DC-1
What are the minimum allocation requirements for TH plans?
- 3% comp minimum (IRC 415 comp)--UNLESS keys allocations are LESS than 3% (excluding catch-up & earnings), then... - Highest allocation for Key = minimum allocation for staff (includes aggregated plans)
Who is eligible to receive TH minimum allocation?
-Non-key participant (no class exclusions) -May stipulate employment on last day of PY -Eligible to defer in 401(k) even if NOT doing so (note: eligibility for 401(k) elements may be more lenient in some plans) CANNOT -Min HOS (this is OK for PS contribution, but not for TH allocations)
Name 4 items NOT included in the TH ratio.
1. Deemed IRA account balances 2. UNRELATED rollovers 3. Former employee's account balances 4. Former keys account balances
Solutions for failed Ratio % Test?
1. Increase ratio via plan amendment (i.e., make contribution for additional NHCEs) IF, not fail safe. Some plans include a fail safe plan method in the Plan doc thereby NOT requiring an amendment (usually terminated EE's get added in reverse order of termination of 70% of ratio is satisfied). 2. Perform Average Benefits Test instead
3 types of Key Employees
1. More than 5% owner (or related employer owner) 2. 1% owner via owning more than 1% of employer/related employer AND compensation exceeds $150k (FIXED--not COLA) 3. Officer AND satisfies COLA officer comp limit = $170k for 2014 (i.e., IRC 415-includes deferrals and catch-up contribs)
What are the two test options, in which a plan must pass one in order to pass coverage requirements under IRC 410(b)?
1. Ratio % Test 2. Average benefit test
Based on the following information, determine the minimum TH allocation: -Non-key -IRC 415 comp = $30,000 -Plan comp = $12,000, mid-year entry -850 HOS -Highest allocation rate for Key = 2% -TH
2% * $30,000 = $600
Max number of officers is the greater of...
3 or 10% of total EE's--maximum of 50
Based on the following info, determine the minimum TH allocation to Participant AL - Non-key - IRC 415 comp is $40,000 - Plan comp for the plan year is $20,000 since he entered mid-year -The highest allocation rate for a Key is 4% - PLan is TH
3% * 40,000 = 1,200
All of the following statements regarding profit sharing plans are TRUE, except: A. An employer is required to have profits to make a profit sharing contribution. B. Profit sharing plans are required to have recurring and substantial contributions. C. A definite allocation formula is required in a profit sharing plan. D. A definite contribution formula is not required in a profit sharing plan. E. Nonprofit organizations may adopt a profit sharing plan.
A -- An employer is not required to have profits to contribute to a PS Plan unless the plan document requires it so expressly.
All of the following statements regarding the differences between pension plans and nonpension plans are TRUE, except: A. Pension plans may qualify for an exemption from the QJSA rules. B. Only nonpension plans may include a 401(k) arrangement C. The minimum funding requirements of IRC 412 apply to pension plans D. The definitely determinable benefit requirement is applied solely to pension plans E. The permissible distribution events are different for pension plans and nonpension plans
A -- Nonpension plans may qualify for an exemption from the QJSA rules. There is no exemption for pension plans.
All of the following statements regarding qualified plans are TRUE, except: A. They must provide for participant loans. B. They must limit benefits or contributions under IRS 415. C. They must allow for eligible rollover distributions to another eligible retirement plan. D. They must contain provisions protecting benefits in the event of a merger with another plan. E. They must provide for RMDs under IRC 401(a)(9)
A -- Participant loans in a qualified plan are common but not required.
All of the following statements regarding plan documents are TRUE, except: A. An M&P plan consists of a basic plan document and a trust document. B. An M&P plan must be maintained by a sponsoring organization. C. A volume submitter plan consists of specimen plan and optional provisions that may be used in that specimen plan. D. A volume submitter plan is pre-approved by the IRS E. An individually designed plan is not pre-approved by the IRS.
A. An M&P plan document consists of a basic plan document and an adoption agreement.
All of the following statements regarding eligibility requirements are TRUE except: A. A plan's eligibility provisions may not be amended to exclude a current participant B. A new business establishing a plan may have more liberal eligibility requirements for current employees than for future employees C. A newly established plan may have more liberal eligibility requirements for current employees than for future employees D. A plan may have immediate eligibility for 401(k) component, but a one year of service requirement for the matching component E. A plan may have a one year of service requirement for the 401(k) component, but require two years of service for the profit sharing component
A. Eligibility requirements are not a protected benefit. A plan amending its eligibility requirements is not required to grandfather employees who have met the pre-amendment eligibility requirements.
