Retirement: 4 Fundamentals of 401k Plans

Question 1

Retirement 4-1: Basic characteristics of a 401(k) plan

A 401(k) plan must allow plan participation to any employee who

1. has completed one year of service and has worked a minimum of 1,000 hours during that period, and
2. is at least __ years old.
   a. 17
   b. 18
   c. 21

Answer 1

c. 21

Question 2

Retirement 4-1: Basic characteristics of a 401(k) plan

Matching contributions from employers (called 401(m) contributions); employers can match employee contributions in whole or in part. These matching contributions are tax deductible for the employer to the extent that they do not exceed certain limits (__% of participating employees’ payroll).

a. 5%
b. 20%
c. 25%

Answer 2

c. 25%

Question 3

Retirement 4-1: Basic characteristics of a 401(k) plan

Example. Uptick Financial Group Inc. established a 401(k) profit sharing plan and elected in the plan documents to make matching contributions equal to 50% of each participant’s 401(k) deferrals, up to 15% of compensation. Jeff, an Uptick employee, earns $60,000 annually and makes employee deferrals equal to 20% of his earnings. What is the total amount going into the plan for Jeff?

a. $15,500
b. $16,500
c. $17,500

Answer 3

b. $16,500

$60,000 Income
* 20% EE contribution election
= $12,000 EE contribution

$60,000 Income
* 15% 
= $9,000
* 50% 
= $4,500 Employer Match

$12,000 EE contribution
+ $4,500 Employer Match
= $16,500 total amount going into the plan

First, let’s look at the matching contribution. Uptick will make a total matching contribution of $4,500 ($60,000 × .15 = $9,000; this means that Uptick will match each dollar that Jeff contributes up to $9,000 with 50
cents). The first $9,000 that Jeff contributes will then be matched with $4,500. The additional $3,000 that Jeff contributes will not be matched. So the total contributed to the plan for Jeff for the year would be $16,500: $12,000 from Jeff and $4,500 from the employer.

Question 4

Retirement 4-1: Basic characteristics of a 401(k) plan

Example. Uptick Financial Group Inc. established a 401(k) profit sharing plan and elected in the plan documents to make matching contributions equal to 50% of each participant’s 401(k) deferrals, up to 15% of compensation. Jeff, an Uptick employee, earns $60,000 annually and makes employee deferrals equal to 5% of his earnings. What is the total amount going into the plan for Jeff?

a. $3,000
b. $4,500
c. $5,500

Answer 4

b. $4,500

5% of $60,000 would be $3,000, and Uptick would match 50 cents for each dollar, making the company match $1,500, for a total of $4,500 going into the plan for Jeff. Note that in this case Jeff is leaving “free money” on the table, as he is not taking full advantage of the match.

Question 5

Retirement 4–2: Minimum coverage rules for 401(k) plans

The percentage of eligible nonhighly compensated
employees benefiting from the plan must be at least 70% of the percentage of eligible highly compensated employees benefiting from the plan.

a. The ratio percentage test
b. Average benefits percentage test

Answer 5

a. The ratio percentage test

Question 6

Retirement 4–2: Minimum coverage rules for 401(k) plans

Both parts of this two-part test must be satisfied:

The plan must be nondiscriminatory and benefit a class of employees that reflects a reasonable business-related classification (the classification test).

The average benefit percentage for eligible non-highly compensated employees must be at least 70% of the average benefit percentage for eligible highly compensated employees

a. The ratio percentage test
b. Average benefits percentage test

Answer 6

b. Average benefits percentage test

Question 7

Retirement 4–2: Minimum coverage rules for 401(k) plans

If the ADP test for a plan year is not satisfied, the portion of the 401(k) plan attributable to elective contributions—or, most likely, the plan in its entirety— will no longer be qualified. Fortunately, plan administrators have several mechanisms for making corrections, and they can use one or more of them to bring the plan into compliance with the test:

They can distribute excess contributions and
allocable income. This would mean returning part of the contributions made by highly compensated employees (HCEs), thus bringing down the HCE’s percentage.

a. Corrective distributions
b. Recharacterization.
c. Qualified matching contributions (QMACs)
d. Qualified nonelective contributions (QNECs)

Answer 7

a. Corrective distributions

Question 8

Retirement 4–2: Minimum coverage rules for 401(k) plans

If the ADP test for a plan year is not satisfied, the portion of the 401(k) plan attributable to elective contributions—or, most likely, the plan in its entirety—
will no longer be qualified. Fortunately, plan administrators have several mechanisms for making corrections, and they can use one or more of them to
bring the plan into compliance with the test:

They can recharacterize excess contributions as
voluntary employee after-tax contributions, so HCEs would have part of their contribution treated as having been made after-tax rather than pretax. This would lower the ADP percentage for HCEs but would raise the ACP percentage for HCEs, making it more likely that the ACP test would fail.

a. Corrective distributions
b. Recharacterization.
c. Qualified matching contributions (QMACs)
d. Qualified nonelective contributions (QNECs)

Answer 8

b. Recharacterization.

Question 9

Retirement 4–2: Minimum coverage rules for 401(k) plans

If the ADP test for a plan year is not satisfied, the portion of the 401(k) plan attributable to elective contributions—or, most likely, the plan in its entirety—will no longer be qualified. Fortunately, plan administrators have several mechanisms for making corrections, and they can use one or more of them to bring the plan into compliance with the test:

They can make and treat qualified matching contributions for nonhighly compensated employees (NHCEs) as elective contributions for purposes of satisfying the ADP test. When combined with employee deferrals, this would raise the ADP percentage for NHCEs, which could then satisfy the ADP test.

a. Corrective distributions
b. Recharacterization.
c. Qualified matching contributions (QMACs)
d. Qualified nonelective contributions (QNECs)

Answer 9

c. Qualified matching contributions (QMACs)

