)

Question 34

Q

Which of the following statements regarding coverage testing under IRC §410(b) is/are TRUE?

I. The ratio percentage is determined by dividing the HCE ratio by the NHCE ratio.
II. The NHCE ratio is the number of NHCEs in the benefiting group divided by the number of NHCEs in the coverage testing group.
III. The HCE ratio is the number of HCEs in the benefiting group divided by the number of HCEs in the coverage testing group.

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

Answer

A

D - The ratio percentage is the NHCE ratio / the HCE ratio. (Syllabus Topic 6)

Question 35

Q

Based on the following information, determine the employer contribution allocation to Participant A:

The plan year end is December 31, 2009.
The plan is a money purchase pension plan with an allocation formula of 15% of eligible compensation.
Participant A earns $250,000 for the plan year.
This is the only plan maintained by the employer.
The IRC §401(a)(17) limit for 2009 is $245,000.

A. $34,500
B. $36,750
C. $37,500
D. $49,000
E. $61,250

Answer

A

B - The IRC §401(a)(17) limit is $245,000. The money purchase allocation is 15% of compensation, or $245,000 * .15 = $36,750. (Syllabus Topic 7)

Question 36

Q

All of the following statements regarding characteristics of defined contribution plans are TRUE, EXCEPT:

A. Actuarial certifications are never required.
B. The employer bears the risk of investment gain/loss.
C. Individual participant account balances must be maintained.
D. Forfeitures may be used to reduce employer contributions.
E. Annual additions are limited to the lesser of 100% of compensation or $40,000, as indexed.

Answer

A

B - Actuarial certifications are not required for defined contribution plans, only defined benefit plans. The employee bears the risk of investment gains/losses in a defined contribution plan. (Syllabus Topic 2)

Question 37

Q

Based on the following information, determine the participant’s vested balance as of December 31, 2009:

The plan’s effective date is January 1, 2005.
The plan year is the calendar year.
A year of service for vesting purposes is a plan year with at least 1000 hours.
Years of service before age 18 are excluded.
Participant A’s date of birth is March 15, 1988 and date of hire is December 15, 2003.
Participant A worked 1000 hours in plan years 2004 through 2008, but less than 1000 hours in 2009.
The vesting schedule is the six-year graded schedule.
The vesting computation period is the plan year.

Account Account Balance
Salary Reduction $1,750
Match $525
Nonelective $3,250
QMAC $450
Rollover $5,750

A. $7,950
B. $9,190
C. $9,460
D. $10,970
E. $11,725

Answer

A

D - Participant A has 5 years of vesting service (2004, 2005, 2006, 2007 and 2008). This translates to 80% vesting, applicable to matching and nonelective sources. The vested balance is $1,750 + $525 *.8 + $3,250 * .8 + $450 + $5,750 = $10,970. (Syllabus Topic 9)

Question 38

Q

All of the following statements regarding the excise tax on nondeductible contributions are TRUE, EXCEPT:

A. Nondeductible contributions may be subject to a 10% excise tax.
B. Contributions must be withdrawn from the plan no later than 90 days from the date made to avoid an excise tax.
C. The excise tax is applicable in subsequent years if the nondeductible contribution has not been deducted in the subsequent year.
D. Obtaining an extension for filing Form 5500 does not automatically extend the date for payment of the excise tax.
E. The excise tax is not deductible by the employer.

Answer

A

B - Nondeductible contributions may not be withdrawn from the plan in order to avoid the 10% excise tax. (Syllabus Topic 8)

Question 39

Q

Which of the following statements regarding the elapsed time method to credit service is/are TRUE?

I. Absences of less than 12 months are treated as continuous employment.
II. Eligibility computation periods must be based on the plan year.
III. It is an effective option for employers who want to exclude seasonal employees.

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

Answer

A

A - Under the elapsed time method, hours of service are not counted, and there are no eligibility computation periods to measure. Because an employee can attain a year of service regardless of the number of hours of service, it is ineffective if the employer wants to exclude part-time or seasonal employees. (Syllabus Topic 3)

Question 40

Q

All of the following may result in a partial plan termination, EXCEPT:

A. A discontinuance of employer contributions to a profit sharing plan
B. An amendment that makes eligibility less liberal
C. An amendment from a money purchase pension plan to a profit sharing plan
D. An amendment that makes vesting less liberal
E. A substantial number of participants have their employment severed by the employer

Answer

A

C -Generally, a partial plan termination occurs either by plan amendment (including one that affects the rights to vest in benefits), discontinuance of employer contributions or by involuntary termination of employment. It is a facts and circumstances determination, but a change in plan type (e.g., a money purchase to a profit sharing) does not usually result in a partial plan termination. (Syllabus Topic 10)

Question 41

Q

Which of the following statements regarding ERISA §204(h) notices is/are TRUE?

I. A small plan is required to give the ERISA §204(h) notice no less than 30 days before the effective date of the ERISA §204(h) amendment.
II. A 401(k) plan is not subject to the ERISA §204(h) notice requirements.
III. An ERISA §204(h) notice must be provided to all plan participants and beneficiaries.

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

Answer

A

B - An ERISA §204(h) notice is due no less than 15 days before the effective date of the amendment for a small plan filer. It is required for all applicable individuals (defined as each participant whose future rate of accrual is reasonably expected to be significantly reduced.) (Syllabus Topic 10)

Question 42

Q

Based on the following information, determine the minimum top-heavy allocation to Participant R:
Participant R’s IRC §415 compensation for the plan year is $40,000. Participant R’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 2%. The plan is top-heavy for the current plan year.

A. $0
B. $400
C. $600
D. $800
E. $1,200

Answer

A

D - The minimum top-heavy allocation required is the highest rate allocated to a key employee (2%) times total plan year compensation ($40,000) or $40,000 * .02 = $800. (Syllabus Topic 5)

Question 43

Q

Based on the following information, determine the HCEs for 2009:

Employees A and B are married.
The top-paid group election is not made.

Emp 08Comp 08Own 09Comp 09Own
A $250,000 75% $275,000 75%
B $50,000 0% $55,000 0%
C $125,000 0% $130,000 15%
D $60,000 25% $85,000 10%
E $80,000 0% $115,000 0%

A. A, B and D only
B. A, C and D only
C. A, B, C and D only
D. A, C, D and E only
E. A, B, C, D and E

Answer

A

C - An employee is an HCE in 2009 if they are a more than 5% owner in 2008 or 2009, or if they earn more than $105,000 in 2008. Employees A, B and D satisfy the ownership requirements and Employee C satisfies the compensation requirement. Note, while Employee B is not a direct owner, they are attributed ownership due to the fact they are married to Employee A. (Syllabus Topic 4)

Question 44

Q

All of the following are types of plan documents, EXCEPT:

A. Individually designed
B. Revenue procedure
C. Volume submitter
D. Master
E. Prototype

Answer

A

B - A revenue procedure is not a type of plan document. (Syllabus Topic 1)

Question 45

Q

All of the following statements regarding deductible contributions are TRUE, EXCEPT:

A. A deductible contribution must be an ordinary and necessary business expense.
B. Compensation used to determine deductible contributions includes IRC §125 salary reduction contributions made by employees.
C. The definition of compensation for allocation purposes does not affect the definition of compensation for deduction purposes.
D. A nondeductible contribution may be subject to a 10% excise tax.
E. An employer has until the due date for filing Form 5500, plus extensions, to make a deductible contribution.

Answer

A

E - Deductible contribution deadlines are based on the filing of the entities’ tax return, not the plan’s tax filing (Form 5500). (Syllabus Topic 8)

Question 46

Q

Based on the following information, determine the maximum deductible contribution for the calendar plan year ended December 31, 2009:

The plan is a profit sharing plan with a 401(k) feature.
The plan allows the employer to make discretionary profit sharing and matching contributions.
The plan satisfies all nondiscrimination and minimum coverage tests.
All participants are eligible for a contribution allocation.
The IRC §401(a)(17) limit for 2009 is $245,000.

Participant Compensation
W $300,000
X $200,000
Y $100,000
Z $50,000

A. $89,250
B. $118,750
C. $141,250
D. $148,750
E. $162,500

Answer

A

D - Eligible compensation is $245,000 + $200,000 + $100,000 + $50,000 = $595,000. The deductible limit is 25% of eligible compensation or $595,000 * .25 = $148,750. (Syllabus Topic 8)

Question 47

Q

Which of the following statements regarding Type I and Type 2 SAS 70 reports is/are TRUE?

