DC-3 – Flashcards
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T/F: A multiple ER plan applies coverage testing under IRC 410(c) separately for each unrelated ER.
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T
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T/F: A multiemployer plan is maintained under a collectively bargained agreement between an EE organization and more than one unrelated ER.
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T
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T/F: A multiple ER plan is one adopted by two or more ERs where at least two of the participating ERs are not members of the same related group.
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T
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T/F: A multiple ER plan, sponsored by the leasing organization, may allow all the leasing organizations recipient organizations to participate.
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T
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T/F: Substantially full-time service means 1,500 hours in a 12-month period (or 75% of the customary hours in that job position, if less).
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T
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T/F: Whether the recipient organization has the right to hire or fire an individual is a relevant factor in the primary direction or control test in determining whether the individual is a leased employee.
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False. The right to hire or fire is not a relevant factor in determining primary direction or control. It is, however, relevant in determining the common law employer and may indicate that the individual is a common law employee of the recipient, and not a leased employee.
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T/F: Benefits, contributions and compensation from all ER's participating in a multiple ER plan sponsored by a leasing organization would be aggregated for each participant's account from both the leasing organization and the recipient organization for computing the IRC 415 limit.
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T
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T/F: YOS with both the leasing organization and the recipient organization are aggregated if they both are participating ER's in the same multiple employer plan.
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T
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T/F: The leased EE is included in the recipient and the leasing organization's single ER plan for HCE determination.
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T
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T/F: A multiple ER plan, sponsored by the leasing organization, must perform coverage testing separately for the leasing organization and the recipient organization.
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T
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1.1 All of the following are conditions for an individual to be considered a leased EE, EXCEPT: A. The recipient and leasing organization must have an agreement covering the services of the individual. B. The individual must be providing services on a substantially full-time basis for at least one year. C. The recipient must have primary direction or control over the individual's services. D. The leasing organization must be the common law ER of the individual. E. The individual must be covered by the leasing organization's plan.
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E
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1.2 Which of the following statements regarding the treatment of leased EE's in the recipient's plan is/are TRUE? I. They are treated as EE's for the purposes of applying the nondiscrimination tests under IRC 401(a)(4), 401(k) and 401(m). II. They are treated as EE's for purposes of determining who are HCE's. III. They may not participate in an ESOP. A. I only B. II only C. I and II D. II and III E. I, II and III
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E. Leased EE's are treated similarly to EE's for nondiscrimination purposes, but it appears to be the IRS's view that leased employees may not participate in an ESOP maintained by the recipient company or any member of its controlled group.
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1.3 Which of the following statements regarding the leasing organization's multiple ER plan is/are TRUE? I. Only one Form 5500 is filed regardless of the number of recipients participating. II. Contributions from both the leasing organization and the participating recipients are aggregated to determine the IRC 415 limit. III. Contributions made by the leasing organization and the participating recipients are aggregated then prorated, based on the number of leased EE's, to the organization for deduction purposes. A. I only B. II only C. I and II D. II and III E. I, II and III
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C. Statement I and II are true. Statement III is false. Each participating ER may deduct the amount contributed by such organization.
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1.4 All of the following are relevant factors in determining if the recipient has primary direction or control over services of a leased EE, EXCEPT: A. Whether services must be performed by a particular person. B. Whether services must be performed in the order or sequence set by the recipient. C. Whether the individual is subject to supervision by the recipient. D. Whether the recipient has the right to hire or fire the individual. E. When the individual is to perform services.
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D. It is NOT relevant whether the recipient has the right to hire or fire the individual.
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1.5 All of the following statements regarding multiple ER plans are TRUE, EXCEPT: A. The plan must apply the minimum age and service eligibility requirements as if each ER were participating in a single-ER plan. B. The plan must consider each unrelated ER separately for purposes of coverage testing under IRC 410(b). C. The plan must consider each unrelated ER separately for purposes of ADP testing. D. Each ER must recognize service for vesting purposes without considering service performed for any other participating ER. E. Annual additions attributable to all participating ER's must be considered when determining an individual's maximum annual addition.
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D
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T/F: All corporations are taxed on their earnings at the corporate level and not at the shareholder level.
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F. An S corp is taxed at the individual shareholder level, not the corporate level.
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T/F: A sole-prop files a separate tax return to report earned income.
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F. The earned income for a sole proprietorship is reported on the individual's tax return, not a separate return for the proprietorship.
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T/F: A QSLOB who meets the different industry's safe harbor will have met the administrative scrutiny test.
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T.
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T/F: A sole-prop's earnings are reduced by 100% of the SE tax when determining earned income.
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F. The earnings are reduced by 1/2 of the SE tax.
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T/F: An LLP may be a nonprofit organization.
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F. LLPs must be organized as FOR profit entities.
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T/F: The separate line of business must satisfy a 50-EE requirement, a notice requirement and an administrative scrutiny requirement to be a QSLOB.
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T
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T/F: Each QSLOB must be tested separately for all annual compliance testing.
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F. The ER may elect to test on a QSLOB basis for coverage testing under IRC 410(b) (and thereby nondiscrimination testing under IRC 401(a)(4), 401(k) and 401(m)). TH testing, as well as the application of the IRC 415 limits, among other things are performed on an ER-wide basis.
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T/F: A plan must satisfy the nondiscriminatory classification test on an ER-wide basis first before testing on a QSLOB basis.
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T
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T/F: Compensation that may be used for plan purposes, for EE's of a C-Corp, is Form W-2 compensation.
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T
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T/F: Compensation that may be used for plan purposes, for a partner of a partnership, is Form W-2 compensation.
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F. The partner's compensation for plan purposes will be his or her earned income.
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2.1 All of the following statements regarding business entity types are TRUE, EXCEPT: A. A sole-prop is an unincorporated business owned by only one person. B. A partnership is an unincorporated business owned by more than one individual. C. An LLP must be treated as a partnership for federal tax purposes. D. S-corp income flows to the shareholders and is taxed as if the shareholders were partners. E. A C-corp is taxed as a corporation.
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C. An LLP may elect to be taxed as a partnership or as a corporation.