Question 10

Retirement 4–2: Minimum coverage rules for 401(k) plans

If the ADP test for a plan year is not satisfied, the portion of the 401(k) plan attributable to elective contributions—or, most likely, the plan in its entirety—will no longer be qualified. Fortunately, plan administrators have several mechanisms for making corrections, and they can use one or more of them to bring the plan into compliance with the test:

They can make and treat qualified non-elective contributions for non-highly compensated employees as elective contributions for purposes of satisfying the ADP test. When combined with employee deferrals, this would raise the ADP percentage for NHCEs, which could then satisfy the ADP test.

a. Corrective distributions
b. Recharacterization.
c. Qualified matching contributions (QMACs)
d. Qualified nonelective contributions (QNECs)

Answer 10

d. Qualified nonelective contributions (QNECs)

Question 11

Retirement 4–2: Minimum coverage rules for 401(k) plans

Penalties for excess contributions. As we have discussed, a plan can run afoul of the ADP or ACP tests if it provides an “excess contribution” to HCEs, and corrective action needs to be taken. If the correction is not made within a time prescribed by the IRC, the employer is subjected to a penalty equal to __% of the excess contribution

a. 6%
b. 10%

Answer 11

b. 10%

Question 12

Retirement 4–2: Minimum coverage rules for 401(k) plans

Who is considered to be a highly compensated employee (HCE)? An HCE is any employee who:

Is a greater than 5% owner during the current or preceding year

Received compensation greater than $120,000 in 2015, which is the lookback year for 2016.

Alternatively, the employer may elect to classify only the top __% of all employees as HCE

a. 10%
b. 15%
c. 20%

Answer 12

c. 20%

Question 13

Retirement 4–2: Minimum coverage rules for 401(k) plans

What criteria is taken into account for the ADP and ACP tests?

It looks at the average deferral percentage of the HCEs and the NHCEs.

a. The ADP test
b. The ACP test

Answer 13

a. The ADP test is the “actual deferral percentage” test

Question 14

Retirement 4–2: Minimum coverage rules for 401(k) plans

What criteria is taken into account for the ADP and ACP tests?

It compares the percentage of employer matching contributions and employee after-tax contributions of the HCEs and the NHCEs.

a. The ADP test
b. The ACP test

Answer 14

b. The ACP test, the “actual contributions percentage” test.

It compares the percentage of employer matching contributions and employee after-tax contributions of the HCEs and the NHCEs.

Question 15

Retirement 4–2: Minimum coverage rules for 401(k) plans

What is the maximum vesting schedule, if any, for the following types of contributions?

100% vested at all times

a. employee elective deferrals, qualified employer matching contributions, employer qualified non-elective contributions
b. employer matching contributions (regular), employer discretionary contributions

Answer 15

a. employee elective deferrals, qualified employer matching contributions, employer qualified non-elective contributions

Question 16

Retirement 4–2: Minimum coverage rules for 401(k) plans

What is the maximum vesting schedule, if any, for the following types of contributions?

2- to 6-year graded or 3-year cliff

a. employee elective deferrals, qualified employer matching contributions, employer qualified non-elective contributions
b. employer matching contributions (regular), employer discretionary contributions

Answer 16

b. employer matching contributions (regular), employer discretionary contributions

Question 17

Retirement 4–2: Minimum coverage rules for 401(k) plans

A profit sharing 401(k) plan, or any defined contribution plan, becomes top heavy if more than __% of account balances are attributed to key employees.

a. 20%
b. 40%
c. 60%

Answer 17

c. 60%

A defined contribution plan is top heavy if more than 60% of account balances are attributed to key employees.

Question 18

Retirement 4–2: Minimum coverage rules for 401(k) plans

What minimum contribution amount must be made for NHCEs in a defined contribution plan?

There is a minimum contribution amount of _% required for NHCEs, unless the amount being contributed for the HCEs is less, then the amount contributed for the NHCEs must be the same.

a. 3%
b. 4%
c. 5%

Answer 18

a. 3%

If this occurs and 2% is being contributed for the HCEs, then 2% must be contributed for the NHCEs.

Question 19

Retirement 4–2: Minimum coverage rules for 401(k) plans

The ____ test is calculated the same way. It compares:

1. the percentage of employer matching contributions
2. nondeductible employee contributions (in other words, employee after-tax contributions) made by or on behalf of nonhighly compensated employees
   with the percentage of matching contributions and nondeductible employee contributions made by or on behalf of HCEs.

a. The ADP test
b. The ACP test

Answer 19

b. The ACP test: actual contribution percentage

Question 20

Retirement 4–2: Minimum coverage rules for 401(k) plans

The ____ test compares the deferral rates of non-highly compensated participants (NHCEs) with those of their highly compensated colleagues (HCEs). The actual deferral ratio of an eligible employee is calculated by dividing his or her elective contributions for the plan year by his or her compensation for the plan year.

a. The ADP test
b. The ACP test

Answer 20

a. The ADP test: actual deferral percentage

Question 21

Retirement 4–2: Minimum coverage rules for 401(k) plans

Example. Suppose an individual participates in a 401(k) plan that provides for matching employer contributions, does not allow employee after-tax contributions to be made, and requires an employee-participant to complete 1,000 hours of service to be eligible to receive an employer matching contribution. If this individual completes more than 500 hours of service during the plan year but fails to complete at least _____ hours, he or she won’t receive an employer matching employer contribution and will not be treated as benefiting from the matching feature of the plan.

a. 500
b. 750
c. 1,000

Answer 21

c. 1,000

Nevertheless, IRS rules require this individual to be counted for purposes of determining whether or not the plan’s IRC Section 401(m) feature satisfies the minimum coverage requirements. The plan’s 1,000
hour requirement could cause the plan to fail the IRC’s minimum coverage requirements.

Question 22

Retirement 4–2: Minimum coverage rules for 401(k) plans

Example. Mantra Enterprises has calculated the ADP test for its 401(k) plan and has come up with the following deferral percentages:

5% ADP for NHCEs

7.5% ADP for HCEs

Mantra has failed the test, and needs to take action to bring the plan into compliance. How could the following solution help?

