Exam Questions Flashcards

Question

Based on the following information, determine the minimum number of NHCEs who must benefit under the plan in order to satisfy the ratio percentage test under IRC §410(b): * XYZ Company has 2 Divisions, M and N, and wants to establish a profit sharing plan covering only employees of Division M. * All HCEs at Division M will benefit under the plan. * No employees work for both Division M and Division N. * The employees in the table are nonexcludable. Division M Division N HCE 20 40 NHCE 50 80 A. 12 B. 29 C. 31 D. 35 E. 49

Answer 1

C - The ratio percentage is satisfied if the NHCE ratio divided by the HCE ratio is at least 70%. The NHCE ratio is the number of NHCEs benefiting (x) / the total number of NHCEs (130). The HCE ratio is the number of HCEs benefiting (20) / the total number of HCEs (60). (x / 130) / (20 / 60) \>= .7. X \>= 30.33, X = 31. (Syllabus Topic 6)

Answer 2

C - Participant B is not eligible for an allocation. The remaining compensation totals $259,000 ($180,000 + $30,000 + $25,000 + $24,000). The allocation to Participant D is $4,000/$259,000\*$25,000 = $386 (Syllabus Topic 9)

Answer 3

C - An eligibility computation period is the period during which an employee’s hours are examined to determine whether a year of service has been completed. The eligibility computation period must be a period of 12 consecutive months. (Syllabus Topic 3)

Answer 4

D - The plan may use different definitions of compensation for different plan purposes (e.g., matching allocations and profit sharing allocations). (Syllabus Topic 7)

Answer 5

D - All employees are age 21 in 2009. Employee C has not had one year of service (only worked 750 hours) so the remaining three employees have satisfied the eligibility conditions. (Syllabus Topic 3)

Answer 6

C - The extended deadline for a sole proprietor is October 15 for a calendar year filer. (Syllabus Topic 8)

Answer 7

C - The remedial amendment period is a period of time when a plan document language may not yet conform to new qualification rules. Remedial amendment periods do apply when a new plan is adopted or amended. (Syllabus Topic 10)

Answer 8

E - An employee is considered an HCE if they satisfy either the ownership test or the compensation test - the employee need not satisfy both. (Syllabus Topic 4)

Answer 9

D - The ratio percentage is the NHCE ratio (80 / 90) / the HCE ratio (9 / 9) = 88.89%. (Syllabus Topic 6)

Answer 10

D - The ratio percentage is the NHCE ratio / the HCE ratio. (Syllabus Topic 6)

Answer 11

B - The IRC §401(a)(17) limit is $245,000. The money purchase allocation is 15% of compensation, or $245,000 \* .15 = $36,750. (Syllabus Topic 7)

Answer 12

B - Actuarial certifications are not required for defined contribution plans, only defined benefit plans. The employee bears the risk of investment gains/losses in a defined contribution plan. (Syllabus Topic 2)

Answer 13

D - Participant A has 5 years of vesting service (2004, 2005, 2006, 2007 and 2008). This translates to 80% vesting, applicable to matching and nonelective sources. The vested balance is $1,750 + $525 \*.8 + $3,250 \* .8 + $450 + $5,750 = $10,970. (Syllabus Topic 9)

Answer 14

B - Nondeductible contributions may not be withdrawn from the plan in order to avoid the 10% excise tax. (Syllabus Topic 8)

Answer 15

A - Under the elapsed time method, hours of service are not counted, and there are no eligibility computation periods to measure. Because an employee can attain a year of service regardless of the number of hours of service, it is ineffective if the employer wants to exclude part-time or seasonal employees. (Syllabus Topic 3)

Answer 16

C -Generally, a partial plan termination occurs either by plan amendment (including one that affects the rights to vest in benefits), discontinuance of employer contributions or by involuntary termination of employment. It is a facts and circumstances determination, but a change in plan type (e.g., a money purchase to a profit sharing) does not usually result in a partial plan termination. (Syllabus Topic 10)

Answer 17

B - An ERISA §204(h) notice is due no less than 15 days before the effective date of the amendment for a small plan filer. It is required for all applicable individuals (defined as each participant whose future rate of accrual is reasonably expected to be significantly reduced.) (Syllabus Topic 10)

Answer 18

D - The minimum top-heavy allocation required is the highest rate allocated to a key employee (2%) times total plan year compensation ($40,000) or $40,000 \* .02 = $800. (Syllabus Topic 5)

Answer 19

C - An employee is an HCE in 2009 if they are a more than 5% owner in 2008 or 2009, or if they earn more than $105,000 in 2008. Employees A, B and D satisfy the ownership requirements and Employee C satisfies the compensation requirement. Note, while Employee B is not a direct owner, they are attributed ownership due to the fact they are married to Employee A. (Syllabus Topic 4)

Answer 20

B - A revenue procedure is not a type of plan document. (Syllabus Topic 1)

Answer 21

E - Deductible contribution deadlines are based on the filing of the entities’ tax return, not the plan’s tax filing (Form 5500). (Syllabus Topic 8)