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2.2 Based on the following information, determine the net earned income for Partner A: - Partner A owns 30% of partnership - The partnership has net income, before the profit sharing contribution, of $450,000 - The partnership contributes $50k to the plan for nonpartner EE's - Partner A's SE tax is $9,000 - Partner A receives a PS allocation equal to 5% of comp
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B. 110,000
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2.3. All of the following statements regarding SE individuals are TRUE, EXCEPT: A. A qualified plan may cover a SE owner as if that individual were an EE. B. Compensation for plan purposes is W-2 wages. C. Pre-tax elective contributions are included in compensation in determining the maximum deductible ER contribution under IRC 404. D. A limited partner will not necessarily derive any earned income from a partnership. E. Earned income is not treated as currently available until the end of the taxable year.
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B. Plan compensation for a SE individual is earned income, not W-2 wages.
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2.4 All of the following SH tests may be used to satisfy the QSLOB administrative scrutiny test, EXCEPT: A. Mergers and acquisitions B. ADP C. Maximum or minimum benefits D. Statutory E. Industry segment
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B. The ADP SH is not a QSLOB SH. There are six QSLOB SH. 1. Statutory 2. Different Industries 3. Mergers & Acquisitions 4. Industry Segment 5. Average Benefits 6. Max/Min Benefits
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2.5 All of the following statements regarding QSLOBs are TRUE, EXCEPT: A. They are treated as a separate line of business for vesting. B. They are treated as a separate line of business for coverage. C. They are treated as a single ER for eligibility. D. They are treated as a separate line of business for nondiscrimination. E. They are treated as a separate line of business for IRC 415.
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E. Testing for IRC 415 is performed as a single ER not on a QSLOB basis.
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T/F: A parent subsidiary controlled group exists if the companies are connected through at least 50% stock ownership.
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F. The companies must be connected by at least 80% of stock ownership to satisfy the parent-subsidiary requirements.
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T/F: A brother-sister controlled group exists if either the common ownership or the effective control test is satisfied.
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F. Both the common ownership and effective control tests must be satisfied for a brother-sister controlled group to exist.
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T/F: Attribution between spouses does not apply if the couple is childless.
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F. For the spousal exception from attribution to apply, the individuals must not have direct ownership in each other's businesses, they must not participate in the management of each other's businesses, no more than 50% of the gross income of the businesses may be derived from passive investments, and the spouse's ownership interest may not be subject to disposition restrictions. In addition, whether the individuals reside in a community property state may affect the ability to satisfy the exception.
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T/F: Attribution from a parent to a minor child applies only if the parent owns more than 50% of the business.
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F. Attribution applies to minor children regardless of the amount owned by the parent.
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T/F: Company A and Company B are a controlled group. The workforces of both companies are considered when testing each company's plan for coverage requirements.
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T
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T/F: A financial institution is considered a service organization because it provides a service of lending money.
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F. A financial institution is not a service organization.
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T/F: In order for A-Org group to exist, the A-Organization must have at least a 10% ownership interest in the FSO.
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F. While an A-Org group must have some ownership in an FSO, there is no minimum % requirement.
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T/F: If an FSO is a corporation, it always must be a professional service corporation for affiliated service group rules.
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F. If an FSO is a corp, it need only be a professional service corp if it is part of an A-Org group. This requirement does not apply to B-Org groups.
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T/F: If two or more entities are deemed to be an affiliated service group, they do not need to be tested together for top-heavy purposes as long as each is not top-heavy on its own.
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F. Plans must be aggregated for TH purposes.
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T/F: If two or more entities are deemed to be an affiliated service group and each entity sponsors its own plan, each plan must pass coverage.
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T
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T/F: For purposes of determining any type of affiliated service group, ownership is attributed from a grandchild to a grandparent, but not from a grandparent to a grandchild.
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T
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3.2 All of the following conditions are necessary to avoid spousal attribution controlled group purposes, EXCEPT: A. The spouse must not have any direct ownership in the business. B. The spouse must not be a director or EE of the business. C. The spouse must not participate in the management of the business. D. The spouse must not inherit the business upon death of the business owner. E. NO more than 50% of the business' gross income may be derived from passive investments.
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D
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3.3 All of the following statements regarding attribution for controlled group purposes are TRUE, EXCEPT: A. Ownership is attributed from husband to wife unless the business is wholly owned by the husband and certain requirements are met. B. Ownership is attributed from a minor child to a parent. C. Ownership is attributed from an adult child to a parent if the parent owns more than 50% of the corporation. D. Ownership is attributed from a grandparent to a grandchild if the grandchild owns more than 50% of the corporation. E. Ownership is attributed from a father-in-law to a son-in-law.
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E
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3.4 All of the following IRC sections consider controlled group members as a single-ER, EXCEPT: A. Eligibility and coverage (IRC 410) B. Deduction (IRC 404) C. Top-heavy (IRC 416) D. Vesting (IRC 411) E. Annual additions (IRC 415)
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B. Generally, for deductibility purposes, controlled group members are not treated as a single-ER. If the members participate in the same plan, they may be treated as a single-ER.
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3.5 All of the following statements regarding affiliated service groups are TRUE, EXCEPT: A. An FSO can be part of both an A-Org group and a B-Org group. B. An FSO of an A-Org group must be a professional service organization. C. An A-Organization must be a service organization. D. A B-Organization need not be a service organization. E. An A-Organization must have some ownership in the FSO.
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B. FSOs in an A-Org group must be professional service organizations only if they are corporations. If the FSO is a partnership or sole proprietorship, this rule does not apply.
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3.6 All of the following are effects of being an affiliated service group, EXCEPT: A. An employee's service with all group members is credited when determining plan eligibility. B. Plans must satisfy coverage requirements considering all employees in the affiliated service group. C. HCE status is determined by looking at the ownership in each entity separately. D. Annual additions for all plans in the group are aggregated to determine if the IRC 415 limits have been exceeded. E. An EE's service with all group members is credited when determining vesting percentages.
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C. HCE status is determined by treating the ASG members as a single-ER.
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3.7 All of the following regarding attribution in determining affiliated service groups are TRUE, EXCEPT: A. Ownership interest is attributed between spouses. B. Ownership interest is attributed from parent to adult child only if the parent owns more than 50% of the company. C. Ownership interest is not attributed between siblings. D. Ownership interest is attributed from grandchild to grandparent. E. Ownership interest is not attributed from grandparent to grandchild.
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B. Ownership is attributed from parent to child no matter the age-the adult reference in the answer was a red herring. Do not confuse the attribution under IRC 318 used for ASG rules with that of IRC 1563 used for controlled group determinations.