Corrective distributions. Mantra could return some of the amounts contributed by the HCEs, and bring their ADP down to _%

a. 5%
b. 6%
c. 7%

Answer 22

c. 7% (reducing the spread between the HCEs and NHCEs to 2%).

Question 23

Retirement 4–2: Minimum coverage rules for 401(k) plans

Example. Mantra Enterprises has calculated the ADP test for its 401(k) plan and has come up with the following deferral percentages:

5% ADP for NHCEs

7.5% ADP for HCEs

Mantra has failed the test, and needs to take action to bring the plan into compliance. How could the following solution help?

Qualified matching contributions. Mantra could make qualifying matching contributions to NHCEs only, and bring the NHCE ADP up to __%. This would reduce the spread to the 2% minimum required. Note that only
NHCEs making deferrals would receive the match.

a. 5.5%
b. 6.5%
c. 7.5%

Answer 23

a. 5.5%

Question 24

Retirement 4–2: Minimum coverage rules for 401(k) plans

Penalties for excess contributions. As we have discussed, a plan can run afoul of the ADP or ACP tests if it provides an “excess contribution” to HCEs, and
corrective action needs to be taken. If the correction is not made within a time prescribed by the IRC, the employer is subjected to a penalty equal to __% of the
excess contribution.

a. 6%
b. 10%
c. 20%

Answer 24

b. 10%

The penalty on excess contributions does not apply to the extent such contributions and earnings on these contributions are distributed (or forfeited, in the case of nonvested amounts) within six months after the close of the plan year. If such amounts are distributed during this time period, the distribution shall be taxable to the participant for the year that the distribution is made.

Question 25

Retirement 4–3: Safe harbor 401(k) and QACAs

Safe harbor nonelective contribution. The safe harbor nonelective contribution requirement is satisfied if, under the terms of the plan, the employer is required to make a safe harbor nonelective contribution on behalf of each nonhighly compensated employee (NHCE) who is an “eligible employee.” Contributions must be equal to:

_% nonelective contribution for all eligible employees

and

all nonelective contributions must be 100% vested

a. 1%
b. 2%
c. 3%

Answer 25

c. 3%

If a safe harbor 401(k) plan provides a nonelective contribution, this contribution is not discretionary; it is required. Note that this 3% contribution goes to all
eligible employees, whether they are deferring into the plan or not.

Question 26

Retirement 4–3: Safe harbor 401(k) and QACAs

Safe harbor matching formulas. The safe harbor matching formula requirement is satisfied if, under the terms of the plan, matching contributions are made (as
described below) on behalf of each NHCE who is an eligible employee. A safe harbor matching contribution is not discretionary; it is required. This is typically
not the choice of employers, since they want to encourage participation in the plan. Most employers prefer to do some sort of matching contribution.

The matching formula must be in an amount equal to

100% match on the first 3% of compensation and a 50% match on amounts between 3% and 5% of the employee’s compensation,

or

100% match on the first _% of compensation, and
all matches must be 100% vested.

a. 2%
b. 3%
c. 4%

Answer 26

c. 4%

Question 27

Retirement 4–3: Safe harbor 401(k) and QACAs

Example. Laughlin Corporation’s 401(k) plan provides the following employer matching contributions: 100% of each employee’s elective contributions that do not exceed 3% of compensation, plus 50% of each
employee’s elective contribution between 3% and 5%. Therefore, the plan satisfies the basic matching formula and is deemed to satisfy the safe harbor test. John Johnson is eligible to be in the Laughlin 401(k) plan, and has deferred $2,000 during the year. His compensation during the year was $80,000.

How much is his match?

a. $2,000
b. $2,200
c. $3,200

Answer 27

a. $3,200

$80,000
* 3%
= $2,400

  $80,000
* 2%
= $2,400
* 50%
= $1,600

$2,400
+ $1,600
= $3,200

Question 28

Retirement 4–3: Safe harbor 401(k) and QACAs

Example. Laughlin Corporation’s 401(k) plan provides the following employer matching contributions: 100% of each employee’s elective contributions that do not exceed 3% of compensation, plus 50% of each
employee’s elective contribution between 3% and 5%. Therefore, the plan satisfies the basic matching formula and is deemed to satisfy the safe harbor test. John Johnson is eligible to be in the Laughlin 401(k) plan, and has deferred $2,000 during the year. His compensation during the year was $80,000.

How much is his match?

a. $2,000
b. $2,200
c. $3,200

Answer 28

a. $2,000

$80,000
* 3%
= $2,400

$2,400 > $2,000 contribution, so only $2,000 would be matched

Question 29

Retirement 4–3: Safe harbor 401(k) and QACAs

Example. Laughlin Corporation’s 401(k) plan provides the following employer matching contributions: 100% of each employee’s elective contributions that do not exceed 3% of compensation, plus 50% of each
employee’s elective contribution between 3% and 5%. Therefore, the plan satisfies the basic matching formula and is deemed to satisfy the safe harbor test. John Johnson is eligible to be in the Laughlin 401(k) plan, and has deferred $12,000 during the year. His compensation during the year was $80,000.

How much is his match?

a. $3,200
b. $4,200
c. $5,200

Answer 29

a. $3,200

$80,000
* 3%
= $2,400

$80,000
* 2%
= $1,600
*50%
= $1,600

$2,400
+ $1,600
= $3,200

Question 30

Retirement 4–3: Safe harbor 401(k) and QACAs

Example. Laughlin Corporation’s 401(k) plan provides the following employer matching contributions: 100% of each employee’s elective contributions that do not exceed 3% of compensation, plus 50% of each
employee’s elective contribution between 3% and 5%. Therefore, the plan satisfies the basic matching formula and is deemed to satisfy the safe harbor test. John Johnson is eligible to be in the Laughlin 401(k) plan, and has deferred $3,000 during the year. His compensation during the year was $80,000.