I. Type 1 reports document a service organization’s internal controls.
II. Type 2 reports test the effectiveness of a service organization’s internal controls.
III. Type 1 reports are required while Type 2 reports are voluntary.

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

Answer

A

C - SAS 70 reports are not required of service organizations, but they are an effective way to distribute the cost of plan audits and can be marketed as a value-added service for clients. (Syllabus Topic 11)

Question 48

Q

Which of the following is/are amendments that may affect the ability of a participant to continue plan participation prospectively?

I. Amend the service requirement for eligibility
II. Amend the age requirement for eligibility
III. Amend to exclude a class of employees

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

Answer

A

E - All of these types of amendments may result in a participant no longer being eligible to participate. Even if an employee has met the age and service requirements for participation, and is a participant, a future amendment to change these conditions could result in that employee no longer being eligible to participate. (Syllabus Topic 3)

Question 49

Q

All of the following statements regarding remedial amendment periods are TRUE, EXCEPT:

A. The remedial amendment period is always based on the plan sponsor’s EIN.
B. The remedial amendment period may be accelerated when a plan terminates.
C. The remedial amendment period may be extended if the plan files for a determination letter.
D. Remedial amendment periods allow a plan to conform to legislation operationally without updating the plan document until later.
E. Plans that take advantage of a remedial amendment period often adopt plan amendments retroactively.

Answer

A

A - There is one six-year cycle for preapproved plans that is not based on the plan sponsor’s EIN. The five-year cycle based on the plan sponsor’s EIN is only applicable to individually designed plans. (Syllabus Topic 10)

Question 50

Q

Which of the following is/are counted as participants for Form 5500 series filing?

I. The beneficiary of an employee who died during the plan year and has an account balance as of the end of the plan year.
II. Eligible employees who choose not to defer in a 401(k) plan and do not have an account balance as of the end of the plan year.
III. An eligible employee who can not defer during the year because of a hardship distribution.

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

Answer

A

E - All of these employees are considered participants for Form 5500 reporting purposes. (Syllabus Topic 11)

Question 51

Q

All of the following information is reported on Schedule C of Form 5500, EXCEPT:

A. Name and relationship of service providers
B. EINs for service providers
C. Identification of any actuary or accountant terminations
D. A list of assets held by each service provider
E. Fees and commissions paid by the plan

Answer

A

D - Plan assets are not reported on Schedule C. (Syllabus Topic 11)

Question 52

Q

Based on the following information, determine the ratio percentage under IRC §410(b):

The plan year end is December 31, 2009.
Employees must work 1000 hours during the plan year and be employed on the last day of the plan year to share in the contribution.
Assume all employees have met the eligibility requirements of this profit sharing plan.

Part HCE Hours Term
A Yes 2080
B Yes 2080
C No 2080
D No 1250
E No 450 03/11/2009
F No 1460 10/31/2009

A. 33%
B. 50%
C. 67%
D. 75%
E. 100%

Answer

A

C - The ratio percentage is the NHCE ratio (2 / 3) / the HCE ratio (2 / 2) = 67%. NHCEs C and D are the two employees in the coverage group who are benefiting, NHCE E is excludable (terminated with fewer than 500 hours and not benefiting) and NHCE F is includable but not benefiting. (Syllabus Topic 6)

Question 53

Q

Which of the following statements regarding Audit CAP is/are TRUE?

I. The employer must agree to correct the violation.
II. The employer must pay a sanction.
III. The employer must sign a closing agreement with the IRS.

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

Answer

A

E - All three statements regarding Audit CAP are true. (Syllabus Topic 1)

Question 54

Q

Based on the following information, determine the latest date for filing the Form 5500:

The plan year begins July 1, 2008 and ends June 30, 2009.
Form 5558 has been filed timely.

A. September 15, 2009
B. January 31, 2010
C. March 15, 2010
D. April 15, 2010
E. May 15, 2010

Answer

A

D - The filing deadline for Form 5500 is 7 months following the end of the plan year (January 31, 2010) plus 2 ½ months if on extension (April 15, 2010). (Syllabus Topic 11)

Question 55

Q

All of the following statements regarding nondiscrimination rules are TRUE, EXCEPT:

A. The nondiscrimination rules of IRC §401(a)(4) can be satisfied by either a safe harbor approach or by general testing.
B. A safe harbor plan under IRC §401(a)(4) can be design-based or nondesign-based.
C. A top-heavy allocation available only to non-key employees will not qualify as a safe harbor under IRC §401(a)(4).
D. A design-based safe harbor under IRC §401(a)(4) is deemed nondiscriminatory because the allocation formula is designed to produce uniform allocation rates.
E. A safe harbor plan under IRC §401(a)(4) must allocate forfeitures in the same manner as employer contributions.

Answer

A

C - A top-heavy allocation does not fail to be uniform merely because the top-heavy allocation is available only to non-key employees. Top-heavy formulas qualify for an exception from uniformity requirements if the plan is able to pass coverage under IRC §410(b) by treating an employee as not benefiting if his allocation is determined solely with reference to the top-heavy formula. (Syllabus Topic 7)

Question 56

Q

All of the following statements regarding annual addition limits under IRC §415 are TRUE, EXCEPT:

A. Investment earnings are not considered annual additions.
B. The annual additions are based on the limitation year which may or may not be the same as the plan year.
C. A participant with IRC §415 compensation of $35,000 could have annual additions totaling $35,000.
D. Direct rollovers from an unrelated employer are not considered annual additions.
E. The annual additions dollar limit is based on the dollar limit in effect as of the beginning of the plan year.

Answer

A

E - The annual additions limit is one of the few limits that is based on the dollar limit in effect at the end of the plan year instead of the beginning. (Syllabus Topic 7)

Question 57

Q

All of the following statements regarding protected benefits under IRC §411(d)(6) are TRUE, EXCEPT:

A. The right to direct investments is not a protected benefit under IRC §411(d)(6).
B. Participant loans are a feature that is not a protected benefit under IRC §411(d)(6).
C. The right to invest in employer securities is not a protected benefit under IRC §411(d)(6).
D. The right to make elective deferrals is not a protected benefit under IRC §411(d)(6).
E. Hardship withdrawals are a feature that is a protected benefit under IRC §411(d)(6).

Answer

A

E - The right to direct investments, participant loans, investing in employer securities, making elective deferrals and hardship withdrawals are not protected benefits and thus may be eliminated prospectively. (Syllabus Topic 10)

Question 58

Q

All of the following statements regarding eligibility requirements are TRUE, EXCEPT:

A. Employees may be required to work two years of service before becoming eligible for a matching contribution.
B. A plan may have different eligibility conditions for different groups of employees.
C. A plan with age 21 and one year of service eligibility requirements may waive those requirements for employees employed when the plan was first established.
D. Failing to include an employee who has met the eligibility requirements is an operational error that may be corrected under EPCRS.
E. A plan amendment that changes the eligibility requirement must grandfather in existing participants.

Answer

A

E - Plan amendments changing eligibility requirements often grandfather in existing participants, but it is not a requirement to do so. (Syllabus Topic 3)

Question 59

Q

Which of the following statements regarding the filing deadlines for Form 5500 is/are TRUE?

I. Form 5500, without extension, is due April 15th for plan year ending September 30th.
II. Form 5500, without extension, is due May 31st for a plan year ending October 31st.
III. Form 5500, with extension, is due September 15th for a plan year ending November 30th.

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

Answer

A

D - Form 5500 is due 7 months following the end of the plan year (April 30 (not April 15) for a plan year ending September 30 and May 31 for a plan year ending October 31) and if on extension 9½ months following the end of the plan year (September 15 for a plan year ending November 30). (Syllabus Topic 11)

Question 60

Q

All of the following statements regarding the top-paid group limitation are TRUE, EXCEPT:

A. When making the top-paid group election, the number of employees considered HCEs may be fewer than those considered HCEs under the regular rules.
B. An employee may be considered an HCE if in the top 20 percent of employees when ranked by compensation in the lookback year.
C. An employee may be considered an HCE if the employee’s compensation in the lookback year exceeds the compensation limit, as indexed.
D. An employee who is not an HCE due to the top-paid group limitation is excluded from the ADP test.
E. The election to use the top-paid group limitation in determining HCEs, if made, must be included in a prototype plan document.