All of the following statements regarding top-heavy requirements are TRUE except: A. Distributions due to death made in the five-year period ending on the determination date are included in the top-heavy ratio B. A safe harbor 401(k) plan that consists solely of contributions that satisfy the safe harbor requirements is deemed not top-heavy C. Top-heavy defined contribution plans have minimum allocation requirements D. Rollovers between plans of unrelated employers are included only in the distributing plan's top-heavy testing E. Top-heavy plans have minimum vesting requirements
A. Only certain in-service withdrawals made in the five-year period are included in the top-heavy ratio. A distribution due to death would only be included if made in the one-year period ending on the determination date and the deceased participant had at least one hour of service in that same period.
All of the following statements regarding HCE determination are TRUE except: A. Ownership in the lookback year has no impact on an employee's HCE status B. Ownership in the current year has an impact on an employee's HCE status C. Compensation in the lookback year has an impact on an employee's HCE status D. Compensation in the current year has no impact on an employee's HCE status E. Compensation is not considered when applying the ownership test for HCE determination
A. Ownership in the lookback year does have an impact on an employee's HCE status. The 5 percent owner test is satisfied if the employee owns more than 5 percent of the employer at any time during the current plan year or during the lookback year.
All of the following statements regarding the calendar year data election are TRUE except: A. It is applicable when determining the lookback year for the 5 percent owner test B. It is applicable when determining the lookback year for the compensation test C. It may be made only for a noncalendar year plan D. It must be reflected in the document if the plan contains an HCE definition E. It may be made operationally if a plan document does not include an HCE definition
A. The calendar year data election applies only to determine the lookback year for the compensation test and does not apply to determine the HCEs under the 5 percent owner test.
Which of the following statements abut TH plans is/are TRUE? I. A plan termination distribution from a plan in a required aggregation group is included in the TH determination II. Forfeitures are considered employer contributions for determining TH minimum allocation requirements III. Plans are permissively aggregated only when to do so will cause the group not to be TH
ALL
Which of the following statements regarding stock attribution for purposes of determining HCE status is/are TRUE? I. Stock is attributed from child to parent II. Stock is attributed from spouse to spouse III. Stock is attributed from grandchild to grandparent
ALL
Which of the following statements regarding money purchase plans is/are TRUE? I. They must provide a fixed contribution formula II. They are required to provide a QJSA as a distribution option III. They may not include a 401(k) feature
ALL are true
Which of the following statements regarding types of defined contributions plans is/are TRUE? I. A target benefit is a defined contribution plan. II. An ESOP is designed to invest primarily in employer stock. III. A profit sharing plan is a nonpension plan.
ALL true
Which of the following statements regarding plan documents is/are TRUE? I. An opinion letter is issued to a sponsoring organization of an M&P plan. II. An advisory letter is issued to the sponsor of a volume submitter document. III. A determination letter is issued to the plan sponsor of an individually designed plan.
All statements are true.
Based on the following information, determine when Employee A will enter the plan: -Full-time -DOB 12/01/1992 -DOH 03/01/2012 -Plan Year is April 1 - March 31 -Eligibility requirements are Age 21 and 1 YOS -ERISA statutory entry dates
April 1, 2014
All of the following are HCEs except: A. A sole-proprietor B. The grandson of a 50 percent owner C. The spouse of a 10 percent owner D. The grandfather of a 30 percent owner The daughter of a 75 percent owner
B
All of the following statements regarding service for eligibility purposes are TRUE except: A. A plan must count an employee's service performed prior to meeting the plan's minimum age requirement B. A plan is not required to count an employee's service performed prior to the plan's inception date C. Individuals may be credited with hours of service while on leave during active military duty D. Hours of service may be calculated by actually counting hours or by using equivalencies E. Paid sick time counts as hours of service for eligibility purposes
B -- A plan must count an employee's service performed prior to the plan's inception date
Pension plans may permit distributions upon all of the following events, EXCEPT: A. Death B. Hardship C. Disability D. Retirement E. Termination of Employment
B -- Pension plans may not permit hardship withdrawals
All of the following statements regarding notices to participants of plan provisions and amendments are TRUE, except: A. The SPD must be written in a manner that is reasonably expected to be understood by the average plan participant. B. For an existing plan, a participant must receive the SPD no later than 30 days after he or she first becomes eligible to participate. C. For a new plan, a participant must receive the SPD no later than 120 days after the later of the effective date or the adoption date of the plan. D. A beneficiary is not required to receive an SPD until 90 days after he or she begins to receive benefits from the plan. E. An SMM is required when there has been a material modification to the plan or when the information provided in the SPD has changed.