How much is his match?

a. $2,700
b. $3,700
c. $4,700

Answer 30

$80,000
* 3%
= $2,400

  $3000 
- $2,400
= $600
* 50%
= $300

$2,400
+ $300
= $2,700

Question 31

Retirement 4–3: Safe harbor 401(k) and QACAs

A feature of a tax-deferred retirement plan that preempts state law and permits an employer to automatically reduce an employee’s pay by a default percentage stated in the plan and contribute that amount to the employee’s plan account, unless the employee affirmatively chooses not to contribute or elects to contribute a different amount.

a. automatic contribution arrangement (ACA)
b. eligible automatic contributions arrangement (EACA)
c. qualified automatic contributions arrangement (QACA)

Answer 31

a. automatic contribution arrangement (ACA)

Automatic contribution arrangements may be used by retirement plans that permit employees to make elective deferral contributions (salary reduction contributions) such as

 traditional 401(k) plans,
 403(b) plans,
 457(b) plans maintained by a governmental employer,
 SARSEPs, and
 SIMPLE IRA and SIMPLE 401(k) plans

Question 32

Retirement 4–3: Safe harbor 401(k) and QACAs

A feature of a tax-deferred retirement plan that preempts state law and permits an employer to automatically reduce an employee’s pay by a default percentage stated in the plan and contribute that amount to the employee’s plan account, unless the employee affirmatively chooses not to contribute or elects to contribute a different amount, but includes a procedure for withdrawing all funds contributed to the 401(k) by the automatic deferral

a. automatic contribution arrangement (ACA)
b. eligible automatic contributions arrangement (EACA)
c. qualified automatic contributions arrangement (QACA)

Answer 32

b. eligible automatic contributions arrangement (EACA)

Question 33

Retirement 4–3: Safe harbor 401(k) and QACAs

Similar to the other two, but goes a step farther, and becomes a type of “safe harbor” plan and the top-heavy test will
not apply. May be used by 401(k) and 403(b) plans only.

a. automatic contribution arrangement (ACA)
b. eligible automatic contributions arrangement (EACA)
c. qualified automatic contributions arrangement (QACA)

Answer 33

c. qualified automatic contributions arrangement (QACA)

Question 34

Retirement 4–3: Safe harbor 401(k) and QACAs

A qualified automatic enrollment feature requires that, unless an employee elects
otherwise, the employee is treated as making an election to make elective
deferrals equal to the stated default percentage of compensation (default
percentage) of at least

 3% of compensation for the first year the deemed election applies to the participant,
 4% during the second year,
 5% during the third year, and
 6% during the fourth year and thereafter.

The stated percentage cannot exceed __% of compensation and must be applied
uniformly to all eligible employees

a. 6%
b. 8%
c. 10%

Answer 34

c. 10%

Question 35

Retirement 4-4: 401(k) Plan Types: Profit Sharing Plans

A profit sharing plan is a defined contribution qualified plan that features a provision for _____ employer contributions to the accounts of eligible
employees.

a. fixed
b. flexible

Answer 35

b. flexible

Question 36

Retirement 4-4: 401(k) Plan Types: Profit Sharing Plans

A stand-alone Roth-only 401(k) plan __ permitted

a. is
b. is not

Answer 36

A stand-alone Roth-only 401(k) plan is not permitted

Question 37

Retirement 4-4: 401(k) Plan Types: Profit Sharing Plans

Tax-free distributions from Roth 401(k) contribution accounts. As with all Roth accounts, qualified distributions from a Roth 401(k) account are tax free. Distributions are considered qualified when the Roth account owner is

 at least age 59½ or fully disabled, and

 the account has been open for at least five calendar years.

The five-year “clock” starts on _____ for which the contribution was made

a. the day
b. first day of the month
c. January 1 of the year

Answer 37

c. January 1

For example, if a contribution was made in December 2011, the clock would start on January 1, 2011. This would then mean that you could start taking qualified distributions on January 1, 2016, if you are over age 59½ or fully disabled. Roth 401(k)s and Roth 403(b)s each have their own separate clock, meaning if you establish another Roth 401(k) with another company it will start its own clock as of January 1 for the first year that a contribution is made. So if there are different accounts, there are different clocks running.

Question 38

Retirement 4-4: 401(k) Plan Types: Profit Sharing Plans

If a participant has had a Roth IRA for more than five years, then by moving the Roth 401(k) over to the traditional Roth IRA the five-year requirement _____ been met.

a. has
b. has not

Answer 38

a. has, regardless of how long the Roth 401(k) has been opened.

Question 39

Retirement 4-4: 401(k) Plan Types: Profit Sharing Plans

If a participant has had the Roth 401(k) opened for years, and then establishes a new Roth IRA for rollover purposes, the five-year clock for the Roth IRA

a. does not need to be restarted
b. will start as of January 1st of the year of the rollover and it will not matter how long the Roth 401(k) has been opened.

Answer 39

b. will start as of January 1st of the year of the rollover and it will not matter how long the Roth 401(k) has been opened.

This holding period requirement applies to a participant or his or her beneficiary. For example, if the Roth account owner died after three years, then the beneficiary would
have to wait an additional two years to meet the five-year holding requirement.