Answer

A

D - When making the top paid group election, employees who are not HCEs because of this determination are included in the testing as NHCEs. (Syllabus Topic 4)

Question 61

Q

All of the following statements regarding allocation conditions are TRUE, EXCEPT:

A. A plan may require a participant to be employed on the last day of the plan year to receive a profit sharing allocation.
B. A plan may require a participant to be employed on the last day of the quarter to receive an employer matching allocation.
C. A plan may require a participant to complete 1200 hours of service to receive a profit sharing allocation.
D. A plan may require a participant to complete a year of service to receive a profit sharing allocation.
E. A plan may make a profit sharing allocation to a participant who died during the plan year, ignoring other applicable allocation conditions.

Answer

A

C - A plan may not require more than 1000 hours in a plan year to receive a profit sharing allocation. (Syllabus Topic 7)

Question 62

Q

Which of the following is/are qualifying plan assets with regard to the small plan audit waiver?

I. Qualifying employer securities
II. Registered mutual funds
III. Annuity contracts issued by a qualified insurance company

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

Answer

A

E - All of these assets are qualifying assets when considering the small plan audit exemption requirements. (Syllabus Topic 11)

Question 63

Q

Which of the following statements regarding ASPPA’s Code of Professional Conduct is/are TRUE?

I. The ASPPA Code of Professional Conduct must be prominently displayed in the offices of an ASPPA member.
II. An ASPPA member shall render opinions or advice only when qualified to do so based on education, training or experience.
III. An ASPPA member shall make use of the membership titles and designations only where that use conforms to the practices authorized by ASPPA.

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

Answer

A

D - There is no requirement to display the ASPPA Code of Professional Conduct in your office, or elsewhere. (Syllabus Topic 12)

Question 64

Q

All of the following entry dates satisfy the statutory requirements of the Internal Revenue Code, EXCEPT:

The eligibility requirements are one year of service and the attainment of age 21.
A. First day of the month following satisfaction of the eligibility requirements
B. First day of the calendar quarter following satisfaction of the eligibility requirements
C. First day of the payroll period following satisfaction of the eligibility requirements
D. First day of the plan year following satisfaction of the eligibility requirements
E. First day of the plan year nearest satisfaction of the eligibility requirements

Answer

A

D - The statutory plan entry date is the earlier of the first day of the plan year beginning after OR six months following the date the employee satisfies the age/service requirements. The first day of the plan year following will not satisfy the requirements because it could be more than six months following the date the employee satisfied the eligibility requirements. (Syllabus Topic 3)

Answer 65

A

A - Interested parties for IRS determination letter submissions are present employees who are eligible to participate in the plan and present employees employed at the place of business for those eligible to participate. Terminated employees are not considered interested parties for this purpose. (Syllabus Topic 1)

Answer 66

A

C - A master/prototype plan consists of a basic plan document and an adoption agreement. (Syllabus Topic 1)

Answer 67

A

E - All of the statements regarding excess annual additions under IRC §415 are true. (Syllabus Topic 7)

Answer 68

A

A - A plan is not required to provide for full vesting upon the total disability of a participant, although most plans do. (Syllabus Topic 9)

Answer 69

A

B - Compensation is not considered when applying the ownership test. An employee’s compensation in the current plan year is not considered when determining HCE status. Only prior year compensation is considered. (Syllabus Topic 4)

Answer 70

A

E - All of the statements regarding excess fidelity bonds are true. Every person who handles plan funds must be bonded by a fidelity bond. It is permissible to use plan assets to purchase a fidelity bond. The plan is listed as the insured on the fidelity bond. (Syllabus Topic 11)

Answer 71

A

C - An employee is an HCE in 2010 if they are a more than 5% owner in 2009 or 2010, or if they earn more than $110,000 in 2009.

Employees A, B, C and D satisfy the ownership requirements. While Employee B is not a direct owner, Employee A’s ownership is attributed to Employee B due to the fact they are married.

Employees A and C also satisfy the compensation requirement. Employee E will not be an HCE until 2011 since compensation earned during the current plan year is not considered when determining HCE status. (Syllabus Topic 4)

Answer 72

A

D - The cash-out rules do not apply to in-service withdrawals. (Syllabus Topic 9)

Answer 73

A

A - A target benefit plan may not impose a maximum age restriction on participation if the employee is within five years of retirement age.

Exclusion of part-time employees by category is an impermissible service condition, if the term part-time employee is defined on the basis of a customary work schedule (such as, less than 20 hours per week). This is because the exclusion relates solely to the employee’s service. (Syllabus Topic 3)

Answer 74

A

E - All of the statements regarding Form 5500 filings are true. (Syllabus Topic 11)

Answer 75

A

D - Not all optional forms of benefit are protected benefits. For example, annuity options may be eliminated anytime from a profit sharing plan or stock bonus plan without violating the anti-cutback rules. (Syllabus Topic 10)

Answer 76

A

C - Participant B’s distribution of $2,500 represents 40% of participant B’s total account balance. Participant B’s total account balance was $6,250 ($2,500 / 0.40). The remaining 60% of Participant B’s account balance is $3,750 ($6,250 - $2,500).

Participant B is not eligible for an allocation. The remaining compensation totals $320,000 ($200,000 + $40,000 + $45,000 + $35,000). The allocation to Participant D is $3,750 / $320,000 x $45,000 = $527. (Syllabus Topic 9)

Answer 77

A

A Plans are not required to credit service for unpaid employer approved personal leave under the break-in-service rules. (Syllabus Topic 3)

Answer 78

A

B The employer pays the excise tax due to nondeductible contributors by filing Form 5330. The due date for the excise tax is the last day of the 7th month following the taxable year for which there was a nondeductible contribution as of the close of the year.

Form 5558 may be filed to extend this deadline by no more than six months. The extension does not apply to the payment of the tax, only to the filing deadline, so the tax due must be submitted with the extension request. (Syllabus Topic 8)

Answer 79

A

E - Where applicable, Schedules C, G and H are included a Form 5500 filing for large plan filers only. These Schedules are not required for small plan filers. (Syllabus Topic 11)

Answer 80

A

A - Top-heavy minimums are not required after the plan termination date, but any minimum contribution liabilities that accrued as of the termination date, but have not been funded must be satisfied. (Syllabus Topic 10)

Answer 81

A

C - The calendar year data election applies only to determine the lookback year for the compensation test and does not apply to determine the HCEs under the 5 percent owner test. (Syllabus Topic 4)

Answer 82

A

D - First, determine the participants included. Include those with at least one hour of service in the determination year (2010). Participant G is not included in any of the top-heavy calculations.

Next determine which distributions need to be included. Participant B’s in-service distribution ($50,000) is included since it occurred during the 5 year period ending on the determination date. Participant F’s termination distribution ($15,000) is included since it occurred during the determination year.

The numerator is the key employee balances ($60,000 + $10,000) and the denominator is all includable employee balances ($60,000 + $40,000 + $10,000 + $35,000 +$ 25,000) plus the includable distributions ($50,000 + $15,000). The denominator totals $235,000.

The top-heavy ratio is ($70,000 / $235,000). (Syllabus Topic 5)

Answer 83

A

A - SIMPLE IRA plans are exempt from top-heavy rules. (Syllabus Topic 2)

Answer 84

A

E - All of the statements regarding break-in-service rules and vesting are true. (Syllabus Topic 9)

Answer 85

A

A - The filing deadline for the Forms 5500, 5500-SF and 5500-EZ is the last day of the seventh month following the close of the plan year. Thus, for a plan year ending June 30th, Form 5500, without extension, is due January 31st. The maximum extension is 2½ months.

For a terminated plan, the date on which final distribution of assets occurs ends the plan year for reporting purposes, creating a short plan year. The return is due on the last day of the seventh calendar month following that date, unless an extension is granted. (Syllabus Topic 11)

Answer 86

A

E - If a qualification failure involves the diversion or misuse of plan assets, relief under any of the EPCRS programs, not even under Audit CAP.

The Self-Correction Program (SCP) is a self-initiated correction program for resolving operational failures. It involves no disclosure or fees to the IRS.

The Voluntary Correction with IRS Approval Program (VCP) is a self-initiated program for fixing qualification failures. However, in contrast to SCP, VCP requires disclosure to the IRS and a payment to the IRS (called a VCP compliance fee).