B. For an existing plan, a participant must receive the SPD no later than 90 days after he/she first becomes a participant.
All of the following are advantages of having a qualified plan, except: A. Tax-deductible employer contributions B. Earnings on employer contributions are tax deductible to the employee C. Deferred taxation to the employee on employer contributions D. Most distributions are eligible for rollover E. Deferred taxation on trust earnings
B. Taxation on earnings is deferred. It is not a deduction to be taken by plan participants.
All of the following are Key employees for 2014 except: A. The spouse of a sole-proprietor B. The mother (who earns $50,000) of a 2% owner (who earns $200,000) C. The son of a 50% owner D. An includible officer earning $175,000 E. A 10% partner in a partnership
B. The stock ownership (2%) is attributed to the mother, but she does not have enough compensation to be considered a Key
All of the following regarding the top-paid group election are TRUE except: A. Employees who have not completed six months of service by the end of the lookback year may be excluded B. The plan sponsor is not required to use the top-paid group election to limit the number of HCEs C. Employees who are more than 5 percent owners may be excluded D. Employees who have not attained age 21 by the end of the lookback year may be excluded D. The top-paid group election must be applied consistently to all compliance tests using HCE determinations
C
All of the following statements regarding eligibility requirements are TRUE except: A. A plan may permit employees to participate on their date of hire B. A 401(k) plan may require no more than 12 months of service before employees are eligible to make elective contributions C. Quarterly entry dates are required if the plan has a 401(k) component D. A plan may permit employees to participate before they are age 21 E. A money purchase plan may require two years of service before employees are eligible to participate
C
All of the following statements regarding SCP are TRUE, except: A. It may be used to correct significant qualification violations. B. It may be used to correct insignificant qualification violations. C. It may be used to correct egregious failures. D. It is used to correct operational failures. E. It involves no disclosure or fees to the IRS.
C.
All of the following statements regarding TH requirements are TRUE except: A. A plan is TH if more than 60% of the benefits are attributable to Keys B. After-tax employee contributions are included in calculating the TH ratio C. A TH minimum contribution is required for all plan participants D. Catch-up contributions made in the year in which the determination date falls are included in calculating the TH ratio E. In-service withdrawals made during the five-year period ending on the determination date are included in calculating the TH ratio
C. If TH contribution is required, it only needs to be allocated to NON-Keys who are EMPLOYED ON THE LAST DAY OF THE PY--not all participants.
Which of the following is/are potential disqualification issues addressed under EPCRS? I. Plan document failures II. Catastrophic failures III. Demographic failures
C. The potential disqualification issues addressed by EPCRS include plan document failures, operational failures, demographic failures and employer eligibility failures.
All of the following statements regarding defined contribution plans are TRUE, except: A. A profit sharing plan may use forfeitures to reduce employer contributions. B. A money purchase plan is subject to minimum funding requirements under IRC 412. C. A profit sharing plan may be exempt from QJSA requirements. D. Employer contributions are discretionary in a SIMPLE 401(k) plan. E. A SEP is subject to full an immediate vesting of employer contributions.
D -- Employer contributions are mandatory in a SIMPLE 401(k)
All of the following statements regarding SIMPLE plans are TRUE, except: A. SIMPLE IRAs may allow for catch-up contributions B. SIMPLE 401(k) plans may allow for catch-up contributions C. SIMPLE IRAs do not have to file a Form 5500 D. Participant loans may be available in SIMPLE IRAs E. Participant loans may be available in SIMPLE 401(k) plans
D -- Participant loans are NOT permitted in SIMPLE IRAs.