Answer 22

D - Eligible compensation is $245,000 + $200,000 + $100,000 + $50,000 = $595,000. The deductible limit is 25% of eligible compensation or $595,000 \* .25 = $148,750. (Syllabus Topic 8)

Answer 23

C - SAS 70 reports are not required of service organizations, but they are an effective way to distribute the cost of plan audits and can be marketed as a value-added service for clients. (Syllabus Topic 11)

Answer 24

E - All of these types of amendments may result in a participant no longer being eligible to participate. Even if an employee has met the age and service requirements for participation, and is a participant, a future amendment to change these conditions could result in that employee no longer being eligible to participate. (Syllabus Topic 3)

Answer 25

A - There is one six-year cycle for preapproved plans that is not based on the plan sponsor’s EIN. The five-year cycle based on the plan sponsor’s EIN is only applicable to individually designed plans. (Syllabus Topic 10)

Answer 26

E - All of these employees are considered participants for Form 5500 reporting purposes. (Syllabus Topic 11)

Answer 27

D - Plan assets are not reported on Schedule C. (Syllabus Topic 11)

Answer 28

C - The ratio percentage is the NHCE ratio (2 / 3) / the HCE ratio (2 / 2) = 67%. NHCEs C and D are the two employees in the coverage group who are benefiting, NHCE E is excludable (terminated with fewer than 500 hours and not benefiting) and NHCE F is includable but not benefiting. (Syllabus Topic 6)

Answer 29

E - All three statements regarding Audit CAP are true. (Syllabus Topic 1)

Answer 30

D - The filing deadline for Form 5500 is 7 months following the end of the plan year (January 31, 2010) plus 2 ½ months if on extension (April 15, 2010). (Syllabus Topic 11)

Answer 31

C - A top-heavy allocation does not fail to be uniform merely because the top-heavy allocation is available only to non-key employees. Top-heavy formulas qualify for an exception from uniformity requirements if the plan is able to pass coverage under IRC §410(b) by treating an employee as not benefiting if his allocation is determined solely with reference to the top-heavy formula. (Syllabus Topic 7)

Answer 32

E - The annual additions limit is one of the few limits that is based on the dollar limit in effect at the end of the plan year instead of the beginning. (Syllabus Topic 7)

Answer 33

E - The right to direct investments, participant loans, investing in employer securities, making elective deferrals and hardship withdrawals are not protected benefits and thus may be eliminated prospectively. (Syllabus Topic 10)

Answer 34

E - Plan amendments changing eligibility requirements often grandfather in existing participants, but it is not a requirement to do so. (Syllabus Topic 3)

Answer 35

D - Form 5500 is due 7 months following the end of the plan year (April 30 (not April 15) for a plan year ending September 30 and May 31 for a plan year ending October 31) and if on extension 9½ months following the end of the plan year (September 15 for a plan year ending November 30). (Syllabus Topic 11)

Answer 36

D - When making the top paid group election, employees who are not HCEs because of this determination are included in the testing as NHCEs. (Syllabus Topic 4)

Answer 37

C - A plan may not require more than 1000 hours in a plan year to receive a profit sharing allocation. (Syllabus Topic 7)

Answer 38

E - All of these assets are qualifying assets when considering the small plan audit exemption requirements. (Syllabus Topic 11)

Answer 39

D - There is no requirement to display the ASPPA Code of Professional Conduct in your office, or elsewhere. (Syllabus Topic 12)

Answer 40

D - The statutory plan entry date is the earlier of the first day of the plan year beginning after OR six months following the date the employee satisfies the age/service requirements. The first day of the plan year following will not satisfy the requirements because it could be more than six months following the date the employee satisfied the eligibility requirements. (Syllabus Topic 3)

Answer 41

A - Interested parties for IRS determination letter submissions are present employees who are eligible to participate in the plan and present employees employed at the place of business for those eligible to participate. Terminated employees are not considered interested parties for this purpose. (Syllabus Topic 1)

Answer 42

C - A master/prototype plan consists of a basic plan document and an adoption agreement. (Syllabus Topic 1)

Answer 43

E - All of the statements regarding excess annual additions under IRC §415 are true. (Syllabus Topic 7)

Answer 44

A - A plan is not required to provide for full vesting upon the total disability of a participant, although most plans do. (Syllabus Topic 9)

Answer 45

B - Compensation is not considered when applying the ownership test. An employee’s compensation in the current plan year is not considered when determining HCE status. Only prior year compensation is considered. (Syllabus Topic 4)

Answer 46

E - All of the statements regarding excess fidelity bonds are true. Every person who handles plan funds must be bonded by a fidelity bond. It is permissible to use plan assets to purchase a fidelity bond. The plan is listed as the insured on the fidelity bond. (Syllabus Topic 11)