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3.8 All of the following activities would be considered management functions, EXCEPT: A. Supervisory roles B. Hiring EE's C. Investing 401(k) plan assets D. Setting EE compensation E. Business planning
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C. The law does not define management functions. However the term should be interpreted under common business practices. Investing 401(k) assets would not be a management function. It would be a role for the plan trustee.
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T/F: IRC 415 compensation must include elective deferrals to a 401(k) plan.
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T.
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T/F: The average percentage of total compensation that is considered for NHCE's must be at least 70% of the average percentage of total compensation considered for HCE's in order for the definition of compensation to satisfy IRC 414(s).
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F. If the definition of compensation does not satisfy one of the IRC 414(s) SH, the average percentage of total compensation that is considered for HCE's cannot exceed the average percentage of total compensation for NHCE's by more than a de minimus amount.
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T/F: The plan's definition of compensation used for allocating contributions must satisfy the nondiscriminatory definition of compensation under IRC 414(s).
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F. The IRC 414(s) compensation must be used to determine if the contributions are nondiscriminatory. However, a plan is not required to use a definition of compensation that satisfies IRC 414(s) in calculating the amount of contributions provided to the plan.
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T/F: IRC 414(s) compensation must include elective deferrals to a 401(k) plan to avoid testing that definition for nondiscrimination.
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F. Elective deferrals may be excluded from the definition of IRC 414(s) compensation as a SH, so long as all elective deferrals (i.e., 401(k), 403(b), Roth and 125 Plan) are treated the same.
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T/F: IRC 415 compensation must be used to determine HCE's.
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T.
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T/F: IRC 414(s) compensation must be used to determine Key EE's.
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F. IRC 415 compensation must be used to determine Key EE's.
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T/F: The IRC 415 compensation must not include tips, depending on how IRC 415 compensation is determined.
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F. IRC 415 compensation may include some tips and generally do include cash tips over $25.
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T/F: Designated Roth contributions are included in IRC 415 compensation.
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T. Care must be taken that designated Roth contributions are not counted twice due to how these are reported on Form W-2.
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T/F: Excluding nontaxable fringe benefits from IRC 415 compensation is a safe harbor modification to IRC 414(s) compensation, meaning the resulting definition will not need to be tested for nondiscrimination purposes.
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F. None of the definitions include nontaxable fringes. They only include taxable fringe benefits.
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T/F: IRC 415 compensation is based on the plan year.
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F. IRC 415 compensation is based on a limitation year, which may or may not be the same as the plan year.
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4.1 All of the following statements regarding IRC 414(s) compensation are TRUE, EXCEPT: A. A plan using a SH definition of IRC 414(s) compensation for nondiscrimination testing need not perform the compensation ratio test. B. A plan using a nonsafe harbor definition of IRC 414(s) compensation for nondiscrimination testing must apply such definition consistently for all participants. C. A plan may meet the safe harbor definition of 414(s) compensation by including 401(k) elective deferrals and excluding 125 plan elective deferrals. D. A plan may use a 12-month period other than the plan year for purposes of determining IRC 414(s) compensation. E. A plan may use a rate-of-pay definition of compensation for IRC 414(s) purposes.
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C. The treatment of deferrals (including those for 401(k) and 125 plans) must be consistent, either all included or all excluded, for the definition to meet the SH requirements.
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4.2 All of the following exclusions are deemed reasonable for defining IRC 414(s) compensation, EXCEPT: A. 20% of regular compensation B. Bonuses C. Overtime D. Expense allowances E. Fringe benefits
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A. Percentages of compensation are not deemed reasonable exclusions for IRC 414(s) purposes.
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4.3 All of the following are included in compensation under IRC 415, EXCEPT: A. Elective deferrals B. Expense reimbursements paid under an accountable plan C. Bonuses D. Overtime E. Commissions
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B
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4.4 Based on the following information, determine the participant's IRC 415 compensation: - ER sponsors a 401(k) plan that allows designated Roth contributions. - The plan excludes overtime for allocation purposes. - The participant's taxable income, not including elective deferrals, is $58,000. - The participant defers $4,000 as pre-tax elective deferrals and $4,000 as designated Roth contributions. - The participant defers $500 into the ER's IRC 125 plan. - The participant's overtime compensation totals $3,000. A. $58,000 B. $59,500 C. $62,500 D $66,500 E. $69,500
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C - Don't include Roth because it's already included in income!
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4.5 Which of the following statements regarding the calculation of the ER deduction is/are TRUE? I. In the case of a short taxable year, the deduction limit for a DC plan is applied to aggregate participant compensation paid for the short period. II. A short taxable year results in a prorated compensation dollar limit under IRC 401(a)(17). III. A short plan year does not directly affect the DC deduction limit because that deduction limit is based on participant compensation for the ER's taxable year. A. I only B. II only C. I and II only D. II and III only E. I, II and III
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E
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4.7 All of the following describe when a plan's definition of compensation is subject to nondiscrimination testing, EXCEPT: I. The plan defines IRC 414(s) compensation as IRC 415 compensation excluding elective deferrals to a cafeteria plan and including elective deferrals to a 401(k) plan. II. The plan defines IRC 414(s) compensation as IRC 415 compensation excluding commissions for HCE's only. III. The plan defines IRC 414(s) compensation as IRC 415 compensation excluding overtime. A. II only B. III only C. I and II only D. I and III only E. I, II and III only
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D. A plan may use IRC 415 compensation and exclude an item of compensation that applies only to HCEs when it defines compensation for IRC 414(s) nondiscrimination purposes.
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4.8 Based on the following information, determine the combined plan deduction: - The ER sponsors a PS and DB plan. - The DB plan is not covered by the PBGC. - The ER makes a contribution to the defined benefit plan in the amount of $250,000 which meets the minimum funding requirements. - The ER makes a contribution to the PS plan of $30,000. - Compensation for all eligible EE's is $600,000 A. $30,000 B. $36,000 C. $150,000 D. $250,000 E. $280,000
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E
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T/F: To be excludable under the annual coverage testing method, an employee must be excludable for the entire plan year.
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T
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In order for a plan to pass the nondiscriminatory classification test, what tests must it pass?