Which of the following statements regarding the effect of changing a plan's eligibility requirements is/are TRUE? I. Existing participants must be allowed to continue participating II. Rehired former participants may need to satisfy the new requirements before re-entry III. A plan is permitted to grandfather in existing participants
D -- When eligibility conditions are amended, the plan is not required to allow existing participants to continue participating if they cannot satisfy the new eligibility conditions
All of the following employees may be excluded for eligibility purposes, except: A. Nonresident aliens with no US income B. Employees who has not met the plan's eligibility requirements C. Leased employees D. Employees classified as part-time E. Union employees subject to a collective bargaining agreement
D -- a plan cannot exclude part-time employees as a job classification
All of the following statements regarding TH aggregation are TRUE except: A. A required aggregation group includes each plan of an employer in which a Key employee participates B. If the required aggregation group is TH, each plan in the group is TH unless the SH exception applies C. IF a permissive aggregation group is not TH, then all plans in the group are not TH D. A SIMPLE 401(k) plan is subject to the TH aggregation rules E. A required aggregation group includes each plan of an employer than enables a plan within which a Key employee participates to satisfy coverage or nondiscrimination requirements
D. A SIMPLE 401(k) is not subject to TH aggregation rules.
Which of the following statements regarding plan disqualification is/are TRUE? I. The employer loses its deduction for vested contributions made to a plan that is disqualified. II. The NHCEs may be taxed on vested contributions, unless the plan is disqualified solely due to a coverage violation. III. Taxes may apply if a distribution from a disqualified plan was rolled over an resulted in an excess contribution to an IRS.
D. If the plan is disqualified, the employer loses its deductions for NONvested contributions made to the plan for open tax years.
What are the minimum vesting requirements for TH plans?
DB: 3-year cliff or 6-year graded (vs. 5-year cliff or 7 years graded)
All of the following statements regarding HCE determination are TRUE except: A. An employee's compensation for the current plan year has no bearing on the employee's HCE status for that year B. The lookback year is generally the 12-month period preceding the determination year C. The 5 percent owner test applies to the determination year and the lookback year D. The compensation test applies to the lookback year only E. An employee must satisfy the 5 percent owner test and the compensation test to be considered an HCe
E
All of the following statements regarding a break-in-service rules for eligibility purposes are TRUE, except: A. A plan using the counting hours-method determines breaks in service based on hours credited in the eligibility computation period B. Unpaid FMLA leave cannot cause a participant to incur a break in service C. A plan using the elapsed time method determines breaks in service based on periods of severance D. A retired participant's period of severance begins on the date the participant retires E. A plan using the counting-hours method uses the 12-month period beginning on the day a participant first terminates employment for determining breaks in service
E -- a plan using the counting-hours method must use the eligibility computation period for determining whether a break in service has occurred
All of the following statements regarding VCP are TRUE, except: A. It may be used to correct significant qualification violations. B. It may be used to correct insignificant qualification violations. C. It may be used to correct egregious failures. D. It may be used even if the plan does not have a determination letter. E. It may be used by plans currently under examination.
E. To use VCP to correct a violation, the plan must not be under examination.
A SEP plan is not subject to the top-heavy aggregation rules.
F -- A SEP plan is subject to the top-heavy aggregation rules.
T / F: A qualified plan may rely on operational compliance alone.
F -- A plan is not qualified unless it satisfies the requirements of the law in both FORM (plan document) and OPERATION.
T / F: A qualified plan must accept a direct transfer of an eligible rollover distribution.
F -- A qualified plan must permit employees to transfer eligible rollover distributions to a qualified plan. However, a qualified plan is not required to accept rollovers.
T/F: Generally, a plan may require a participant to attain age 24 before entering the plan.
F -- Age 21 is the statutory max, unless they are governmental or electing church plans that are expect from the minimum age and service requirements.
T/F: An employee must be employed on the last day of the eligibility computation period to receive credit for a year of service.
F -- Although a year of service is not credited until the end of the eligibility computation period, an employee is not required to be employed on the last day of the eligibility computation period to be credited with a year of service.
T / F: An advisory letter is issued to the sponsoring organization of an M&P plan.
F -- An advisory letter is issued for volume submitter plans.
T/F: An employee with annual compensation in excess of $80,000 (as indexed) is a key employee in 2014.