Question 40

Retirement 4-4: 401(k) Plan Types: Profit Sharing Plans

Amounts held in a Roth 401(k) account ____ subject to federal estate taxes.

a. are
b. are not

Answer 40

a. are

Question 41

Retirement 4-5: SIMPLE 401(k)s

SIMPLE 401(k)s provide _____ employers with a plan that had the attractive features of the traditional 401(k) plan used by large firms, but without the administrative complexities. For example, a SIMPLE 401(k) is not subject to the ADP and ACP tests, or to top-heavy testing. The acronym SIMPLE stands for Savings Incentive Match Plan for Employees.

a. small
b. not for profit

Answer 41

a. small

Question 42

Retirement 4-5: SIMPLE 401(k)s and Others

SIMPLE 401(k)s provide _____ employers with a plan that had the attractive features of the traditional 401(k) plan used by large firms, but without the administrative complexities. For example, a SIMPLE 401(k) is not subject to the ADP and ACP tests, or to top-heavy testing. The acronym SIMPLE stands for Savings Incentive Match Plan for Employees.

a. small
b. not for profit

Answer 42

a. small

Question 43

Retirement 4-5: SIMPLE 401(k)s and Others

The Internal Revenue Code limits the level of pretax contributions to all SIMPLEs (whether 401(k) or IRA) to a maximum of _____ per year in 2016 (indexed for inflation).

a. $12,500
b. $18,000
c. $25,000

Answer 43

a. $12,500

Question 44

Retirement 4-5: SIMPLE 401(k)s and Others

An individual who is at least age 50 by the end of the plan or calendar year may make an additional elective deferral (“catch-up contribution”) of up to $_____ for 2016.

a. $3,000
b. $5,000
c. $6,000

Answer 44

a. $3,000

Question 45

Retirement 4-5: SIMPLE 401(k)s and Others

Part of what makes a SIMPLE plan “simple” is the limited choices for the employer
as far as contributions are concerned. The employer is required to do one of the
following:

 100% match of the first 3% of compensation or

 Nonelective contribution of _% on behalf of all participants

a. 1%
b. 2%
c. 3%

Answer 45

b. 2%

The matching contribution would apply only to employees who are making deferrals,
whereas the nonelective contribution would be done on behalf of all eligible
employees, regardless of whether they contributed or not.

Question 46

Retirement 4-5: SIMPLE 401(k)s and Others

$265,000 limit on includible compensation will apply, meaning the company can only match up to $265,000, so the maximum potential match would be

a. $6,950
b. $7,950
c. $8,950

Answer 46

b. $7,950 ($265,000 × .03).

Question 47

Retirement 4-5: SIMPLE 401(k)s and Others

SARSEPs are permitted only if they were established prior to 1997 by for-profit
businesses that meet these conditions:

 Twenty-five or fewer employees were eligible to participate during the prior
year.
 At least __% of eligible employees choose to have amounts contributed to
the SARSEP.

a. 40%
b. 50%
c. 60%

Answer 47

b. 50%

Question 48

Retirement 4-6: 401k Investments

Information furnished to participants about their diversification rights must include an explanation of the importance of a well-balanced and diversified investment portfolio, including a statement of the risk that holding more than __% of a portfolio in the security of one entity (such as employer securities) may not be adequately diversified.

a. 10%
b. 20%
c. 30%

Answer 48

b. 20%

Question 49

Retirement 4-7: Distributions from 401(k) Plans

A 401(k) plan sponsor _____ have to offer participants the ability to borrow against their 401(k)

a. does
b. does not

Answer 49

b. does not

Question 50

Retirement 4-7: Distributions from 401(k) Plans

If the account balance is under $_____, the employer can “cash out” the account
and send a check to the former employee without any instructions or permission
from the former employee.

a. $500
b. $1,000
c. $2,000

Answer 50

b. $1,000

Question 51

Retirement 4-1)

Module Check

1. Which one of the following is not correct about qualified plan limits for profit sharing 401(k) plans?

The retirement benefit is not certain; investment risk is borne by the participant.

Includible compensation is limited to the lesser of 100% of compensation or $210,000 in 2016.

The employer contribution limit is 25% of compensation.

The maximum allowable employee deferral amount is $18,000, not counting any catch-ups, in 2016.

Answer 51

Includible compensation is limited to the lesser of 100% of compensation or $210,000 in 2016.

The maximum amount of includible compensation is $265,000, not $210,000.

Question 52

Retirement 4-1)

Module Check

2. Which one of the following statements incorrectly describes components of defined contribution plans in 2016?

The overall annual employee limit, including both employee and employer contributions, is $53,000 or 100% of compensation, whichever is less.

The maximum age 50 catch-up deferral amount for 2016 is $6,000.

Compensation that may be considered in the calculations is limited to $265,000 this year.

All profit sharing plans are also 401(k) plans.

Answer 52

All profit sharing plans are also 401(k) plans.

Profit sharing plans are traditionally funded by the employer. Section 401(k) of the IRC allows for profit sharing plans to offer pretax employee deferrals, but it is not mandatory. There are still profit sharing plans that are entirely funded by the employer, and that do not offer 401(k) provisions.

Question 53

Retirement 4-1)

Module Check

3. Which one of the following statements correctly describes the term “elective deferral”?

the ratio of non-highly compensated employees’ benefits to highly compensated employees’ average compensation

the dollar amount of forfeitures being allocated to a 401(k) plan participant

the dollar amount contributed by the employer into a 401(k) plan

the dollar amount contributed by an employee into a 401(k) plan

Answer 53

the dollar amount contributed by an employee into a 401(k) plan

“Elective deferral” is the dollar amount that the employee defers into the 401(k) plan.

Question 54

Retirement 4-2)

Module Check

4. Which one of the following would classify an employee as being highly compensated?

5% or less owner

greater than 5% owner

10% or less owner

greater than 10% owner

Answer 54

A greater than 5% owner is considered to be both a highly compensated employee and a key employee.

Question 55

Retirement 4-1)

Module Check

5. All of the following may be included under the IRS’s definition of compensation as it applies to defined contribution plans except

investment income.

salaries.

fees for professional services.

salary reduction contributions.

Answer 55

investment income.

Investment income is not considered compensation.

Question 56

Retirement 4-1)

Module Check

6. All of the following affect the ultimate retirement benefit in a defined contribution plan except

investment earnings on the plan’s assets.

the participants deferral amount.

the participant’s years in the plan.

the plan’s formula.

Answer 56

the plan’s formula.

Defined benefit plans, not defined contributions plans, have a plan formula that determines a participant’s retirement benefit.