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1. Reasonable classification test 2. Nondiscriminatory classification ratio test
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T/F: A plan with an NHCE concentration percentage of 70 percent will have a higher safe harbor percentage than a plan with an NHCE concentration percentage of 80 percent.
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T
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T/F: A plan with a coverage ratio percentage that is less than the safe harbor percentage fails the nondiscriminatory classification ratio test.
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F. This type of plan could still pass the nondiscriminatory classification test if the coverage ration percentage satisfies the unsafe harbor percentage and the plan passes the facts and circumstance test.
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T/F: When calculating the ABP, both employer contributions and elective deferrals are included.
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T
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T/F: Permissive aggregation might be used when one plan fails coverage on its own but could pass when aggregated with another plan.
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T
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T/F: If an employee is part of two or more disaggregated groups during a plan year, each group must take into account all allocations made to the employee's account during the plan year.
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F. Each disaggregated group generally takes into account only benefits accrued or allocations made while the EE is a member of that group.
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T/F: A plan must satisfy either the nondiscriminatory classification test or the ABP test to satisfy the average benefit test.
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F. A plan must pass both the nondiscriminatory classification test AND the ABP test in order to satisfy the Average Benefit Test.
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T/F: If NHCEs are excluded from the plan, the plan is deemed to satisfy coverage requirements.
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F. If there are NO NHCEs in the coverage testing group, the plan is deemed to satisfy coverage requirements. This is different from excluding NHCEs from participating in the plan altogether.
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T/F: Leased employees are part of the recipient employer's workforce for coverage testing purposes.
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T
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5.1 All of the following are reasonable classifications with respect to the average benefit test, EXCEPT: A. Hourly paid employees B. Salary paid employees C. Janitors D. Employees named Joe Smith E. Employees working in Maryland
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D
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5.2 All of the following statements regarding the ABP test are TRUE, EXCEPT: A. The NHCE actual benefit percentage is the average of the employee benefit percentages for each NHCE in the coverage testing group. B. Only employees who are benefiting are considered when determining the employee benefit percentages. C. Elective deferrals are considered employer contributions and are, thus, included when determining employee benefit percentages. D. The employee benefit percentages may be determined based on allocation rates or benefit rates. E. Compensation used to determine employee benefit percentages must satisfy IRC 414(s)
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B. All EE's in the coverage testing group are considered, not just those that are benefiting.
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5.4 All of the following statements regarding permissive aggregation for coverage testing are TRUE, EXCEPT: A. Plans must have the same plan year to be permissively aggregated. B. A plan may not be included in more than one group of aggregated plans for coverage testing purposes. C. A qualified plan under IRC §401(a) is not allowed to take into account a SEP to demonstrate that it passes coverage. D. An employee must meet the minimum age and service requirements for all plans in a permissively aggregated group to be considered a nonexcludable employee. E. Plans that are permissively aggregated for coverage must be aggregated for nondiscrimination purposes.
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D. If the plans being aggregated have different age and/or service requirements, the excludable EE's are determined based on the lowest age and service requirement.
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5.5 Based on the following information, determine the maximum number of HCEs that may benefit to pass the ABP test. - The coverage testing group consists of 70 NHCEs and 30 HCEs. - Of the 70 NHCEs, 50 have a benefit percentage of 9 percent, ten have a benefit percentage of 4 percent and the other ten do not benefit under the plan. - Each HCE either has a benefit percentage of 15 percent or does not benefit under the plan. A. 10 B. 12 C. 20 D. 24 E. 30
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C.
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5.6 All of the following statements regarding testing otherwise excludable employees separately for coverage purposes are TRUE, EXCEPT: A. Separate testing may be done on a year-to-year basis. B. If the average benefit test is used for statutory employees, it must also be used for the otherwise excludable employees. C. Employees with more than one year of service are not considered otherwise excludable employees in plans with a two-year eligibility condition, unless they are not age 21. D. The 401(k) component of the plan may use the otherwise excludable option even if the 401(m) component of the plan does not. E. Plans that use the otherwise excludable option for coverage purposes must also use it for nondiscrimination testing.
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B. Statutory EE's may be tested using the ratio percentage test while otherwise excludable employees may be tested using the average benefits test and vice versa.
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T/F: If contributions, benefits or availability of BRFs are discriminatory, a corrective amendment may be adopted within 9½ months after the close of the plan year.
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T
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What is the only type of nondesign-based safe harbor defined contribution plan?
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Uniform points plan.
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T/F: A rate group consists of a single HCE and each NHCE who has an equal or greater allocation rate or accrual rate.
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F. A rate group is established for each HCE. However, there may be more than one HCE in a rate group if the HCE (not being tested) has an equal or greater allocation rate or accrual rate than the HCE being tested. The rate group consists of the HCE and each participant (HCE and NHCE) ho has an equal or greater allocation rate or accrual rate.
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T/F: If plans are aggregated to satisfy the coverage tests under IRC §410(b), they must be aggregated to satisfy the nondiscrimination tests under IRC §401(a)(4).
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T
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T/F: If two or more plans are permissively aggregated for nondiscrimination testing, then the nondiscriminatory classification tests must be applied as if the plans were a single plan.
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T
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T/F: For purposes of satisfying the gateway contribution test, each NHCE who benefits under the plan must receive an allocation of at least 5 percent of IRC §415 compensation.
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F. The lowest allocation rate for any NHCE who benefits under the plan must be at least equal to the lesser of one-third of the highest allocation rate for any HCE or 5 percent of IRC 415 comp.
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T/F: Age-based plans automatically satisfy nondiscrimination testing since every participant has the same EBAR.
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F. Age-based plans are designed to satisfy nondiscrimination purposes under this premise, but the plans do not automatically pass. For example, participant EBARs could vary due to IRC 415 limitations or TH minimum contributions.
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T/F: Cross-tested defined contribution plans may not use the safe harbor approach to satisfying nondiscrimination under IRC §401(a)(4).
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T
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T/F: A plan must benefit at least one NHCE to satisfy nondiscrimination requirements.
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F. An ER with only HCEs, or where the NHCEs are excludable for coverage testing, may still satisfy nondiscrimination requirements.
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T/F: Rate groups must satisfy the average benefit test.
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F. Rate groups can satisfy either the ratio percentage test or the average benefits test.