F -- An employee's compensation level alone will not make the employee a key employee. Do not confuse HCE determination with key employee determination.
T/F: Catch-up contributions are included when determining a key employee's allocation rate.
F -- Catch-up contributions are disregarded when determining a kay employee's allocation rate (earnings and catch-ups are excluded)
Form 5307 is used to request a determination letter for an individually designed plan.
F -- Form 5300 is used for individually designed plans.
T/F: An employee incurs a break in service if he or she is credited with 501 or fewer hours during the eligibility computation period.
F -- Generally, a break in service is 500 or fewer hours in an eligibility computation period
T/F: A 5 percent owner for purposes of determining who is an HCE is an individual who owns 5 percent of the business
F. A 5 percent owner for purposes of determining who is an HCE is an individual who owns more than 5 percent of the business.
T/F: Employees who have been employed for nine months may be excluded from the top-paid group determination
F. Employees who have been employed less than six months may be excluded from the top-paid group determination.
T/F: Employees who have not attained age 25 may be excluded from the top-paid group determination
F. Employees who have not attained age 21 may be excluded from the top-paid group determination.
T/F: For the 2014 calendar year, only employees earning more than $115,000 in 2013 will be considered HCEs
F. For the 2014 calendar year, employees earning more than $115,000 in 2013 will be considered HCEs. However, the HCE determination consists of two tests: the compensation test and the 5 percent owner test so those meeting the compensation test may not be the only HCEs. Any employee who are 5 percent owners in either 2013 or 2014 would also be considered HCEs regardless of their compensation
T/F: Jim owns 100 of ABC Co. Jim's daughter, Anne, and her husband, Mark, are employees. Mark is considered an HCE because he is a 5 percent owner due to attribution
F. No double attribution.
T/F: The brother of a 5 percent owner is an HCE
F. Stock ownership is attributed from parents, spouses and lineal descendants. Attribution does not extend to siblings.
T/F: The determination year for identifying HCEs is the 12-month period immediately preceding the plan year
F. The determination year for HCE purposes is the current plan year. The 12-month period immediately preceding the plan year is known as the lookback year.
Which of the following types of plans are generally required to file Form 5500? I. Money Purchase II. SIMPLE 401(k) III. SEP
I & II -- A SEP is not required to file Form 5500 if certain conditions are met
Which of the following plans is/are considered pension plans? I. Money purchase plan II. Stock bonus plan III. Target benefit plan
I & III
Which of the following statements regarding types of defined contribution plans is/are TRUE? I. An employee bears the investment risk in a defined contribution plan. II. A money purchase plan is a nonpension plan. III. Stock bonus plan may include 401(k) component.
I & III only.
Which of the following statements regarding a break in service for eligibility purposes is/are TRUE? I. A break in service may affect the date on which a rehired former participant may re-enter the plan II. A plan is required to impose a break-in-service rule III. A plan may define a break in service to be fewer than 750 hours in an eligibility computation period
I only -- A plan may impose a break-in-service rule, but it is not required. A plan may define a break in service to be 500 or fewer hours in an eligibility computation period
Which of the following statements regarding HCE determination is/are TRUE? I. Th IRC 1563 attribution rules apply when determining HCEs II. An employee who owns 5 percent of the employer fails to satisfy the 5 percent owner test III. An individual who owns 10 percent of a corporation has an ownership interest via attribution in other entities owned by that corporation
II & III only. IRC 318 attribution rules apply when determining HCEs
Which of the following statements regarding the plan qualification under 401(a) is/are TRUE? I. A qualified plan may not permit the assignment of benefits under any circumstance. II. A contribution may be returned to the employer if it was made due to a mistake of fact. III. Participant accrued benefits must be protected upon plan merger.
II & III. A qualified may permit the assignment of benefits in limited circumstances.
Which of the following statements regarding eligibility computation periods is/are TRUE? I. The eligibility computation period for a year of service may be less than a 12-month period II. Using the shift to plan year method, there is usually an overlap between the first and second eligibility computation periods III. Using the anniversary method, there is usually an overlap between the first and second eligibility computation periods
II only -- The eligibility computation period must be a period of 12 consecutive months. Under the anniversary method, the first and second periods will be consecutive and will never overlap.