Question 57

Retirement 4-2)

Module Check

7. Which of the following employer contributions must be 100% vested at all times?

Employer qualified matching contributions (QMACs) and qualified nonelective contributions (QNECs) must be 100% vested at all times.

Any employer-matching contribution taken into account in determining whether the requirements for a qualified automatic enrollment feature are satisfied must be 100% vested at all times.

Discretionary matching and nonelective employer profit sharing contributions must be 100% vested at all times.

Answer 57

Employer qualified matching contributions (QMACs) and qualified nonelective contributions (QNECs) must be 100% vested at all times.

QMACs and QNECs enable a 401(k) plan to pass discrimination testing, and must be 100% vested.

Question 58

Retirement 4-2)

Module Check

8. In 2016, if an employer so elects, they only have to count

the top 20% of employees with compensation greater than $120,000 (in 2015) as highly compensated employees.

the top 20% of employees with compensation greater than $170,000 (in 2016) as highly compensated employees.

any employee who was a more-than-10% owner at any time during the current or preceding year.

Answer 58

the top 20% of employees with compensation greater than $120,000 (in 2015) as highly compensated employees.

An employer can pass discrimination tests by only having to count the top 20%. $120,000 is the applicable amount for 2015, the lookback year for 2016.

Question 59

Retirement 4-2)

Module Check

9. The ratio percentage test and average benefits percentage test

both look at key versus non-key employees to determine if a company passes the tests.

both look at highly compensated employees (HCEs) versus nonhighly compensated employees (NHCEs) to determine if a company passes the tests.

are similar, but the ratio percentage test looks at key versus non-key employees to determine if a company passes and the average benefits percentage test looks at highly compensated employees (HCEs) versus nonhighly compensated employees (NHCEs) to determine if a company passes the tests.

Answer 59

both look at highly compensated employees (HCEs) versus nonhighly compensated employees (NHCEs) to determine if a company passes the tests.

The ratio percentage and average benefits tests use highly compensated employees (HCEs), not key employees.

Question 60

Retirement 4-2)

Module Check

10. Ace Industries has 10 highly compensated employees, and 9 of them participate in the plan. If 30 of the 40 nonhighly compensated employees participate, the plan

passes.

fails. The plan would need at least 36, or 90% of, nonhighly compensated employees to participate to pass.
fails. To pass, the plan would need each nonhighly compensated employee to participate.

Answer 60

passes.

If 90% of the HCEs participate (9/10), then at least 63% of the NHCEs must participate (70% of 90%, or .90 x .70 = .63). If 30 of the 40 NHCEs participate, that means 75% of the NHCEs are participating (30/40 = .75), which is more than the 63% requirement.

Question 61

Retirement 4-2)

Module Check

11. The ADP test looks at the

amount of employer contributions.

employee deferrals (actual deferral percentage).

amount of employee after-tax contributions.

Answer 61

employee deferrals (actual deferral percentage).

The ADP test looks at employee deferrals (actual deferral percentage).

Question 62

Retirement 4-2)

Module Check

12. If the ADP for nonhighly compensated employees is 9%, then the maximum deferral percentage for highly compensated employees is

11%.

11.25%.

18%.

Answer 62

11.25%.

Starting at 9% (and higher), the allowable spread between NHCEs and HCEs is 1.25 (125%).

Question 63

Retirement 4-2)

Module Check

13. The maximum vesting schedule for defined contribution plans, which includes profit sharing plans, is

either 2- to 6-year graded or 4-year cliff.

either 2- to 6-year graded or 3-year cliff.

either 3- to 7-year graded or 5-year cliff.

Answer 63

either 2- to 6-year graded or 3-year cliff.

The maximum vesting schedule is either 2- to 6- year graded or 3-year cliff.

Question 64

Retirement 4-2)

Module Check

14. If a 401(k) profit sharing plan is top heavy, and the employer is contributing 5% for HCEs, then the employer must contribute at least

2% for the NHCEs.

3% for the NHCEs.

5% for the NHCEs.

Answer 64

3% for the NHCEs.

If a defined contribution plan, which includes profit sharing plans, is top heavy then a minimum contribution of 3% must be made for the NHCEs. The only exception would be if a lower amount (such as 2%) were being contributed for the HCEs, then an equal amount (in this case also 2%) would need to be contributed on behalf of the NHCEs.

Question 65

Retirement 4-2)

Module Check

15. A defined contribution plan is considered top heavy if more than 60% of the account balances are attributed to

key employees.

highly compensated employees.

employees that are more-than-10% owners.

Answer 65

key employees.

A defined contribution plan is considered top heavy if more than 60% of the account balances are attributed to key employees.

Question 66

Retirement 4-2)

Module Check

16. Viva Industries has just learned that their profit sharing 401(k) plan has failed the ADP test. All of the following could bring the plan into compliance except

discretionary contribution.

corrective distribution.

qualified matching contribution.

qualified non-elective contribution.

Answer 66

discretionary contribution.

A discretionary contribution is an employer contribution and would not affect the employee deferral calculation and would not help bring the plan into compliance. However, if a qualified matching or qualified nonelective contribution is made, then even though the employer is making the contribution it is counted as if the nonhighly compensated employees are making the contribution. This raises the ADP for the NHCEs, and can bring the plan into compliance. A corrective distribution, where money is returned to HCEs, can also bring the plan into compliance.

Question 67

Retirement 4-2)

Module Check

17. One of the criteria used to determine if an employee is a key employee is if they are a

greater-than-1% owner with annual compensation greater than $150,000.

greater-than-10% owner.

an officer of the company with annual compensation greater than $165,000 (2016).

Answer 67

greater-than-1% owner with annual compensation greater than $150,000.

One of the criteria used to determine if an employee is a key employee is if they are a greater-than-1% owner with annual compensation greater than $150,000. The other two criteria that make one a key employee would be a greater-than-5% owner, or an officer of the company with annual compensation greater than $170,000 (2016).