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6.1 All of the following statements regarding nondiscrimination testing under IRC 401(a)(4) are TRUE, EXCEPT: A. A design-based safe harbor plan is deemed to be nondiscriminatory. B. A plan that provides an allocation that is a uniform percentage of compensation is a design-based safe harbor plan. C. A plan that provides an allocation that is a uniform dollar amount to each participant is a nondesign-based safe harbor plan. D. Design-based safe harbor plans must use a definition of compensation for allocation purposes that satisfies IRC §414(s). E. A uniform points plan is a nondesign-based safe harbor plan.
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C. A plan that allocates a uniform dollar amount to each participant is a design-based SH plan and is deemed to be nondiscriminatory.
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6.2 None of the following provisions affect a plan's ability to rely on the IRC §401(a)(4) safe harbors, EXCEPT: A. Multiple entry dates B. Imposing a last day requirement for allocation purposes C. Imposing an hours of service requirement for allocation purposes D. Limiting allocations to a total of $5,000 E. Lower allocations for one or more NHCEs
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E. A plan that provides for a lower allocation to one or more HCEs may still rely on the IRC 401(a)(4) SHs, but not one that does the same for NHCEs.
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6.3 All of the following statements regarding general testing are TRUE, EXCEPT: A. Rate groups that satisfy the coverage tests of IRC 410(b) are nondiscriminatory under IRC 401(a)(4). B. Rate groups can be tested by converting the ER contributions into allocation rates. C. Rate groups can be tested by converting the ER contributions into EBARs. D. Determining whether a DB plan satisfies nondiscrimination requirements on a benefits basis is a type of SH and avoids general testing. E. Elective deferrals are included when determining rate groups for the average benefits portion of the general test.
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D. General testing, or rate group testing, is performed when a plan cannot satisfy the nondiscrimination requirements under the SH approach. Cross-testing, which uses defined benefit principles to demonstrate nondiscrimination in a defined contribution plan (or vice versa), is a type of general testing.
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6.4 Based on the following, determine the EBAR: - Annual Comp $160,000 - Allocation $35,000 - Actuarial Factor .006877
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Allocation / (Actuarial Factor * Annual Comp) C. 31.81
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6.5 All of the following statements regarding EBARs are TRUE, EXCEPT: A. EBARs may be expressed as percentages of average annual compensation. B. The testing age used to normalize the benefits must be the Social Security retirement age. C. EBARs may be expressed as dollar amounts. D. The allocations used in the EBAR calculation may be based on the current plan year. E. The allocations used in the EBAR calculation may be based on the current plan year and all prior years.
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B. The testing age must be a uniform normal retirement age and is usually the normal retirement age specified in the plan.
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6.6 All of the following statements regarding gateway requirements are TRUE, EXCEPT: A. The one-third test must be determined on the basis of IRC §415 compensation. B. The one-third test is satisfied if the lowest permissible allocation rate for any NHCE who benefits under the plan is 2%, and the highest allocation rate for any HCE who benefits under the plan is 5%. C. The 5 percent test is satisfied if each NHCE receives an allocation of 6% of IRC 415 compensation. D. The one-third test is satisfied if the lowest permissible allocation rate for any NHCE who benefits under the plan is 3%, and the highest allocation rate for any HCE who benefits under the plan is 9%. E. Compensation from date of participation may be used in the one-third test and the 5 percent test.
answer
A. The one-third test is based on allocation rates. Allocation rates are determined based on plan compensation that satisfies IRC 414(s), which may or may not satisfy IRC 415.
question
6.7 All of the following statements regarding nondiscrimination testing are TRUE, EXCEPT: A. Plans cannot be aggregated for coverage and tested separately for nondiscrimination. B. Plans cannot be permissively aggregated unless they have the same plan year. C. Elective deferrals can be general tested to satisfy nondiscrimination requirements. D. A plan may permissively disaggregate otherwise excludable employees for nondiscrimination purposes. E. Permissive disaggregation of certain portions of a plan into component parts for nondiscrimination testing is known as restructuring.
answer
C. ADP test is the only method available for elective deferrals to satisfy nondiscrimination requirements.
question
6.8 All of the following statements regarding BRFs are TRUE, EXCEPT: A. Participant loans are a right or feature subject to nondiscrimination requirements. B. Life insurance is considered an ancillary benefit. C. A lump sum distribution is an optional form of benefit. D. Participant-direction of investments is a right or feature subject to nondiscrimination requirements. E. A BRF is considered nondiscriminatory if it satisfies either the current availability test or the effective availability test.
answer
E. Both tests (current and effective availability) must be satisfied for BRFs to be considered nondiscriminatory.
question
T/F: To satisfy the diversification requirements, a plan must offer three investment alternatives other than employer stock.
answer
F. A plan need not offer other investment alternatives--it could instead offer a cash distribution and/or transfer to another qualified plan that offers such investment alternatives.
question
T/F: Leveraged ESOPs must take a loan from a commercial source.
answer
F. The loan can come from any source, as long as it is an arms-length transaction.
question
T/F: ESOPs cannot be integrated using permitted disparity.
answer
T.
question
T/F: For publicly traded stock, voting rights must be passed through to the participant in the ESOP.
answer
T
question
T/F: For closely held stock, voting rights must be passed through to the participant in the ESOP.
answer
F. Only certain issues must voting rights be passed through to shareholders.
question
T/F: Stock bonus plans may make distributions in employer stock.
answer
T
question
T/F: ESOPs invest primarily in employer stock.
answer
T
question
T/F: Many employers can contribute more to an ESOP than to other defined contribution plans.
answer
T
question
T/F: A participant who is age 55 is eligible for IRC §401(a)(28) diversification.
answer
F. A participant must be age 55 with ten years of plan participation to be subject to the diversification requirements of IRC 401(a)(28)
question
T/F: Dividends paid to an ESOP may be tax deductible to the employer.
answer
T
question
T/F: If an ESOP makes a prohibited allocation or accrual, an excise tax equal to 50 percent of the accrual is imposed on the S corporation, and the disqualified person is deemed to have received a distribution in the amount of the prohibited allocation.
answer
T
question
T/F: The definition of family used in IRC §409(p) is much broader than other definitions of family used under other attribution rules that apply to qualified plan requirements.
