QKA 2 Unit 6 Top Heavy & Key Ees

Question 1

In 1982 Congress passed which act that applies top-heavy testing to Retirement Plan’s

Answer 1

TEFRA: Tax, equity and fiscal, responsibility act

Question 2

Top-heavy rules are found in what section of the internal revenue code?

Answer 2

IRC 416

Question 3

Failure to comply with top heavy rules. May do want to a plan?

Answer 3

Cause disqualification

Question 4

To make the determination of whether a Plan is top heavy or not; what seven steps should a plan administrator Identify?

Answer 4

1) employer for the plan
2) determination date
3) Employee Groups
4) plan being tested
5) Account balances for all included EEs
6) calculate Key Balances
7) does it pass?

Question 5

All of the top-heavy determinations, including if an employee is a key employee, what account balances are reviewed, are based off of data from the…

Answer 5

Determination Period

Question 6

The determination date is what?

Answer 6

The last day of the determination period

Question 7

The farmer company establishes a 401(k) on January 1, 2022. The determination date for the first plan year is what? The determination date for the second plan year is what?

Answer 7

12/31/2022 & 12/31/2022

Question 8

What is the limit on how many officers may be considered to be key employees in any given year?

Answer 8

The maximum is the greater of:

10% of the number of employees.

Three.

To a limit of 50.

Question 9

What is the cap in terms of how many employees can be considered officers for a company even if the 10% cap is greater?

Answer 9

Numerically the most employees that can be considered officers is 50

Question 10

If there are more officers than the maximum number permitted, then how do you determine which officers to include?

Answer 10

Rank the officers by compensation.

The highest paid up to the number includable are the key employees.

Question 11

If an employee already satisfies a key definition based on ownership, does that preclude them from being considered an officer of the company?

Answer 11

No, it does not

Question 12

Treasury regulations indicate that an officer is someone who does what?

Answer 12

Is an administrative executive in regular and continued service with the employer.

Question 13

An employer can bypass having an employee set up as an officer by not providing that employee with an executive title, even though they wield a great deal of administrative power. True or false?

Answer 13

False someone with no title, who fulfills the role of an administrative executive would be an officer if they meet the compensation test as well

Question 14

What compensation is used for the purposes of determining the threshold of the officer test?

Answer 14

415 as defined by the plan

Question 15

What are the three prescribe definitions of 415 compensation for the determination of key employees?

Answer 15

Current includable compensation,

W-2 compensation

Compensation for FICA withholding purposes

Question 16

If a required aggregation groups, top-heavy ratio exceeds 60% then what happens to every plan inside of the aggregation group?

Answer 16

Every single plan whether it would pass if it was tested independently or not is then considered top-heavy?

Question 17

In a testing environment where a client has multiple plans, the required aggregation group consists of Plans that:

Answer 17

Each plan in which at least one key employee participates

Any other plan that enables the plan with the key employee to satisfy no discrimination testing or coverage testing

Question 18

A law partnership sponsors, two 401(k) plans, one that covers the partners and staff in the other, which covers associate attorneys. None of the associates as an officer. The plans separately meet coverage and nondiscrimination testing. Because none of the associates as a key employee what happens?

Answer 18

The two plans are not part of a required aggregation group and may be tested separately for top-heavy purposes

Question 19

A doctors office offers two separate 401(k) plans, one that covers the doctors and the second plan covers office staff. If one of the employees in the office staff becomes a doctor in a partner in the practice and fails to move to the doctors plan. What happens?

Answer 19

At that point because there is a key employee inside of the staff 401(k) plan, both plans are tested together for aggregate testing

Question 20

From the perspective of 5500 filing, what is the definition of a participant?

Answer 20

An individual is considered a participant if he or she is an employee who is or may become eligible to receive a benefit of any type from an employer 401(k)

Question 21

Employees who were disaggregated for ADP or ACP testing can be disaggregated for top-heavy testing as well, true or false?

Answer 21

False, even though otherwise excludable employees are disaggregated for other non-discrimination testing, the top-heavy testing determines based off of the plans actual eligibility

Question 22

If a company offers in ESOP and a 401(k) and key employees participate in both. Are they aggregated for top-heavy testing?

Answer 22

Even though ESOPs are typically tested by themselves if a 401(k) is present and key employees are participating in both they are tested together

Question 23

Why would a company want to make use of permissive aggregation with relationship to top-heavy testing if that company had other plans?

Answer 23

It could help to reduce the top-heavy ratio

Question 24

What are the two requirements for companies to be able to permissively aggregate plans for testing?

Answer 24

Condition one: they are not required to be aggregated because of the required aggregation rules.

Condition two: they satisfy coverage testing, nondiscrimination testing and ADP/ACP if they are considered together.

Question 25

If the defined contribution plan is actually a pension plan like a money, purchase plan, employer contributions due as of the determination date under the funding requirements are included in the account balance, even if the contributions were not deposited by that date. True or false?

Answer 25

True

Question 26

Define contribution plan is is not a pension plan, can employer nonelective contributions be made beyond the determination date?

Answer 26

No. Non-pension plans are based on cash basis, accounting

Question 27

What is the year one exception for post determination date contributions?

Answer 27

In the first year of a non-pension plan, employer contributions made after the determination date, can be used to credit the account balances for the benefit of the top heavy test. This is the only time in the life of the plan this is allowed.

Question 28

Are after tax contributions included as a benefit to be measured in the top heavy test?

Answer 28

Yes

Question 29

Are catch-up contributions considered in top-heavy testing?

Answer 29

Catch-up contributions are disregarded for top-heavy only for the plan year in which they are made. They are included in subsequent years of testing.