Any VCP submission may be made as an Anonymous Submission, regardless of the type of plan (qualified plan, 403(b) plan, SEP, SIMPLE IRA plan) or the type of failure (operational failure, demographic failure, plan document failure, employer eligibility failure). (Syllabus Topic 1)

Answer 87

A

A - A defined contribution plan may satisfy the legal vesting requirements for employer contributions under one of two statutory minimum schedules: three-year cliff vesting or six-year graded vesting. A six-year cliff vesting schedule does not satisfy the statutory minimum.

A plan may also design a customized cliff or graded vesting schedule, provided that participants are no less vested at any point in time than they would be under the statutory cliff or graded vesting schedules. (Syllabus Topic 9)

Answer 88

A

A - Only employees who satisfy the plan eligibility requirements are included in the ratio percentage test. The question provides the number of nonexcluable HCEs, but the number of nonexcludable NHCEs must be determined. Of the 150 total NHCEs, only 105 met the eligibility requirements (150 total NHCEs – 20 NHCEs under age 21 – 25 NHCEs with less than one year of service).

The HCE ratio is 50% ( 8 benefiting HCEs / 16 nonexcludable HCEs). In order to pass the ratio percentage 70% of the NHCEs, as compared to the percentage of HCEs must benefit. Since the HCE ratio is only 50%, only 35% of the nonexcludable NHCEs must benefit to achieve a plan ratio percentage of 70% ( 50% HCE ratio x 70% = 35% needed NHCE ratio).

35% of the nonexcluable NHCEs is 37 (105 x 35%). (Syllabus Topic 6)

Answer 89

A

D - The overall deduction limit for overlapping plans is generally 25 percent of the aggregate compensation of all participants under the overlapping plans. However, the overlapping plan limit is never less than the minimum funding requirement under IRC §412 with respect to a defined benefit plan included in the calculation. So, even if such minimum funding requirement is greater than the 25 percent limit, contributions to the defined benefit plan that exceed such amount but are within the minimum funding requirement are deductible.

There are other exceptions to the 25 percent limit. The 25 percent limit does not apply if a defined contribution plan contribution does not exceed 6 percent of compensation. Also, the 25 percent limit does not apply if the defined benefit plan is covered by the PBGC. (Syllabus Topic 8)

Answer 90

A

E - All three are service organizations that may issue a SAS 70. (Syllabis Topic 11)

Answer 91

A

C - If a plan is a multiple employer plan—that is, a plan that covers more than one company and not all the companies are related to each other—top-heavy rules are applied separately to the different companies. (Syllabis Topic 5)

Answer 92

A

B - Since all employees met the statutory eligibility requirements, no one is excluded from the ratio percentage test based on failure to satisfy eligibility requirements. However, those NHCEs who terminated employment with less than 500 hours of service are excudable because the plan has allocation requirements.

There are 220 NHCEs in the plan (240 total employees – the 20 HCEs). 20 of these NHCEs are excludable from the ratio percentage test because they terminated employment with less than 500 hours of service are excudable. Thus, there are 200 nonexcludable NHCEs in the plan.

109 of these nonexcludable NHCEs failed to satisfy the allocation requirements (60 with less than 1,000 hours of service and 49 that terminated employment with more than 500 hours of service). Thus, there are 91 nonexcludable NHCEs benefiting.

The NHCE ratio is 45.50% ( 91 benefiting NHCEs / 200 nonexcludable NHCEs).

Since the NHCE ratio is 45.50%, only 65.00% of the nonexcludable HCEs may benefit to achieve a plan ratio percentage of 70% ( 45.50% NHCE ratio / 70% = 65.00% needed HCE ratio). 65% of the 20 HCEs equals 13 HCEs that may benefit under Company S’s profit sharing plan and still satisfy coverage requirements using the ratio percentage test. (Syllabus topic 6)

Answer 93

A

D - The top-paid group election is used in the determination of HCEs, not for key employees. (Syllabis Topic 4)

Answer 94

A

B - ASPPA members are not required to display the ASPPA Code of Professional Conduct in their offices. (Syllabus Topic 12)

Answer 95

A

D - The filing deadline for the Forms 5500, 5500-SF and 5500-EZ is the last day of the seventh month following the close of the plan year. Thus, for a plan year ending May 31st, Form 5500, with extension, is due March 15th.

The maximum extension is 2½ months. Thus, for a plan year ending June 30th, Form 5500, with extension, is due March 15, 2011. (Syllabus Topic 11)

Answer 96

A

B - Once the amount of contribution is determined, another formula, called the allocation formula, will specify how the money is to be allocated to the participants’ accounts. In some cases, the contribution formula and the allocation formula are the same: for example, an employer may decide to contribute 5 percent of compensation of the eligible participants, and to allocate that contribution by giving each participant’s account 5 percent of that participant’s compensation. On other occasions, the allocation formula is very different. (Syllabus Topic 7)

Answer 97

A

C - Forfeiture allocations made to participants in a plan year do not reduce an employer’s overall deduction limit. (Syllabus Topic 8)

Answer 98

A

E - The financial status of the employer is not a consideration in determining the discriminatory effect of the plan amendment. (Syllabus Topic 10)

Answer 99

A

B - Pension plans may permit distribution only upon retirement, death, disability, termination of employment and in-service distributions to a participant who has reached age 62, even if normal retirement age is later than age 62. (Syllabus Topic 2)

Answer 100

A

B - There are two minimum coverage tests under IRC §410(b): the ratio percentage test and the average benefit test. The average benefit test is not part of the ratio percentage test.

If there are no NHCEs in the coverage testing group, the plan is deemed to satisfy coverage for the plan year. However, if there is at least one NHCE in the coverage testing group, this rule does not apply. (Syllabus Topic 6)

Answer 101

A

E - All of these situations may cause a plan to be disqualified. (Syllabus Topic 1)

Answer 102

A

C - The question provides the number of nonexcluable HCEs, but the number of nonexcludable NHCEs must be determined. Of the 200 total NHCEs, only 100 met the eligibility requirements (200 total NHCEs – 50 NHCEs under age 21 – 50 NHCEs with less than one year of service).

The HCE ratio is 60% ( 6 benefiting HCEs / 10 nonexcludable HCEs). In order to pass the ratio percentage 70% of the NHCEs, as compared to the percentage of HCEs must benefit. Since the HCE ratio is only 60%, only 42% of the nonexcludable NHCEs must benefit to achieve a plan ratio percentage of 70%
( 60% HCE ratio x 70% = 42% needed NHCE ratio).

42% of the nonexcluable NHCEs is 42 (100 x 42%). (Syllabus Topic 6)

Answer 103

A

E - CPCs do not qualify as designated representatives on Form 2848. Only attorneys, CPAs, enrolled agents, enrolled actuaries and enrolled retirement plan agents (ERPAs) may be designated as representatives under Form 2848. (Syllabus Topic 1)

Answer 104

A

E - All of the statements regarding vesting schedules are true. (Syllabus Topic 9)

Answer 105

A

B - Compensation for purposes of determining top-heavy minimum allocations is IRC §415 compensation. IRC §415 compensation includes compensation from the beginning of the plan year, rather than from the participant’s date of entry. (Syllabus Topic 5)

Answer 106

A

D - Based on a six-year graded vesting schedule, Participant A is 80% vested as of December 31, 2010. As of December 31, 2008 (the end of the plan year prior to terminating employment), Participant A was 60% vested.

Participant A did not earn a year of vesting credit during 2009. As a full-time employee, Participant A would not have performed 1,000 hours of service between January 1, 2009 and March 14, 2009. It typically takes a full-time employee approximately six months to perform 1,000 hours of service.

Participant A worked from May 1, 2010 through December 31, 2010. An eight month period is enough time for a full-time employee to work 1,000 hours. Thus, Participant A earned a year of vesting credit during 2010. The additional year raises Participant A’s vested percentage from 60% to 80%. (Syllabus Topic 9)

Answer 107

A

D - Catch-up contributions are disregarded in determining a key employee’s allocation rate for top-heavy minimum contribution purposes. (Syllabus Topic 5)

Answer 108

A

A - A plan may exclude select classifications of employees from participation in the plan. If these types of exclusions are used, special testing applies under IRC §410(b) to show that the plan satisfies the coverage requirements.

An employer is not permitted, either specifically or indirectly, to create a job category for the purpose of excluding participants who have not completed eligibility requirements that exceed the statutory requirements, even if the coverage rules are met when these individuals are excluded. In addition, a plan may not impose any eligibility conditions that on the surface appear to be unrelated to age or service, but in reality are age or service conditions that violate the minimum age or service standards prescribed by the statute.