answer
T
question
7.1 All of the following statements regarding ESOPs are TRUE, EXCEPT: A. A money purchase pension plan can include an ESOP provision. B. A 401(k) plan can include an ESOP provision. C. An ESOP can allocate contributions using permitted disparity. D. The deduction limit may exceed 25 percent of compensation in some ESOPs. E. IRC §415 limits may be higher in ESOPs than in other defined contribution plans.
answer
C. ESOPs may not use permitted disparity in their allocation formulas.
question
7.2 All of the following statements regarding ESOP diversification under IRC §401(a)(28) are TRUE, EXCEPT: A. The right to diversify must be provided annually for six years. B. Qualified participants must be able to diversify a total of 25 percent of their account balance for five years, and 50 percent in the sixth year. C. Diversification must be provided at age 55 and ten years of service. D. In the final election year, the participant must be able to diversify 50 percent of his or her account balance invested in employer stock. E. Diversification is based on the number of shares, not on the value of those shares.
answer
C. Diversification is available to participants age 55 with ten years of participation (not service).
question
7.3 Based on the following information, determine the number of shares currently available for diversification. - Participant A's account contains 20,000 shares valued at $2 per share. - Participant A is age 59 with 20 years of participation. - Two years ago, Participant A diversified 1,500 shares valued at $4 per share. A. 2,750 B. 3,500 C. 3,875 D. 5,000 E. 5,375
answer
C. (Must add back previously diversified shares to determine overall diversification availability)
question
7.4 All of the following statements regarding leveraged ESOPs are TRUE, EXCEPT: A. ESOP loans may be back-to-back loans. B. The shares purchased by the ESOP are security for the loan. C. Loan proceeds may be used to repay another exempt loan. D. Employer securities that are used as collateral are allocated to eligible participants. E. Dividends may be used to repay the loan.
answer
D. ER securities that are used as collateral must be held in a suspense account and are not allocated securities.
question
7.5 All of the following statements regarding calculating net unrealized appreciation (NUA) on a stock distribution are TRUE, EXCEPT: A. It is the difference between the value of the employer stock at the time of distribution minus the plan's cost basis in the stock. B. If the employer stock is rolled over to another qualified plan, the recipient plan's cost basis is equal to the value of the employer stock at the date of rollover. C. A participant who received a lump sum distribution that includes employer stock, may elect to exclude from gross income the entire NUA. D. A participant who receives a distribution prior to age 59½ and includes employer stock will be subject to the 10% tax on early distribution on the NUA portion that is excluded from income. E. If the value of the employer stock at the time of distributions is less than the plan's cost basis, the NUA is zero.
answer
D. The participant is not subject to the 10% excise on early distributions on the NUA that is excludable from income. The penalty only applies to the taxable portion of the distribution.
question
T/F: A person who actually exercises control of the plan's management, but is not authorized to do so, is a fiduciary.
answer
T
question
T/F: An employer that sponsors a qualified retirement plan is a fiduciary as a result of its role as settlor of the trust.
answer
F. An ER foes not become a fiduciary by nature of its role as settlor of the trust since settlor functions are nonfiduciary in nature. However, an ER typically becomes a fiduciary when it takes on the role of plan administrator or other roles under which it has discretion over the management of plan administration and investments.
question
T/F: When plan assets are invested in contracts issued by an insurance company, the insurance company becomes a fiduciary since it manages the assets that provide the benefits under the plan.
answer
F. Plan assets are deemed not to include the underlying assets of an insurance company with respect to a contract issued by an insurer to an employee benefit plan.
question
T/F: If a plan does not specify a named fiduciary, it must provide a procedure for identifying a named fiduciary.
answer
T
question
T/F: An investment manager includes any person who acts in a fiduciary capacity with respect to plan assets.
answer
F. Investment manager is an ERISA term that refers to a fiduciary who has the power to manage, acquire or dispose of any plan assets, and who has acknowledged fiduciary status in writing. ERISA permits only certain types of entities to act as investment managers, and only a named fiduciary may appoint an investment manager.
question
T/F: A person may serve in more than one fiduciary capacity in a plan.
answer
T
question
T/F: A plan must identify the persons with authority to amend the plan.
answer
F. The plan must provide a procedure for identifying the persons with authority to amend the plan. A reference to "the Company" satisfies the request to identify the persons with authority to amend the plan.
question
T/F: An investment policy statement must be adopted to provide instructions to the fiduciaries regarding the investment of plan assets.
answer
F. A plan must provide a procedure for establishing and implementing a funding policy. However, it need not adopt an investment policy statement, although it may be advisable to do so. An investment policy statement provides general instructions or guidelines applicable to investment situations.
question
T/F: If a trustee discovers a breach of fiduciary liability by a co-fiduciary, the best course of action is to resign as trustee.
answer
F. Resignation of a trustee may not be sufficient to avoid liability when the trustee has knowledge of a breach. The trustee must take steps to remedy the breach.
question
T/F: A plan, a fiduciary or an employer may purchase insurance to cover liability or losses by reason of a fiduciary breach.
answer
T
question
8.1 All of the following individuals are fiduciaries with respect to a plan, EXCEPT: A. An individual who exercises discretionary authority over the plan's participant loan program. B. An individual who exercises control over the purchase and sale of plan assets. C. An individual who provides investment advice for a fee with respect to plan funds. D. An individual who prepares audited financial statements of the plan assets. E. An individual who determines which participants are eligible to receive benefits and authorizes the payment of such benefits.
answer
D. The preparation of financial statements by the plan's auditor is not a fiduciary function.
question
8.2 All of the following statements regarding fiduciary liability are TRUE, EXCEPT: A. Any agreement containing exculpatory provisions that attempt to relieve a fiduciary from liability is void under ERISA. B. A fiduciary that approves a limitation of liability clause in a service provider contract is personally liable for any losses that exceed the liability limitations. C. A plan may purchase insurance that will reimburse the plan for any losses suffered as a result of a fiduciary breach. D. An employer or other party may indemnify a fiduciary, provided the fiduciary remains responsible for any breaches committed as a fiduciary. E. A fiduciary may purchase liability insurance with his or her own funds.
answer
B. A fiduciary must consider the liability limitation in a service provider contract in the context of all other factors in determining the reasonableness of the agreement and the potential risks to participants. If the liability limitation is reasonable, then the fiduciary is not necessarily liable for losses in excess of the liability limitation.