Question 68

Retirement 4-3)

Module Check

18. Which one of the following statements is correct regarding a safe harbor 401(k) plan?

A major advantage of a safe harbor 401(k) plan is that the employer does not need to do either the ADP or ACP testing, but the employer is still subject to the top-heavy rules.

A safe harbor 401(k) plan is deemed to have met both the ADP and ACP tests, and in addition it is not subject to the top-heavy rules.

A safe harbor 401(k) plan is not subject to the top-heavy rules, but must meet either the ADP or ACP test.

Answer 68

A safe harbor 401(k) plan is deemed to have met both the ADP and ACP tests, and in addition it is not subject to the top-heavy rules.

Question 69

Retirement 4-3)

Module Check

19. With a safe harbor 401(k) plan, the employer must provide a

50% match of the first 3% of compensation, and a 100% match on the next 2% of compensation; or a 100% match on the first 6% of compensation.

75% match of the first 3% of compensation, and a 50% match on the next 2% of compensation; or a 100% match on the first 6% of compensation.

100% match of the first 3% of compensation, and a 50% match on the next 2% of compensation; or a 100% match on the first 4% of compensation.

Answer 69

100% match of the first 3% of compensation, and a 50% match on the next 2% of compensation; or a 100% match on the first 4% of compensation.

With a safe harbor 401(k) plan, the employer must provide a 100% match of the first 3% of compensation, and a 50% match on the next 2% of compensation; or a 100% match on the first 4% of compensation.

Question 70

Retirement 4-3)

Module Check

20. Which one of the following statements is correct regarding a safe harbor 401(k) plan?

Safe harbor 401(k) plan employer contributions are subject to accelerated vesting.

Safe harbor 401(k) employer contributions must be immediately 100% vested, there is no vesting schedule allowed.

Safe harbor 401(k) employee contributions must be immediately 100% vested, but employer contributions may be subject to a two-year gradual or cliff vesting schedule.

Answer 70

Safe harbor 401(k) employer contributions must be immediately 100% vested, there is no vesting schedule allowed.

Safe harbor 401(k) employer contributions must be immediately 100% vested; there is no vesting schedule allowed.

Question 71

Retirement 4-3)

Module Check

21. Which one of the following statements is correct regarding automatic contribution arrangements?

Qualified automatic contribution arrangements were established in order to make contributing to a 401(k) plan mandatory.

With the automatic contribution arrangements a certain amount will be contributed on behalf of the employee automatically, the idea being that if contributions get started then hopefully the employee won’t miss the amount and will continue to save.

Participants who leave before their salary deferrals are fully vested help to reduce the administrative cost for the employer and participants that stay.

Answer 71

With the automatic contribution arrangements a certain amount will be contributed on behalf of the employee automatically, the idea being that if contributions get started then hopefully the employee won’t miss the amount and will continue to save.

Contributions are not mandatory; one can always change the contribution amount or opt out. The difference is in the approach. Traditionally, employees have had to “opt in” to a plan, and proactively determine and make a contribution. With the automatic contribution arrangements a certain amount will be contributed on behalf of the employee automatically, the idea being that if contributions get started then hopefully the employee won’t miss the amount and will continue to save.

Question 72

Retirement 4-4)

Module Check

22. Which one of the following is a correct statement about a solo 401(k) plan?

A solo 401(k) enables the unincorporated business to contribute up to 20% into the plan for the owner, and the owner can also personally defer up to $12,500 (plus an additional $3,000 if age 50 or older).

A solo 401(k) enables the sole proprietor to contribute up to 25% into the plan as the business contribution, and the owner can also personally defer up to $18,000 (plus an additional $6,000 if age 50 or older).

A solo 401(k) enables the unincorporated business to contribute up to 20% into the plan for the owner, and the owner can also personally defer up to $18,000 (plus an additional $6,000 if age 50 or older).

Answer 72

A solo 401(k) enables the unincorporated business to contribute up to 20% into the plan for the owner, and the owner can also personally defer up to $18,000 (plus an additional $6,000 if age 50 or older).

A solo 401(k) enables the unincorporated business to contribute up to 20% into the plan for the owner, and the owner can also personally defer up to $18,000 (plus an additional $6,000 if age 50 or older). This is a big advantage of solo 401(k)s, the ability to have both the business and owner contribute to the plan.

Question 73

Retirement 4-4)

Module Check

23. Which one of the following is a correct statement regarding an employee with both 401(k) and Roth 401(k) plan?

An employee can contribute $18,000 each to a 401(k) plan and to a Roth 401(k) plan.

An employee has to aggregate and the maximum employee deferral between both plans is $18,000.

As with a Roth IRA, a Roth 401(k) is not subject to the required beginning date for distributions.

Answer 73

An employee has to aggregate and the maximum employee deferral between both plans is $18,000.

One has to aggregate and the maximum employee deferral between both plans is $18,000.

Question 74

Retirement 4-5)

Module Check

24. Which one of the following is correct regarding a SIMPLE 401(k) plan?

The maximum employee deferral (not including catch-up contributions) to a SIMPLE 401(k) plan is $15,000.

An employer may elect to make non-elective contributions of 2% of compensation for each employee that makes a salary deferral into a SIMPLE 401(k) plan.

The maximum employee deferral to a SIMPLE (whether 401(k) or IRA) in 2016 is $12,500; $2,500 is the catch-up amount for a total of $15,000.

Answer 74

An employer may elect to make nonelective contributions of 2% of compensation for each employee that makes a salary deferral into a SIMPLE 401(k) plan.

The maximum employee deferral to a SIMPLE (whether 401(k) or IRA) in 2016 is $12,500; $3,000 is the catch-up amount for a total of $15,500. An employer may elect to make nonelective contributions of 2% of compensation for each employee who is eligible to participate in a SIMPLE 401(k) plan. The employer may make this contribution in lieu of a matching contribution. However, an employer that chooses to make nonelective contributions must make contributions on behalf of all plan participants, including participants who fail to make elective contributions (i.e., salary reduction contributions).