Exclusion of part-time employees or seasonal employees by category is an impermissible service condition, if the term part-time employee is defined on the basis of a customary work schedule (such as, less than 20 hours per week). This is because the exclusion relates solely to the employee’s service. Under the one year of service definition, it is possible that a part-time or seasonal employee could be credited with enough hours of service to earn a year of service. (Syllabus Topic 3)

Answer 109

A

C - An employee is a key employee if they are a more than 5% owner, if they are a more than 1% owner and have compensation in excess of $150,000, or if they are an includible officer satisfying the compensation test. (Syllabus Topic 5)

Answer 110

A

A - IRC §415 limitations are applied to the annual additions allocated to the participant’s account for the limitation year. Annual additions are:

Employer contributions [including elective deferrals under a 401(k) plan, matching contributions and nonelective contributions];
Forfeitures allocated to the participant’s account; and
Employee contributions (i.e., after-tax employee contributions).

Loan repayments, investment earnings and catch-up contributions are not included in annual additions. (Syllabus Topic 7)

Answer 111

A

C - The minimum top-heavy allocation required is the lesser of: 3 percent of compensation for the entire plan year or the highest rate allocated to a key employee. Since the highest rate allocated to a key employee is 7%, Participant C’s top-heavy minimum is 3% of total plan year compensation ($100,000) or $100,000 * .03 = $3,000. (Syllabus Topic 5)

Answer 112

A

B - An eligibility computation period is the period during which an employee’s hours are examined to determine whether a year of service has been completed. The eligibility computation period must be a period of 12 consecutive months.

The first eligibility computation period must begin on the employee’s employment commencement date. Eligibility computation periods after the first such period may be defined as either: (a) the plan year; or (b) 12-month anniversary periods of the initial eligibility computation period. The plan must define which method it will use to determine eligibility computation periods after the first period. No other method is acceptable in determining whether the statutory requirements are satisfied. (Syllabus Topic 3)

Answer 113

A

C - In a defined contribution plan, contribution amounts that have already been allocated may not be adjusted and reallocated after a coverage failure has been identified. This is not a permissible correction method. (Syllabus Topic 6)

Answer 114

A

D - Employee D is age 21 on March 5, 2011. Employee D has one year of service on September 1, 2010. The later of these two dates is March 5, 2011. Employee D enters the plan on July 1, 2011, the first entry date after March 5, 2011. (Syllabus Topic 3)

Answer 115

A

E - A compensation definition that excludes any portion of compensation earned by HCEs only is deemed to be nondiscriminatory.

Generally, a plan must use a nondiscriminatory definition of compensation as the basis for allocations. The IRC defines several compensation definitions that are safe harbors. The safe harbor definitions are deemed to be nondiscriminatory compensation without a need for special testing. If one of those definitions is not used, the plan administrator must be able to demonstrate that the alternate definition is not discriminatory.

IRC §414(s) provides the rules for determining whether a definition of compensation is nondiscriminatory. All of the IRC §415 compensation definitions are safe harbor definitions of IRC §414(s) compensation. The regulations also permit three safe harbor modifications to the IRC §415 compensation definition to arrive at IRC §414(s) compensation. (Syllabus Topic 7)

Answer 116

A

D - A defined benefit plan must satisfy the minimum participation requirements of IRC §401(a)(26), however, defined contributions are not subject to the minimum participation requirements of IRC §401(a)(26). (Syllabus Topic 1)

Answer 117

A

D - A profit sharing or stock bonus plan must have recurring and substantial contributions to be a qualified plan. If there is a complete discontinuance of contributions to a profit sharing or stock bonus plan, the affected participants must be 100 percent vested.

Filing for a determination letter with the IRS is not required by law to maintain qualified status, but is recommended. This filing, which takes place on a Form 5310, will obtain a ruling from the IRS that the termination of the plan does not negatively affect its qualified status.

A money purchase or target benefit plan is not subject to the same obligations as a profit sharing plan or a stock bonus plan to have recurring and substantial contributions to the plan. Freezing a money purchase or target benefit plan is tantamount to amending the contribution formula to zero percent of compensation, and does not require accelerated vesting.

A partial plan termination causes the affected participants to become 100 percent vested in their funded benefits. The affected participants who receive the 100 percent vesting are those who are eliminated from participation, in the case of a significant reduction, or the participants affected by the plan amendment that resulted in the partial termination. Participants who are not affected by the amendment continue to be subject to the vesting schedule with respect to their benefits.

Generally, a partial plan termination occurs when a significant reduction in the number of participants occurs, either by plan amendment or by involuntary termination of employment. (Syllabus Topic 10)

Answer 118

A

B - Permitted disparity may be used when allocating forfeitures. (Syllabus Topic 9)

Answer 119

A

A - It is not required that existing participants be allowed to continue participation if they have not satisfied the new eligibility conditions. When the eligibility conditions are amended, the plan may (but is not required to) provide that the existing participants are grandfathered in, meaning that their participation continues even if they cannot satisfy the new eligibility conditions.

If the eligibility requirements are modified in a way that the employee is no longer satisfies the requirements for participation, the participant’s accrued benefit is protected, but the employee will not accrue additional benefits until he or she first re-establishes the right to participate in the plan under the modified eligibility requirements.

A change in eligibility requirements may affect the re-entry of a rehired employee who was formerly a participant in the plan. Unless the amendment grandfathered in former participants, the rehired employee would have to satisfy the new requirements before his or her participation could resume.

The modification of the plan’s eligibility service condition will not cause an employee to lose participant status if the employee has already satisfied the new requirement.

Just because an employee qualifies as a participant in the plan does not guarantee the employee the right to participate in the plan for the rest of his or her employment with the employer. The right to continue to participate in a plan is not a protected benefit. (Syllabus Topic 3)

Answer 120

A

C - The deduction limit is 25% of eligible compensation or $2,000,000 * .25 = $500,000. Since $50,000 of the deduction limit has already been used towards employer matching contributions, $450,000 is the maximum deductible profit sharing contribution that may be made for the year ($500,000 - $50,000). (Syllabus Topic 8)

Answer 121

A

C - Employees who have not satisfied the plan’s age and service requirements for the portion being tested are excluded from the coverage testing for that portion of the plan. (Syllabus Topic 6)

Answer 122

A

A - Discussing a specific participant’s investment elections with an unrelated investment advisor is a violation of the participant’s confidentiality if the participant has not given permission for you to discuss the information with the unrelated investment advisor. Discussing with a client the fees paid by other clients that the ASPPA member services is a violation of one client’s confidentiality if that client has not given permission for you to discuss the information with another client. (Syllabus Topic 12)

Answer 123

A

B - Participants D and E are not eligible to receive an allocation due to allocation conditions. Participant A’s compensation must be limited to the IRC §401(a)(17) limit amount of $245,000. Total includable compensation is $500,000 ($245,000 + $150,000 + 55,000 + $50,000. The profit sharing contribution is $30,000 ($500,000 x 6%). (Syllabus Topic 7)

Answer 124

A

D - An eligibility computation period is the period during which an employee’s hours are examined to determine whether a year of service has been completed. The eligibility computation period must be a period of 12 consecutive months. A short plan year may not be used.

The first eligibility computation period must begin on the employee’s employment commencement date. Eligibility computation periods after the first such period may be defined as either: (a) the plan year; or (b) 12-month anniversary periods of the initial eligibility computation period. The plan must define which method it will use to determine eligibility computation periods after the first period. No other method is acceptable in determining whether the statutory requirements are satisfied. (Syllabus Topic 3)

Answer 125

A

B - With a three-year cliff vesting schedule, participants are 0% vested in their first two years and achieve 100% vested after three years of service. Since the participant has only two years of vested service, the participant is 0% vested in all employer contribution accounts.

Elective deferral and rollover accounts are always 100% vested. Thus, the participant’s vested balance is $14,000 ($10,000 elective deferral balance + $4,000 rollover balance). (Syllabus Topic 9)

Answer 126

A

E - A common accrual requirement in a defined contribution plan is that the participant must satisfy a minimum hours-of-service requirement for the plan year. This minimum requirement may not exceed 1,000 hours.