question
8.3 All of the following are fiduciary functions, EXCEPT: A. Determining eligibility for the plan B. Reviewing claims for plan benefits C. Paying PBGC premiums D. Maintaining plan records according to ERISA requirements E. Hiring an investment manager
answer
C. Paying PBGC premiums is a settlor function, not a fiduciary function.
question
8.4 All of the following statements regarding consequences of fiduciary breaches are TRUE, EXCEPT: A. Fiduciaries must restore losses incurred by the plan due to a failure to diversify investments. B. A fiduciary will not be held liable for a breach made by the investment manager. C. A fiduciary's account balance in the plan may be used to offset damages to the plan if necessary. D. A fiduciary may be required to pay any profits earned in a breach to the plan. E. Fiduciaries must restore losses incurred by the plan due to mismanagement of the plan.
answer
B. A fiduciary may be subject to co-fiduciary liability with respect to an investment manager's breach of fiduciary duties if the fiduciary hired said investment manager and did not monitor the investment manager's activities.
question
8.5 All of the following factors should be considered when choosing a service provider, EXCEPT: A. Fees charged for services to be performed B. Qualifications of the service provider C. Quality of the services to be performed D. Litigation or enforcement action taken against the service provider E. Design of the service provider's office
answer
E
question
T/F: A disqualified person is always a party-in-interest.
answer
T
question
T/F: A party-in-interest is always a disqualified person.
answer
F. A party-in-interest is not always a disqualified person.
question
T/F: A PT does not necessarily mean plan disqualification.
answer
T
question
T/F: The PT rules do not apply to plans whose assets are participant-directed.
answer
F. Plans that are participant-directed are not exempt from the PT rules.
question
T/F: A plan may not sell or lease property to a disqualified person.
answer
T
question
T/F: Loans to plan participants are exempt from the PT rules as long as certain conditions are met.
answer
T
question
T/F: A class exemption provides relief from the excise tax under the IRC and the fiduciary liability consequences under ERISA.
answer
T
question
T/F: An excise tax of 100 percent of the amount of the PT may be imposed if the transaction is not corrected in a timely manner.
answer
T
question
T/F: The plan is liable for payment of the PT excise tax.
answer
F. The disqualified person is liable for payment of the excise tax on the PT..
question
T/F: The DOL may assess civil penalties on a party-in-interest involved in a PT.
answer
T
question
9.1 All of the following are disqualified persons under IRC §4975, EXCEPT: A. An accountant who prepares Form 5500 for a plan B. A brother of a 45 percent owner of the plan sponsor C. A plan trustee's father D. A member of the board of directors of the plan sponsor E. A union whose members are covered by the plan
answer
B. A brother is not considered a family member under the attribution rules applicable to PTs. A family member would be included as a disqualified person under IRC 4975 only if the relative's ownership is at least 50%.
question
9.2 All of the following transactions are exemptions from the PT rules, EXCEPT: A. The purchase by the plan of the building in which the sponsor conducts his or her business B. Reasonable compensation paid for necessary accounting services for the plan C. The sale of life insurance to a participant from the plan D. The investment of assets of the plan in a bank that is also the plan's trustee E. A loan to a leveraged ESOP from the plan sponsor to purchase employer stock
answer
A. If the sponsor owns the building, this would be a sale of property between the sponsor and the plan. If a third party owns the building, the sale to the plan would then violate the use of plan assets for the sponsor's benefit. Both are PTs.
question
9.3 Which of the following statements regarding consequences of PTs is/are TRUE? I. Form 5330 is used to transmit the applicable excise tax to the IRS. II. EPCRS is available to correct PTs. III. The initial excise tax is 15 percent of the amount involved. A. I only B. II only C. I and II only D. I and III only E. I, II and III
answer
D. EPCRS is not currently available to correct PTs.
question
9.4 All of the following are covered service providers under the fiduciary fee disclosure regulations, EXCEPT: A. Registered investment advisor compensated by plan assets B. Investment platform provider whose fee is paid by the plan C. Trustee who is paid a percentage of the plan assets from the plan D. Third-party administrator paid partly through 12b-1 fees generated by plan investments E. Plan auditor paid by the plan sponsor
answer
E. If the service provider's fees are paid by the plan sponsor rather than the plan, the disclosure fee disclosure rules do not apply to the service provider.
question
9.5 Which of the following statements regarding consequences of failing to comply with the required fiduciary fee disclosures is/are TRUE? I. The PT exemption will not apply to the covered service provider. II. The covered service provider will be liable for a 15% excise tax on the amount of fees charged. III. The IRS may require the service provider to return to the plan any fees that have been paid. A. I only B. II only C. I and III only D. II and III only E. I, II and III
answer
E
question
T/F: The distribution notice describes the benefit payment options, right to delay distribution until at least normal retirement age, and direct rollover feature.
answer
T
question
T/F: Certain distribution notice requirements depend on whether the QJSA rule applies to the participant.
answer
T
question
T/F: The Supreme Court's invalidation of DOMA §3 (in Windsor) allows same-sex couples who are legally married to have many of the rights as opposite-sex couples, such as allowing for hardship distributions for spousal medical expenses.
answer
T
question
T/F: A plan that requires spousal consent for a loan will need to obtain spousal consent from same-sex spouses as well as opposite-sex spouses.
answer
T
question
T/F: Distribution notice requirements refer to information that must be provided to the participant before distributions may be made.
answer
T
question
T/F: The $5,000 threshold for the notice and consent requirements is based on the participant's vested account balance as of the date of distribution.
answer
T
question
T/F: When a participant takes a partial distribution, the consent given applies to the full account balance.
answer
F. The consent given for a partial distribution only applies to the partial distribution, not the full account balance.
question
What will the beneficiary of a life insurance policy will be taxed on for the total distribution from the policy?
answer
On the net insurance proceeds, which is the face amount of the policy less the reserve accumulation.
question
T/F: A self-employed individual's contributions for the purchase of life insurance are not deductible by the self-employed individual.
answer
T
question
T/F: Nonpension plans may use the 100-times rule for determining incidental benefit limits regarding life insurance.