Question 75

Retirement 4-5)

Module Check

25. Which one of the following is correct about a SIMPLE 401(k)?

With a SIMPLE 401(k) plan the employer must make either a 100% match on the first 3% of compensation, or a 2% nonelective contribution for all participants.

If an employer makes a matching contribution of 3% of compensation to either a SIMPLE IRA or SIMPLE 401(k) plan, the annual compensation limit ($265,000 in 2016) does not apply.

With adequate notice, an employer can reduce the matching contribution in a SIMPLE 401(k) to 1%. The reduction cannot be made more than two years out of the five-year period that ends with (and includes) the year for which the election is effective.

Answer 75

With a SIMPLE 401(k) plan the employer must make either a 100% match on the first 3% of compensation, or a 2% nonelective contribution for all participants.

Question 76

Retirement 4-6)

Module Check

26. Which of the following represents action in accordance with Department of Labor regulations that an employer can take to prevent being potentially liable for employee losses in the company 401(k) plan?

Participants must be permitted to choose from a broad range of investment alternatives with different risk and return characteristics. At least three pooled or core funds must be made available.

Employers may choose from investments approved by the Department of ERISA that are considered appropriate risk and return by the investment panel in the Department of ERISA.

Participants can exercise control over the assets in their accounts. Among other things, control implies that participants are able to obtain enough information to make informed investment decisions.

Answer 76

Participants must be permitted to choose from a broad range of investment alternatives with different risk and return characteristics. At least three pooled or core funds must be made available.

One of the DOL requirements is that participants must be permitted to choose from a broad range of investment alternatives with different risk and return characteristics. At least three pooled or core funds must be made available.

Question 77

Retirement 4-6)

Module Check

27. The Pension Protection Act of 2006 (PPA) requires 401(k) plans that are maintained by publicly traded companies to comply with which of the following new investment and diversification rules?

Participants must be permitted to direct at least 66% of after-tax plan contributions and 401(k) elective plan deferrals invested in employer securities be reinvested in suitable alternative investments.

Participants who have at least three years of service (based on the vesting schedule imposed by the plan) must be permitted to direct 66% of their account balances attributable to employer contributions made in plan years after 2006 that are invested in employer securities (i.e., certain contributions other than after-tax plan contributions and elective plan deferrals) be reinvested in suitable alternative investments.

Plan administrators of 401(k) plans subject to ERISA Section 204(j) must provide participants with a notice describing their rights under this law (and IRC Section 401(a)(35)) and the importance of diversifying assets held in their plans, and the notice must direct participants and beneficiaries to the Department of ERISA website at www.erisa.gov/ebsa/investing.html for sources of information on individual investing and diversification.

Plan administrators of 401(k) plans subject to ERISA Section 204(j) must provide participants with a notice describing their rights under this law (and IRC Section 401(a)(35)) and the importance of diversifying assets held in their plans, and the information furnished to participants about their ERISA Section 204(j) diversification rights must include an explanation of the importance of a well-balanced and diversified investment portfolio.

Answer 77

Plan administrators of 401(k) plans subject to ERISA Section 204(j) must provide participants with a notice describing their rights under this law (and IRC Section 401(a)(35)) and the importance of diversifying assets held in their plans, and the information furnished to participants about their ERISA Section 204(j) diversification rights must include an explanation of the importance of a well-balanced and diversified investment portfolio.

Plan administrators of 401(k) plans subject to ERISA Section 204(j) must provide participants with a notice describing their rights under this law (and IRC Section 401(a)(35)) and the importance of diversifying assets held in their plans, and the information furnished to participants about their ERISA Section 204(j) diversification rights must include an explanation of the importance of a well-balanced and diversified investment portfolio.

Question 78

Retirement 4-6)

Module Check

28. Which one of the following fund options could be offered under qualified default investment alternatives for 401(k) plans?

Target retirement funds are an appropriate qualified default investment for 401(k) plans, but life-cycle funds are not.

Life-cycle funds are an appropriate qualified default investment for 401(k) plans, but balanced funds are not.

Professionally managed funds could be offered under qualified default investment alternatives for 401(k) plans, but fiduciaries must consider investment fees and expenses when choosing a qualified investment alternative.

Answer 78

Professionally managed funds could be offered under qualified default investment alternatives for 401(k) plans, but fiduciaries must consider investment fees and expenses when choosing a qualified investment alternative.

Question 79

Retirement 4-7)

Module Check

29. Which one of the following is a correct statement regarding 401(k) plan loan provisions?

Employers are required to offer employees the ability to take out loans and/or take a hardship withdrawal from their profit sharing 401(k) plan.

If an employee with an outstanding loan leaves the company prior to the loan being repaid, the loan must be repaid within five years of termination of employment.

If a participant has a vested benefit of $15,000, the participant could be eligible to borrow $10,000.

Answer 79

If a participant has a vested benefit of $15,000, the participant could be eligible to borrow $10,000.

Normally loans cannot exceed 50% of the participant’s vested benefit. Also, $50,000 is the maximum amount that can be borrowed. However, plans can allow loans up to $10,000 without regard to the 50% restriction.

Question 80

Retirement 4-7)

Module Check

30. If a company allows hardship withdrawals, which of the following statements is correct regarding hardship withdrawals from a 401(k) plan?

Hardship withdrawals can be made from elective deferral amounts only, not from employer contributions or earnings.

The maximum amount distributable in connection with a hardship distribution includes elective deferral amounts, earnings, QNECs, or QMACs credited to the employee’s account after July 31, 1989.

Hardship distributions are eligible rollover distributions, and are therefore subject to the automatic 20% income tax withholding rules. Participants may not elect out of withholding on hardship distributions.

Answer 80

Hardship withdrawals can be made from elective deferral amounts only, not from employer contributions or earnings.

Hardship withdrawals are only available from elective deferral amounts.