Because an hours requirement for allocation purposes is a plan design issue and is not required by statute or regulation to be in the plan, there is no legal rule that demands proration of the hours requirement for short plan year. Thus, a plan may impose a 501 or even 1,000 hours of service requirement during a short plan year in order for participants to receive a contribution allocation. (Syllabus Topic 7)

Answer 127

A

B - Two plans that are not part of a required aggregation group may be permissively aggregated. The purpose of permissive aggregation is to show that the combined plans are not top-heavy. (Syllabus Topic 5)

Answer 128

A

C - Catch-up contributions are not included in annual additions. (Syllabus Topic 7)

Answer 129

A

D - Elective deferrals may not be used to satisfy a top-heavy minimum requirement. (Syllabus Topic 5)

Answer 130

A

C - Service to avoid a break in service need not be credited for employees suspended due to misconduct. (Syllabus Topic 9)

Answer 131

A

A - The minimum participation requirements of IRC §401(a)(26) are only applicable to defined benefit plans.

The other statements regarding plan qualification are true. The plan must not discriminate in favor of HCEs, it must be maintained for the exclusive benefit of the participants and their beneficiaries, it must provide a direct rollover option for an eligible rollover distribution and it must satisfy qualification requirements in form. (Syllabus Topic 1)

Answer 132

A

B - An employer may correct a coverage failure by adopting a corrective amendment up to 9½ months after the close of the plan year. The corrective amendment may cure the coverage defects by expanding the group of NHCEs who benefit under the plan or by increasing the allocations or accruals for NHCEs who already benefit under the plan.

A plan may not adjust contribution amounts that have already been allocated and reallocate the contribution amount. Amounts already allocated are protected from reduction under the anti-cutback rules of IRC §411(d)(6).

Expanding the group of HCEs who benefit under the plan will only exacerbate the testing failure. (Syllabus Topic 6)

Answer 133

A

C - In order to qualify for filing Form 5500-SF, the plan must invest 100 percent of its assets in investments that have a readily ascertainable fair market value.

The other statements regarding requirements a plan must meet in order to qualify for filing Form 5500-SF are true. The plan must cover fewer than 100 participants as of the first day of the plan year, it must meet eligibility requirements for the small plan audit waiver on the basis of qualifying assets, it may hold no employer securities at any time during the plan year and it may not be a multiemployer plan. (Syllabus Topic 11)

Answer 134

A

E - All of the statements are true.

When the eligibility conditions are amended, the plan may (but is not required to) provide that the existing participants are grandfathered in, meaning that their participation continues even if they cannot satisfy the new eligibility conditions. (Syllabus Topic 3)

Answer 135

A

E - A plan may impose less restrictive age and service requirements for eligibility to participate (that is, a shorter service requirement or a younger age requirement than the statutory maximums), but may not impose more restrictive age and service requirements for eligibility to participate (that is, a longer service requirement or an older age requirement than the statutory maximums). An age 22 requirement is more restrictive than the statutory maximum. (Syllabus Topic 3)

Answer 136

A

A - Any qualified plan or SEP is subject to aggregation for top-heavy purposes. SIMPLE IRA or SIMPLE 401(k) plans are not subject to aggregation for top-heavy purposes, as they are both exempt from the top-heavy rules. If a SIMPLE 401(k) plan is later converted to a regular 401(k) plan or is replaced by another type of qualified plan, the converted or replaced plan would be includible in the required aggregation group if it covered a key employee. (Syllabus Topic 5)

Answer 137

A

C - The way the plan defines compensation for allocation purposes does not affect the way compensation is determined for calculating the deduction limit. It is possible for the two compensation definitions to be the same, but it is not required.

For deduction purposes, compensation is determined based on the employer’s tax year, even if different than the plan year. (Syllabus Topic 8)

Answer 138

A

D - Years of service cannot be disregarded simply because a participant declines to make elective deferrals to a 401(k) plan.

Years of service before a one-year break in service may temporarily disregarded until after the participant completes another year of service, however, the one-year break-in-service rule does not affect an employee’s vesting percentage in the benefits already accrued (i.e., benefits accrued before the break in service). An employee does not forfeit his or her vested rights simply because he or she has a break in service. (Syllabus Topic 9)

Answer 139

A

C - Plans are not required to use IRC §415 compensation when allocating employer contributions. (Syllabus Topic 7)

Answer 140

A

D - Employee A is age 21 on August 1, 2011. Employee A has one year of service on April 14, 2011. The later of these two dates is August 1, 2011. Employee A enters the plan on January 1, 2012, the first entry date after August 1, 2011. (Syllabus Topic 3)

Answer 141

A

E - The elapsed time method of crediting service is always based on the employee’s date of hire and does not shift to a plan year computation period.

An employee incurs a break in service for eligibility purposes if he or she is credited with 500 or fewer hours of service during an eligibility computation period. The 500-hour rule is a minimum standard. The plan may be more liberal by defining a break in service using a lesser hours of service rule (for example, fewer than 250 hours of service in an eligibility computation period), or by not imposing a break-in-service rule. (Syllabus Topic 3)

Answer 142

A

E - A distribution made during the one-year period ending on the determination date to a participant who terminated is only included in the top-heavy determination if the terminated participant had at least one hour of service during the plan year including the distribution date. If the participant terminated employment in a prior plan year, the distribution would not be included in the top-heavy determination.

If a distribution is made for a reason other than severance from employment, death or disability, the lookback is extended and the distribution is added back if it occurred within the five-year period ending on the determination date. Thus, in-service distributions to an active participant made four years before the determination date would be included in the top-heavy determination.

The accrued benefit of a former key employee and distributions to a former key employee are disregarded for purposes of determining whether the plan is top-heavy in the following years. It is as if that person is not and never was covered by the plan.

If a rollover is related, the plan making the distribution does not count the distribution in its top-heavy ratio, but the recipient plan includes the rollover account in its ratio.

The minimum top-heavy contribution is the lesser of three percent or the highest allocation rate for any key employee including elective deferrals made by each key employee. If no employer contributions are made to the plan, no forfeitures are allocated and no key employees made elective deferrals to the plan, the top-heavy minimum contribution would be 0 percent. (Syllabus Topic 5)

Answer 143

A

D - Employees who satisfy the plan’s age and service requirements, but are ineligible due to a job category exclusion are included in the testing group as not benefiting. (Syllabus Topic 6)

Answer 144

A

C - If an error has occurred historically over several years, the EPCRS correction procedures require that the error be corrected for all affected years, even if the years are closed for audit purposes. (Syllabus Topic 1)

Answer 145

A

B - The participant has three years of service (2009-2011) and is therefore 40 percent vested. The year of service credited in 2002 is disregarded under the rule of parity. (Syllabus Topic 9)

Answer 146

A

B - Five-year cliff vesting for a non-top-heavy defined contribution plan does not meet the statutory minimum vesting requirements. (Syllabus Topic 9)

Answer 147

A

E - All of the statements are true.

If, absent the excess allocation, the amount would have been allocated to other participants, the plan should reallocate the excess amounts to other participants who are not at their IRC §415 limits.

If the excess amount would not have been allocated to other participants in absence of the overallocation, the excess amount is placed in an unallocated suspense account and used (along with earnings on the unallocated amounts) in the following limitation year(s) to reduce employer contributions other than elective deferrals.

If an excess amount is allocated to a participant’s account and there have been elective deferrals or after-tax employee contributions made by the participant for the limitation year, the plan may provide for the distribution of elective deferrals and/or the return of after-tax employee contributions equal to the excess amount. (Syllabus Topic 7)

Answer 148

A

D - Schedule A is required because the plan has life insurance policies, Schedule SB is required because the plan is a single-employer defined benefit plan, Schedule C is required because the plan is a large plan filer with a terminated accountant and Schedule H is required as a large plan filer to report financial information. (Syllabus Topic 11)

Answer 149

A

D - If a plan is disqualified, the employer loses its deduction for nonvested contributions made to the plan for open tax years. In addition, employees may be taxed on their vested contributions made in open tax years. Tax years that are closed for tax purposes cannot be reopened by the IRS.

A distribution from a disqualified plan is not eligible for rollover. Accordingly, if a distribution is rolled over, excise taxes under IRC §4973 may apply if the bad rollover results in excess contributions to the IRA. (Syllabus Topic 1)

Answer 150

A

E - All of the statements are true.

An ERISA §204(h) notice is required when an ERISA §204(h) amendment is adopted under a pension plan. An ERISA §204(h) amendment is one that significantly reduces or ceases the rate of future benefit accrual under the pension plan or one that eliminates, ceases or significantly reduces an early retirement benefit or retirement-type subsidy.