Question 30

When adding back distributions for measuring top-heavy, due to the Severance Rule, what is the timeframe? And what are the two types that are counted? What constitutes “Severance” under the Rule? What is the Look Back Period for additions for non-Severance Distributions?

Answer 30

1) The 12 month look back period From the determination date.

2 a) terminated participants and their distributed balances (requires 1 hr of service)
2 b) current participants, who took in-service distributions

3) Severance from Employment, Death, Disability

4) 5 year period ending on the Determination Date

Question 31

The exception to the one year look back, having to deal with severance would be what?

Answer 31

The termination of the plan may create in-service withdrawal’s, which are subject to the five year rule.

Question 32

There is some fuzziness when it comes to whether or not excess contributions, excess aggregate, contributions and excess deferrals should be included in top-heavy testing. What is the general guidance from treasury as to how they are to be handled? What is the look back period, if any?

Answer 32

If excess deferral‘s are distributed prior to April 15 of the year following contribution many practitioners believe they should be excluded from top-heavy.

Treasury requires excess contribution and excess aggregate contributions to be included for top-heavy.

They look back. Would be up to five years.

Question 33

Are rollovers included or excluded from top-heavy testing? (Answer for both inbound and outbound)

Answer 33

Roll-outs are included as a form of distribution and may be subject to either one year or five year look back. Depending on whether the rollover was due to termination or an in-service distribution

Rollovers, which are inbound are excluded from testing.

Question 34

Suppose a former employee who has terminated employment, chooses to leave her account in the plan indefinitely, is her account balance included in the top heavy testing

Answer 34

The top-heavy test will not consider her balance if she has not been credited with at least one hour of service during the 12 month look back period.

Question 35

How are former key employees considered in the equation for top-heavy testing?

Answer 35

In the year they become a former key employee and all additional years they are classified as such, their account balance is not considered in either the numerator nor the denominator of the equation. It’s almost as if they don’t exist.

Question 36

Are catch-up contributions included in top-heavy testing? If so, when?

Answer 36

They are excluded from top-heavy testing in the year ending on the determination date.

They are included in top-heavy testing for any year. They were contributed prior to the 12 month determination period.

Question 37

Are QNECs & QMACs included in top-heavy testing?

Answer 37

Yes they are

Question 38

Are additions realized from Forfeitures included in top-heavy testing?

Answer 38

Yes they are

Question 39

After Tax employee contributions are never included in top-heavy, testing true or false?

Answer 39

False they are always included

Question 40

Are Distributions, due to severance of employment, death, or disability included in top-heavy testing?

Answer 40

They are included if the Participant worked at least one hour during the determination year.

Question 41

Are related rollover account balances included in top-heavy testing?

Answer 41

Yes they are

Question 42

Are unrelated inbound rollover account balances included in top-heavy testing?

Answer 42

No, they are not

Question 43

Are former employees account balances included in top-heavy testing?

Answer 43

If the participant terminated prior to the determination year and did not work at least one hour in the determination year then they are not included

Question 44

Are former key employees account balance is included in the top heavy testing?

Answer 44

No, they are not

Question 45

What is the equation for the top-heavy ratio?

Answer 45

Key employee, includable account balances, PVABs and Distributions

DIVIDED BY

Includable account balances, PVABs and distributions for key and non key employees

Question 46

When is the plan top-heavy?

Answer 46

The plan is top-heavy if the ratio is greater than 60%

Question 47

Can match that has been allocated to an employee be used as credit towards a top-heavy correction of 3% to non-key employees?

Answer 47

Yes it can.

Question 48

Are there any exceptions to the 3% minimum top-heavy correction?

Answer 48

Yes. If all key employees allocation rates for the plan year are less than 3%. The minimum is the highest allocation rate for any key employee.

Question 49

Is employment on the last day of the year required to receive a top-heavy allocation?

Answer 49

Yes, it is

Question 50

Is a minimum number of service hours required to receive a top-heavy allocation?

Answer 50

No

Question 51

If an employer maintains more than one top-heavy plan, a non-key employee participating in both plan, is or is not required to receive a top-heavy minimum in each plan?

Answer 51

Is not required

Question 52

What is the formula for determining the highest key employee allocation rate for correcting a failed Top Heavy Test for the current plan year?

Answer 52

deferrals +match + NEC + QNECs + QMACs + Forfeitures
DIVIDED BY———-
415 Compensation

Question 53

If none of the key employees receive an allocation during the plan year, what is the minimum Contribution due to the non key employees?

Answer 53

0%

Question 54

Are amounts rolled over into a plan considered in the top heavy ratio?

Answer 54

It depends on whether the rollover is a “related rollover” or an “unrelated rollover”.

Question 55

What is a related rollover? (2 criteria)

Answer 55

A related rollover is a rollover or transfer either:

1) made to another plan maintained by the same or related employer

2) made without the Participant election (such as the merger of two plans)

Question 56

What is an unrelated rollover? ( 2 criteria)

Answer 56

1) elected by the Participant

2) made to a plan maintained by another, unrelated employer

Question 57

How are related rollovers treated with the top-heavy test? (2 criteria)

Answer 57

1) The plan making the distribution does not count the distribution in its top-heavy ratio.

2) The receiving plan does include the rollover account in its ratio .

Question 58

How are related rollovers treated with the top-heavy test? (2 criteria)

Answer 58

1) The plan making the distribution does not count the distribution and its top-heavy ratio.

2) The receiving plan does include the rollover account in its ratio .

Question 59

How does the top-heavy test regard unrelated rollovers? (2 criteria)

Answer 59

1) The distributing plan includes the amount as part of the distribution.

2) the receiving plan excludes the amount