answer
F. The 100-times rule is only applicable to pension plans.
question
10.1 All of the following information must be provided to a participant prior to receiving a distribution due to termination of employment, EXCEPT: A. Loan procedures B. Taxation issues C. Information about how a distribution will be taxed D. The optional forms of payment available E. The right to delay payment until normal retirement age
answer
A
question
10.2 Which notice must be provided to the participant? - The plan is a target benefit plan - The participant is age 35 and terminates employment. - The participant has a vested account balance of $750. - The plan will make involuntary cash out of benefits. A. Waiver of the QJSA notice B. Optional forms of benefit notice C. Right to delay distribution to NRA notice D. Rollover notice E. Spouse's consent rights regarding a waiver of the QJSA
answer
D. A participant with an account balance of less than $5,000 is only required to receive the rollover notice when an involuntary distribution is made.
question
10.3 All of the following are affected by the Court's invalidation of DOMA §3, EXCEPT: A. Definition of spouse B. Rules for family attribution C. Application of QPSA and QJSA D. Rollover to spousal IRA E. Allocation of participant's contribution
answer
E
question
10.4 Which of the following statements regarding life insurance in defined contribution plans is/are TRUE? I. The participant is required to pay taxes on the term cost of the insurance each year. II. Net insurance proceeds paid to the beneficiary are not taxable. III. Incidental life insurance can remain in the plan post-retirement until the participant elects a distribution. A. I only B. III only C. I and II only D. II and III only E. I, II and III
answer
C. A life insurance policy must be converted to retirement income or distributed to the participant no later than the NRA under the plan in order to satisfy the incidental life insurance requirements.
question
10.5 Which of the following statements regarding the incidental life insurance benefit limit is/are TRUE? I. The limit for a term life insurance policy is 25% of the aggregate contributions. II. The limit for a whole life insurance policy is less than 50% of the aggregate contributions. III. The limit for a universal life insurance policy is less than 50% of the aggregate contributions. A. I only B. III only C. I and II only D. II and III only E. I, II and III
answer
C. A universal life insurance policy is treated as if it is a term insurance policy for purposes of the incidental benefit limit.
question
T/F: Advertising includes all forms of communication whether oral, written or electronic.
answer
T
question
T/F: Professional services include providing advice, recommendations, or opinions related to a retirement plan.
answer
T
question
T/F: An ASPPA Member may disclose to another ASPPA Member confidential information learned about a client whenever asked by another ASPPA Member.
answer
F. An ASPPA Member may only disclose confidential information about a client if the client has authorized the Member to do so.
question
T/F: The ASPPA Code of Professional Conduct shall override IRS Circular 230.
answer
F. The ASPPA Code of Professional Conduct is not intended to supplant, contradict or supersede Law. Where the requirements of Law or such governmentally-sanctioned Codes conflict with this Code, the requirements of Law or such governmentally-sanctioned Codes take precedence.
question
T/F: An ASPPA Member who has the education, training and experience to advise a client regarding the benefits of a cash balance plan versus a target benefit plan may do so.
answer
T
question
T/F: An ASPPA Member who is found guilty of a felony shall be subject to ASPPA's disciplinary procedures.
answer
T
question
T/F: An ASPPA Member may provide professional services to a client who requests it even though the client is being served by another professional in the same manner.
answer
T
question
T/F: If a request for information is received by an ASPPA Member from a person authorized by ASPPA to obtain information regarding a possible violation of the ASPPA Code of Professional Conduct, the Member shall respond promptly in writing.
answer
T
question
T/F: A credential is a membership designation conferred by ASPPA.
answer
T
question
T/F: Confidential information may include information which the ASPPA Member has reason to believe that the client would not wish to be divulged.
answer
T
question
11.1 All of the following statements are violations of ASPPA's Code of Professional Conduct, EXCEPT: A. Advertising that the Member is a CPC when the member has not received the designation from ASPPA. B. Advertising that the Member's firm employs only QKAs to do administration on 401(k) plans when the firm has other individuals administering the plans without the designation. C. Orally informing a potential client that the Member's firm administers 1,500 401(k) plans when in reality it administers only 300. D. On the Member firm's website advertising that the firm is qualified to administer ESOP plans when the firm has never administered one. E. Providing a potential client written material that indicates any potential income it may receive from investment products that are purchased by the plan.
answer
E
question
11.2 All of the following statements are violations of ASPPA's Code of Professional Conduct, EXCEPT: A. After attending a client's confidential board meeting, you inform a friend that the client will merge with another firm so the friend can sell the company stock. B. Your client requests that you provide another service provider participant account balance details and you do so electronically based on the new service provider's specifications. C. You discuss your client's salary information with a friend interested in working for the client. D. The President of the company you administer a profit sharing plan for, notified you that the he would be informing the board next week that he is retiring and you repeat the information today to a shareholder. E. The client has not paid your invoices so you tell the new administration firm that the client has a poor credit rating.
answer
B
question
11.3 Which of the following statements regarding conflict of interest requirements under ASPPA's Code of Professional Conduct is/are TRUE? I. The Member shall fully disclose any actual conflict of interest to a client. II. The Member's ability to act fairly must be unimpaired. III. The Client must expressly agree to the services that are provided by the Member. A. I only B. II only C. I and III only D. II and III only E. I, II and III
answer
E
question
11.4 All of the following statements regarding ASPPA's Code of Professional Conduct are TRUE, EXCEPT: A. An ASPPA Member shall render opinions or advice only when qualified to do so based on education, training and experience. B. An ASPPA Member must adhere to the high standards of conduct, practice and qualification. C. An ASPPA Member must abide by the ASPPA Code of Professional Conduct regardless of other laws. D. An ASPPA Member shall take reasonable steps to ensure that services rendered under the Member's supervision are performed with honesty, integrity, skill and care. E. An ASPPA Member shall perform services with courtesy and shall cooperate with others in the client's interest.
answer
C
question
11.5 Which of the following statements is/are violations of ASPPA's Code of Professional Conduct? - Your client has informed you that they are having cash flow issues and are not going to deposit employee 401(k) contributions into their 401(k) plan for six months so that they can use the funds to help meet their payroll obligations. - There are 50 participants in their 401(k) plan. I. I. You advise the client that this will result in a loan from the plan to the plan sponsor and is a prohibited transaction. II. You advise the client that the employee contributions must be deposited to the plan within seven business days from when they would have been paid to the participants. III. You listen to the client's concern with empathy, discuss how difficult it is for a small business to comply with the additional expenses generated by the new health care laws and concur with their course of action to solve their cash flow issues. A. I only B. III only C. I and II only D. II and III only E. I, II and III
answer
B.