A pension plan for this purpose means a defined benefit plan, a money purchase plan, or any other defined contribution plan that is subject to the minimum funding requirements under IRC §412. A cash balance plan is a type of defined benefit plan. A target benefit plan is a type of money purchase pension plan. (Syllabus Topic 10)

Answer 151

A

A - The minimum required top-heavy contribution is 3% of the total non-key compensation less any employer contribution already considered. The total non-key compensation is $135,000 ($75,000 + $60,000). $135,000 x 3% = $4,050. $4,050 – $375 in employer matching contributions = $3,675. (Syllabus Topic 5)

Answer 152

A

C - In order to satisfy the ratio percentage test under IRC §410(b), the plan’s ratio percentage must be at least 70%.

Only the 30 HCEs from Division B will benefit under the plan. The total number of HCEs from both divisions is 80 (50 from Division A + 30 from Division B). Thus, 37.50% of the HCEs are benefiting (30 benefiting HCEs / 80 total nonexcludable HCEs).

Consequently, 26.25% of the NHCEs must benefit (70% of HCE benefiting ratio of 37.50% = 26.25%). The total number of NHCEs from both divisions is 150 (100 from Division A + 50 from Division B). 26.25% of 150 = 39.38. Round up to the next whole number to conclude that 40 of the NHCEs must benefit.

These figures can be confirmed based on the coverage test worksheet:
HCEs NHCEs Total
Coverage Testing Grp 80 150 230
Benefiting Group 30 40 70
Coverage Ratio 30/80 40/150
37.50% 26.67%
Ratio Percentage 71.12%
(Syllabus Topic 6)

Answer 153

A

D - The 2011 top-paid group election is based on the number of employees in the 2010 lookback year. To determine the maximum number in the top-paid group, the 20 percent limitation is applied to the total number of employees, disregarding certain excluded employees. The employees excluded from being counted as part of the number of employees in the top-paid group are:

employees who have not completed at least six months of service by the end of the year;
employees who normally work less than 17½ hours per week;
employees who normally work less than six months per year; and
employees younger than 21.

In this example, the three employees under age 21 and the seven employees with less than six months of service may be excluded. The number of employees in the top-paid group (50 – 3 – 7) x 20% = 8. (Syllabus Topic 4)

Answer 154

A

C - Employee A meets the five percent owner test with ownership of 98%. Employee B meets the one percent owner test with ownership of 4% and compensation in excess of $150,000. Employee E meets the five percent ownership test through attribution of ownership from Employee A. (Syllabus Topic 5)

Answer 155

A

A - Full vesting upon death is often a feature of a retirement plan but it is not a requirement.

Regardless of the vesting schedule provided by the plan, the plan must provide that an employee is 100 percent vested at NRA. Termination of a plan requires full vesting for affected participants. If a plan requires more than one year of service for eligibility purposes, the plan must provide for immediate vesting. Elective deferrals contributed to a 401(k) plan must always be 100 percent vested. Any vesting schedule stated in the plan will not be applicable to the portion of a participant’s account balance that is attributable to such contributions. Thus, a plan that allows for elective deferrals only would require full vesting of a participant’s account balance. (Syllabus Topic 9)

Answer 156

A

B - Forfeiture may occur upon distribution if allowed in the plan. Five consecutive breaks in service are not always required.

Forfeitures may be used to pay administrative expenses, to reduce an employer’s matching contribution or to reduce an employer’s nonelective contribution. It is permissible to allocate forfeitures using permitted disparity. (Syllabus Topic 9)

Answer 157

A

E - The top-heavy minimum must be satisfied with employer contributions and/or forfeitures. Employer contributions include profit sharing contributions, pension contributions and matching contributions. Even contributions used to help the employer pass the nondiscrimination testing including QNECs, qualified matching contributions (QMACs), safe harbor nonelective contributions and safe harbor matching contributions may be used to satisfy the top-heavy minimum requirement.

After-tax employee contributions are employee contributions and cannot be used to satisfy top-heavy minimum allocation requirements. (Syllabus Topic 5)

Answer 158

A

A - Under the rule of parity, the employee loses credit for prior service on a permanent basis following the break-in-service period, if certain conditions are met. As a result, the employee must start over in satisfying the service requirement, as if he or she were a new employee. For the rule of parity to apply:

the employee must be a participant when the break-in-service period begins. For this purpose, the employee is a participant if he or she has satisfied the plan’s eligibility requirements and has passed the applicable entry date under the plan;
the employee must incur a minimum of five consecutive breaks in service; and
the employee must be zero percent vested in his or her accrued benefit under the plan

The rule of parity rules can apply to plans using elapsed time, it is not limited to those using the counting-hours method. (Syllabus Topic 3)

Answer 159

A

C - Employee A is a more than 5% owner. Employee B earned more than $110,000 in 2010 (the lookback year). Employee D is a more than 5% owner. (Syllabus Topic 4)

Answer 160

A

E - The calendar year data election does not impact a calendar year plan, only non-calendar year plans. (Syllabus Topic 4)

Answer 161

A

C - A target benefit plan is a type of defined contribution plan.

The other statements are true. A SEP is subject to full and immediate vesting of employer contributions. A stock bonus plan may include a 401(k) component, if desired. In-service withdrawals are permitted in profit sharing plans. Nonprofit organizations may adopt a profit sharing plan. (Syllabus Topic 2)

Answer 162

A

B - The contribution deadline applicable to an LLC taxed as a corporation is 2½ months following the end of the plan year, in this example March 15, 2012. (Syllabus Topic 8)

Answer 163

A

C - An employer contribution is still allocable to the plan participants whether or not it is currently deductible.

The other statements are true. A 10 percent excise tax may apply to nondeductible contributions. Nondeductible contributions may be carried forward
2012 DC-1 Practice Exam 33
and deducted in succeeding taxable years. Form 5330 is filed to pay the excise tax on nondeductible contributions. Tax-exempt organizations are not subject to an excise tax on nondeductible contributions. (Syllabus Topic 8)

Answer 164

A

D - Participant A incurs five breaks in service as of December 31, 2013 (2009, 2010, 2011, 2012, 2013) and will incur a forfeiture at that time. (Syllabus Topic 9)

Answer 165

A

C - A SAS 70 report, while helpful is not required. (Syllabus Topic 11)

Answer 166

A

B - A pension plan is required to have “definitely determinable benefits.” In other words, there must be either a formula for determining the participant’s benefit at retirement or a definite formula for determining the company’s annual contribution to the plan.

A nonpension plan need not satisfy the definitely determinable benefits requirement that applies to pension plans, but a nonpension plan must provide for a definite allocation formula, which outlines the method by which the employer’s contribution is allocated among the plan participants’ accounts once that contribution is made to the plan. (Syllabus Topic 2)

Answer 167

A

A - A grandchild’s ownership interest is attributed under IRC §318 to that individual’s grandparent. However, a grandparent’s ownership interest is not attributed under IRC §318 to that individual’s grandchild. (Syllabus Topic 4)

Answer 168

A

E - Based on the coverage test worksheet:

                                   HCEs NHCEs Total  Coverage Testing Group 3        3          6  Benefiting Group            2        2          4  Coverage Ratio              2/3      2/3
                                66.67%  66.67%  Ratio Percentage                            100.00%  (Syllabus Topic 6)

Answer 169

A

C - No 5500 filing is required for a one-participant owner plan with assets of $250,000 or less as of the end of the plan year. A one-participant owner plan with $500,000 of plan assets will likely qualify for the simplified reporting requirements of Form 5500-EZ, but is not exempt from 5500 filing requirements altogether. (Syllabus Topic 11)

Answer 170

A

B - A plan amendment may not reduce an accrued benefit. As a general rule, a participant has accrued a benefit for a plan year under a defined contribution plan after he or she satisfies the plan’s allocation conditions in effect for that plan year.

If a plan has a last day of employment rule, no benefit accrues until the last day of the plan year. In this instance, an employer may amend the plan allocation formula any time prior to the last day of the plan year without reducing accrued benefits.

In contrast, if the plan has no last day of employment rule, participants will accrue benefits earlier in the plan year and the employer may not amend the plan allocation formula at any time prior to the last day of the plan year. (Syllabus Topic 10)

Answer 171

A

A - Final Form 5500 is filed for the year in which the assets have been completely distributed. In the interim, between the plan termination effective date and the final distribution of assets, regular filings must continue. (Syllabus Topic 10)

Answer 172

A

E - Adopting employers may get a favorable determination letter in addition to the opinion letter issued on the basic plan document, if desired. (Syllabus Topic 1)

Answer 173

A

E - All of the statements are true.

