QKA 2 Unit 3: Coverage

Question 1

Qualified plans must meet certain coverage rules. They plan must benefit a minimum number of non-highly compensated employees the required number depends on what? (3 items)

Answer 1

Size of the employer

Employee demographics,

Level of benefits provided

Question 2

Why do we need coverage rules?

Answer 2

The law provides tax advantages to employers and employees. To be entitled to these advantages, the plan cannot discriminate in favor of HCE’s.

Question 3

What does coverage testing determine?

Answer 3

Weather plan participation is made to a sufficient percentage of non-highly compensated employees

Question 4

Is the testing method required to be explained in the plan document?

Answer 4

It is not, the plan administrator can use any method available

Question 5

Can the plan administrator use any testing method available if a prescribed testing method is listed in the plan document?

Answer 5

In that case the prescribed testing method must be followed

Question 6

What are the two minimum coverage tests under IRC 410b?

Answer 6

Ratio percentage test

Average benefits test

Question 7

What percentage must the ratio percentage test be to pass?

Answer 7

70% or greater

Question 8

What is the six step process for the ratio percentage test?

(GE BN HR)

Answer 8

Determine:
1) HCE/NHCE Groups
2) Excludable/Non Excluable
3)Benefitting/Non Beneffiting
4) NHCE Benefitting Ratio
5) HCE Benefitting Ratio
6) Ratio Percentage

Question 9

When is the average benefits test applied?

Answer 9

When the ratio percentage test fails

Question 10

When is the coverage test not required? (There are three exemptions.)

Answer 10

The plan only covers non-highly compensated employees.

The plan only covers HCE’s

Collectively bargained plans.

Question 11

Why are collectively bargained plans exempt from coverage tests?

Answer 11

Because the collectively bargain plans are subject to labor laws to protect employees

Question 12

What is mandatory disaggregation?

Answer 12

Requires that different portions of a single Retirement Plan be treated as separate plans for coverage testing

Question 13

401(k) plans may consist of up to three plans for coverage testing. What are they?

Answer 13

401a

401(k)

401M

Question 14

What do 401a plans cover?

Answer 14

The part of the plan which represents employer NECs, and QNECs

Question 15

The 401(k) plan covers what employee contributions?

Answer 15

Pretax and Roth deferrals

Question 16

The 401 M plan covers what contributions?

Answer 16

After-tax contributions,

Employer match

QMAC contributions

Question 17

What are otherwise excludable employees?

Answer 17

A group of employees who are participants in a plan, but could otherwise be excluded if the plan used maximum age & service requirements

Question 18

An employer may elect to do what to a plan when it pertains to otherwise excludable employees?

Answer 18

Disaggregate and perform coverage testing as if it were a separate plan

Question 19

One item that is not clear when determining an otherwise excludable employee is what?

Answer 19

The entry date that should be used

Question 20

What are the three IRS interpretations when it comes to entry date for otherwise excludable employees?

Answer 20

Statutory; semiannual,

Plan Entry dates

Immediate entry

Question 21

What happens if a plan fails coverage testing?

Answer 21

The plan can be disqualified, unless corrective measures are taken

Question 22

An employer can correct for a failed coverage test by doing what?

Answer 22

By adopting a corrective amendment up to 9 1/2 months after the close of the plan year

Question 23

If the employer corrects a failed coverage test by adopting amendment within 9 1/2 months after the close of the plan year what must the amendment do?

Answer 23

Expand the group of NHCEs benefiting

Question 24

What are the types of excludable employees?

Answer 24

UNITAS

Union EEs

Non Resident Aliens

Independent Contractors

Terminated employees with less than 501 hrs worked

Age- EEs who have not met Age Requirements

Service- EEs who have not met the Service Requirement

Question 25

Who are nonexcludable employees?

Answer 25

Employees who do not fall into any of the excludable coverage testing groups

Question 26

If an employee satisfies the age and service requirement, but is excludable for other reasons, such as job classification, can an employee be treated as an excludable employee?

Answer 26

They cannot be treated as an excludable employee for the coverage test

Question 27

What are the three criteria for nonresident aliens?

Answer 27

not considered a US citizen,

Classified as nonresident alien for taxes

Received no US income

Question 28

In determining benefiting versus non-benefiting employees, there are three ways to determine if a nonexcludable employee benefited under a DC plan. What are they?