Nondiscrimination testing code
IRC 401(a)(4)
Coverage testing code
IRC 410(b)
What is the TH ratio?
Keys / Total Includable = MORE THAN 60%
Based on the following information, determine Participant B's date of participation. -Calendar year plan -Eligibility determined via elapsed time method -Entry dates are the first day of the month following the satisfaction of the eligibility requirements -Participant B is a full-time EE DOB: 08/28/1992 DOH: 02/01/2013 DOT: 01/03/2014 DOR: 03/15/2014
March 15, 2014
What is the Ratio % Test ratio?
NHCE ratio / HCE ratio = MINIMUM 70% to PASS (rounded to nearest one-hundreth) NHCE benefitting / total NHCEs non-excludable HCE benefitting / total HCE non-excludable
Who are excludable EE's for coverage testing purposes?
NOT synonymous with non-plan participants. -NOT satisfy min Age/HOS requirements -Terminated EE w/less than 500 HOS & NOT benefitting under the plan -Union EE under union plan (i.e., collectively bargained) -Non-resident alien for tax purposes (i.e., no US income)
Different levels of contribution / allocation / accrual rates is a ______________________ testing issue, not a ______________________ testing issue.
Nondiscrimination testing issue = IRC 401(a)(4) NOT coverage testing issue = IRC 410(b)
An SMM must be provided to each participant and each beneficiary who is receiving benefits under the plan no later than 210 days after the close of the plan year in which the amendment was adopted.
T
T / F: A plan sponsor is not required to submit the plan to the IRS for a letter of determination.
T
T / F: SCP may be used to correct a significant operational failure as long as it is corrected or substantially corrected within the two-year corrected period.
T
T / F: The consistent failure of a plan to make the required minimum distributions (RMDs) under IRC 401(a)(9) could disqualify a plan.
T
T/F: A 401(k) plan may require two years of service to be eligible for the matching component of the plan.
T
T/F: A 401(k) portion of a plan may not require more than one year of service for eligibility.
T
T/F: A plan that has 25 percent vesting at one year of service, 50 percent vesting at two years of service and 100 percent vesting at three years of service satisfies the top-heavy minimum vesting requirements.
T
T/F: Absences of less than 12 months are treated as continuous employment under the elapsed time method for crediting service.
T
T/F: Absent a top-paid group election, all employees who earn more than $80,000 as indexed, in the lookback year are considered HCEs
T
T/F: An employee's actual hours are not considered under the elapsed time method for crediting service.
T
T/F: An officer earning more than $170,000 in 2014 may be considered a key employee.
T
T/F: Employer matching contributions may be used to satisfy top-heavy minimum requirements.
T
T/F: In a new plan, the determination date is the last day of the first plan year.
T
T/F: In order for two plans to be part of a permissive aggregation group, they must be able to satisfy coverage and nondiscrimination requirements when considered together.
T
T/F: Paid vacation time counts as hours of service for eligibility purposes.
T
T/F: Related rollovers between plans maintained by the same employer are included only in the recipient plan for top-heavy determination.
T
T/F: The identification of HCEs is necessary for determining whether the minimum coverage requirements of IRC 410(b) have been satisfied
T
T/F: The identification of HCEs is necessary for determining whether the nondiscrimination requirements of IRC 401(a)(4) have been satisfied
T
T/F: The statutory plan entry date is the earlier of the first day of the next plan year, or six months after satisfying the statutory age and service requirements.
T
T/F: Two plans that are not part of a required aggregation group may be permissively aggregated for top-heavy purposes.
T
T/F: Using less than one year of service for eligibility purposes usually makes it easier for part-time employees to become plan participants.
T
The plan sponsor may use Audit CAP even if the plan is currently under IRS audit.
T
What is the purpose of IRC 410(b) testing?
To prevent too strict eligibility requirements resulting in allowing only a small number of EE's to participate
T / F: A sponsoring organization must expect to have at least 30 employers adopting a basic plan document.
True.
What is the Average Benefits Test?
Two part test: 1. Nondiscriminatory classification test = looks at whether benefitting EE's is reasonable/nondiscriminatory group AND 2. Average benefit % test = compares average rate of benefits for HCEs to NHCEs to ensure rates of benefitting is reasonable/nondiscriminatory. Requires allocation of benefits to run test. Must pass BOTH.