Coverage testing must be performed separately for the 401(k) portion, the 401(m) portion and the 401(a) portion of the plan. The benefiting group includes only the employees who benefit under the disaggregated portion of the plan being tested. (Syllabus Topic 6)

Answer 174

A

A - Catch-up contributions are not annual additions. (Syllabus Topic 7)

Answer 175

A

D - The compensation limit in 2011 is $245,000. Total compensation is $325,000 ($245,000 + 50,000 + 30,000). The maximum deductible contribution is $81,250 ($325,000 * 25%). (Syllabus Topic 8)

Answer 176

A

A - After-tax employee contributions are always 100% vested and are not forfeitable. Thus, only Participant A’s profit sharing account balance is subject to vesting. Participant A was 60% vested in his $32,000 account balance ($32,000 * 60% = $19,200). The remaining 40% of Participant A’s balance is forfeited ($32,000 * 40% = $12,800). (Syllabus Topic 9)

Answer 177

A

B - A participant loan feature is an ancillary benefit, right and feature. Ancillary benefits, rights and features are not protected. (Syllabus Topic 10)

Answer 178

A

D - Coins held in a safe deposit box are not qualifying plan assets. (Syllabus Topic 11)

Answer 179

A

C - A plan is not permitted to require more than 1,000 hours of service for a year of service. (Syllabus Topic 3)

Answer 180

A

A - Exclusion of part-time employees or seasonal employees by category is an impermissible service condition, if the term part-time employee is defined on the basis of a customary work schedule (such as, less than 20 hours per week). This is because the exclusion relates solely to the employee’s service.

Under the one year of service definition, it is possible that a part-time or seasonal employee could be credited with enough hours of service to earn a year of service. For example, a part-time employee who normally works less than 20 hours of service per week might end up working substantially more hours because of a special project, overtime or busy seasons. If this employee were excluded from the plan solely because of his or her classification as a part-time
2012 DC-1 Practice Exam 35
employee, the plan would be in violation of the minimum service requirements. (Syllabus Topic 3)

Answer 181

A

D - Pleading guilty or being found guilty of any financially-related misdemeanor or any felony (regardless of the nature of the crime) is a violation of the professional integrity portion of ASPPA’s Code of Professional Conduct. Being found guilty of a misdemeanor that is not financially-related does not violate ASPPA’s Code of Professional Conduct.

Telling a client that the prior QKA does sub-standard work and has the worst looking valuation reports you have ever seen is a violation of the courtesy and cooperation portion of ASPPA’s Code of Professional Conduct. (Syllabus Topic 12)

Answer 182

A

D - Employees A and B are more than five percent owners. Employee C is a more than one percent owner with compensation in excess of $150,000. (Syllabus Topic 5)

Answer 183

A

B - Employees who have not met the plan’s eligibility requirements may be excluded. Nonbenefiting participants who terminated with less than 500 hours of service may also be excluded since the plan has a last day requirement in order to receive a contribution.

Based on the coverage test worksheet:

Workforce during the plan year - 100
Number who do not satisfy age/service - (15)
Number nonbenefiting who terminated
with less than 500 hours of service - (5)
Nonexcludable Employees - 80
(Syllabus Topic 6)

Answer 184

A

C - Compensation is limited to $245,000 in 2011. Total compensation is $395,000 ($245,000 + $70,000 + $50,000 + $30,000). Participant C’s allocation is $7,595

(($50,000 / $395,000) * $60,000). (Syllabus Topic 7)

Answer 185

A

A - Leased employees are not necessarily excludable employees for coverage testing. Coverage testing rules are applied by the recipient by treating the leased employees as part of the recipient employer’s workforce. Thus, leased employees must be included in coverage testing unless they are excludable from coverage testing for another reason. (Syllabus Topic 6)

Answer 186

A

D - Rollovers and elective deferrals are always 100% vested. $15,000 of the participant’s balance represents fully vested accounts ($3,000 rollover account + $12,000 elective deferral account).

The remaining account balance of $8,000 is subject to vesting ($23,000 - $15,000 fully vested portion). The participant has four years of vesting service (2006, 2007, 2008, 2009) and is 60% vested in this portion of the account balance. $8,000 * 60% = $4,800.
36 2012 DC-1 Practice Exam

The participant’s vested balance is $19,800 ($15,000 + $4,800). (Syllabus Topic 9)

Answer 187

A

E - M&P plans may be sponsored by any organization that expects to have at least 30 employers adopt the basic plan document. (Syllabus Topic 1)

Answer 188

A

B - A plan must credit both employees on unpaid maternity leave and employees on unpaid FMLA leave with hours of service necessary to prevent a break in service that year. However, a plan need not credit an employee suspended for misconduct hours of service necessary to prevent a break in service.

Under the one-year break-in-service rule, if an employee incurs at least one break in service, the plan may temporarily disregard the employee’s prior service. The employee will not receive credit for that prior service until after he or she completes another year of service.

Under the rule of parity, years of service prior to a break in service may be disregarded for a nonvested participant if certain conditions are met. (Syllabus Topic 9)

Answer 189

A

E - All of the statements are true.

The hours-of-service requirement to receive an allocation of contributions may be less than 1,000 hours, but may not exceed 1,000 hours. Plans are not required to waive allocation requirements for a participant that dies or becomes disabled during the plan year, but the plan may allow for such a waiver, if desired. No allocation conditions may be applied to a safe harbor nonelective contribution. (Syllabus Topic 7)

Answer 190

A

E - All of the statements are true.

Employer contributions are mandatory in SIMPLE 401(k) plans and SIMPLE IRAs. Loans to participants are not permitted in SIMPLE IRAs, but they are permitted in a SIMPLE 401(k) plan. Because a SIMPLE 401(k) plan is a qualified plan, it is subject to the normal Form 5500 filing requirements that apply to other qualified plans. (Syllabus Topic 2)

Answer 191

A

C - Both the IRS and DOL have authority to impose penalties for late or deficient Form 5500 filings. The IRS penalty is $25 per day with a maximum penalty of $15,000 (applicable after 600 days) with respect to the filing required for a plan year. The DOL may impose a civil penalty of up to $1,100 per day with no limit. (Syllabus Topic 11)

Answer 192

A

D - A plan that benefits only HCEs and excludes NHCEs will not satisfy the minimum coverage requirements if there are any NHCEs that meet the eligibility requirements for the plan.

In contrast, a plan that excludes HCEs would satisfy the minimum coverage requirements regardless of how many HCEs met the eligibility requirements or the percentage of NHCEs benefiting. If there are no HCEs benefiting under the plan, the plan is deemed to satisfy coverage for the plan year.

A plan that benefits all NHCEs and 50% of the HCEs would satisfy the minimum coverage requirements with a plan ratio percentage of 200%. 100% NHCE ratio percentage / 50% HCE ratio percentage = 200%. This is well above the 70% ratio needed to satisfy the ratio percentage test. (Syllabus Topic 6)

Answer 193

A

D - There is no such requirement regarding displaying the ASPPA Code of Conduct in an ASPPA member’s office. (Syllabus Topic 12)

Answer 194

A

B - Failure to file Form 5500 may be resolved under the DOL’s Delinquent Filer Voluntary Compliance (DFVC) Program. (Syllabus Topic 1)

Answer 195

A

D - The top-heavy ratio is determined by dividing the key employee balances by the total balances for all participants includible in the test.

The numerator of the ratio is the total of the includible account balances for the key employees ($205,000).

The denominator of the ratio is the total of the includible account balances all key and non-key employees ($205,000 + $300,000) plus certain distributions. In-service distributions made within the five-year period ending on the determination date (2007 - 2011) are included. Only non-key employees took in-service withdrawals during this period, thus the $10,000 is included only in the denominator.

Distributions made to terminated participants during the twelve-month period ending on the determination date are also included in the ratio if the terminated participants performed at least one hour of service during the plan year including the distribution date. In the example, the terminees who received distributions had no service during the 2011 plan year, thus, the $7,000 is disregarded from the top-heavy ratio.

Values for former key employees ($50,000) are disregarded for both the numerator and the denominator of the ratio.

The top-heavy ratio is $205,000 / ($205,000 + $300,000 + $10,000) or $205,000 / $515,000. (Syllabus Topic 5)

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