Answer 28

Did they receive an allocation?

Are they eligible to deferred and receive employer match?

Do they have an exception?

Question 29

Is an employee considered benefiting if they receive an employer contribution allocation, or a forfeiture?

Answer 29

They are

Question 30

Is benefiting / not benefiting status considered separately for 401(k) and 401M plans?

Answer 30

They are considered separately

Question 31

What are two examples of exceptions for benefiting employees under coverage test?

Answer 31

Allocation was not made to an employee because of a 415 limit.

No income reported in year

Question 32

Some plans allow employees to make rollovers into the plan before they’re actually able to become participants. In such plans are these employees considered excludable? If so on what basis?

Answer 32

They are excludable.

The basis is revision rule, 96–48.

Question 33

May a break in service rules period allow a Plan to disregard eligibility service earned prior to a break in service period?

Answer 33

Yes

Question 34

If a nonresident alien receives earned income from US sources they may still be treated as an excludable employee for coverage testing if all US employer income is what?

Answer 34

Exempt from tax under a tax treaty

Question 35

What is the most common testing frequency for coverage testing?

Answer 35

Annual method

Question 36

What is a variation of the annual testing method that is allowed for large companies were tracking workforce over the entire plan year maybe burdensome?

Answer 36

Snapshot testing method

Question 37

Which testing method is commonly reserved, is an enforcement mechanism for the IRS rather than as a method of choice?

Answer 37

Daily testing

Question 38

A Plans termination date does not end the plan year for coverage purposes, so the coverage test is still performed for a 12 month plan year unless what?

Answer 38

The final distribution of assets his completed before the last day of that plan year

Question 39

Describe the purpose of a top-heavy minimum allocation when considering coverage testing.

Answer 39

A good example is with employees who have met the eligibility and entry date requirements for a plan but maybe who have not worked the required amount of hours. These employees would be considered non-benefiting employees and may be due a 3% nonelective contribution as NHCE’s

Question 40

What are 2 options for an employer who has failed the ratio percentage test?

Answer 40

1) Increase coverage by a plan amendment, such as make a contribution for additional NHCEs,

2) or perform the average benefit test

Question 41

In the ratio percentage test, aside from a passing percentage of 70% for NHCEs over HCEs what are two other scenarios in which the test could be deemed to pass?

Answer 41

1) # of EEs in Benefitting Group = # of EEs in Coverage Testing Group.

2) If the NHCE ratio alone is Atleast 70%

Question 42

What is the failsafe provision for coverage testing that has otherwise failed and how does it work?

Answer 42

1) employees who failed benefit are added back to the allocation group to pass coverage test
2) in ordering rule is usually provided
3) employees are added until the ratio percentage equals at least 70%

Question 43

What is the formula 7 step for coverage testing using the Ratio Test?

Answer 43

1) Workforce during Year
2) Number of EEs not meeting Age and Service, Entry Date Requirements.
3) Number of non-benefitting who terminated before Year End and with less than 500 Hr.
4) Determine Coverage Testing Groups
5)Determine Non Benefitting EEs who terminate before Year End with more than 500 Hrs.
6) Subtract Non Benefiting from Coverage Testing.
7) Divide Benefiting Group by Coverage Testing Group.
8) If NHCE is less than 70%, divide by HCE percentage. Ratio must be higher than 70%.

Question 44

What is the Acronym for Excludable EEs in the Coverage Test? Who are the EEs?

Answer 44

“UNITAS”
Union
Non Resident Aliens
Independent Contractors
Term EEs w/ less than 501 hrs worked
Age and Service: EEs that didn’t meet the eligibility reqs.

Question 45

What 6 steps must be performed in order to begin the Coverage Test using percentage ratio test?

Answer 45

1. Identify Employer
2. Identify Workforce
   3.Determine Excludable/Non-excludable EEs
3. Determine HCE/NHCEs
4. Determine Benefitting/Non-Benefiting
5. perform Test

Question 46

Are Leased EEs required to be included in the 401k of a receipient ER?

Answer 46

No, but they would be required to be included in Coverage Testing.

Question 47

For an EE to be treated as a Leased EE under 414n, what 4 conditions must be met? (LE=leased employee)

Answer 47

1. Receipient ER must be paying a fee for the LE
2. LE work (mostly) full time for 1 year
3. ER has control over LEs services
4. Leasing Org must be common law employer.