Answer 47

C - An employee is an HCE in 2010 if they are a more than 5% owner in 2009 or 2010, or if they earn more than $110,000 in 2009. Employees A, B, C and D satisfy the ownership requirements. While Employee B is not a direct owner, Employee A’s ownership is attributed to Employee B due to the fact they are married. Employees A and C also satisfy the compensation requirement. Employee E will not be an HCE until 2011 since compensation earned during the current plan year is not considered when determining HCE status. (Syllabus Topic 4)

Answer 48

D - The cash-out rules do not apply to in-service withdrawals. (Syllabus Topic 9)

Answer 49

A - A target benefit plan may not impose a maximum age restriction on participation if the employee is within five years of retirement age. Exclusion of part-time employees by category is an impermissible service condition, if the term part-time employee is defined on the basis of a customary work schedule (such as, less than 20 hours per week). This is because the exclusion relates solely to the employee’s service. (Syllabus Topic 3)

Answer 50

E - All of the statements regarding Form 5500 filings are true. (Syllabus Topic 11)

Answer 51

D - Not all optional forms of benefit are protected benefits. For example, annuity options may be eliminated anytime from a profit sharing plan or stock bonus plan without violating the anti-cutback rules. (Syllabus Topic 10)

Answer 52

C - Participant B’s distribution of $2,500 represents 40% of participant B’s total account balance. Participant B’s total account balance was $6,250 ($2,500 / 0.40). The remaining 60% of Participant B’s account balance is $3,750 ($6,250 - $2,500). Participant B is not eligible for an allocation. The remaining compensation totals $320,000 ($200,000 + $40,000 + $45,000 + $35,000). The allocation to Participant D is $3,750 / $320,000 x $45,000 = $527. (Syllabus Topic 9)

Answer 53

A Plans are not required to credit service for unpaid employer approved personal leave under the break-in-service rules. (Syllabus Topic 3)

Answer 54

B The employer pays the excise tax due to nondeductible contributors by filing Form 5330. The due date for the excise tax is the last day of the 7th month following the taxable year for which there was a nondeductible contribution as of the close of the year. Form 5558 may be filed to extend this deadline by no more than six months. The extension does not apply to the payment of the tax, only to the filing deadline, so the tax due must be submitted with the extension request. (Syllabus Topic 8)

Answer 55

E - Where applicable, Schedules C, G and H are included a Form 5500 filing for large plan filers only. These Schedules are not required for small plan filers. (Syllabus Topic 11)

Answer 56

A - Top-heavy minimums are not required after the plan termination date, but any minimum contribution liabilities that accrued as of the termination date, but have not been funded must be satisfied. (Syllabus Topic 10)

Answer 57

C - 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. (Syllabus Topic 4)

Answer 58

D - First, determine the participants included. Include those with at least one hour of service in the determination year (2010). Participant G is not included in any of the top-heavy calculations. Next determine which distributions need to be included. Participant B’s in-service distribution ($50,000) is included since it occurred during the 5 year period ending on the determination date. Participant F’s termination distribution ($15,000) is included since it occurred during the determination year. The numerator is the key employee balances ($60,000 + $10,000) and the denominator is all includable employee balances ($60,000 + $40,000 + $10,000 + $35,000 +$ 25,000) plus the includable distributions ($50,000 + $15,000). The denominator totals $235,000. The top-heavy ratio is ($70,000 / $235,000). (Syllabus Topic 5)

Answer 59

A - SIMPLE IRA plans are exempt from top-heavy rules. (Syllabus Topic 2)

Answer 60

E - All of the statements regarding break-in-service rules and vesting are true. (Syllabus Topic 9)

Answer 61

A - The filing deadline for the Forms 5500, 5500-SF and 5500-EZ is the last day of the seventh month following the close of the plan year. Thus, for a plan year ending June 30th, Form 5500, without extension, is due January 31st. The maximum extension is 2½ months. For a terminated plan, the date on which final distribution of assets occurs ends the plan year for reporting purposes, creating a short plan year. The return is due on the last day of the seventh calendar month following that date, unless an extension is granted. (Syllabus Topic 11)

Answer 62

E - If a qualification failure involves the diversion or misuse of plan assets, relief under any of the EPCRS programs, not even under Audit CAP. The Self-Correction Program (SCP) is a self-initiated correction program for resolving operational failures. It involves no disclosure or fees to the IRS. The Voluntary Correction with IRS Approval Program (VCP) is a self-initiated program for fixing qualification failures. However, in contrast to SCP, VCP requires disclosure to the IRS and a payment to the IRS (called a VCP compliance fee). Any VCP submission may be made as an Anonymous Submission, regardless of the type of plan (qualified plan, 403(b) plan, SEP, SIMPLE IRA plan) or the type of failure (operational failure, demographic failure, plan document failure, employer eligibility failure). (Syllabus Topic 1)

Answer 63

A - A defined contribution plan may satisfy the legal vesting requirements for employer contributions under one of two statutory minimum schedules: three-year cliff vesting or six-year graded vesting. A six-year cliff vesting schedule does not satisfy the statutory minimum. A plan may also design a customized cliff or graded vesting schedule, provided that participants are no less vested at any point in time than they would be under the statutory cliff or graded vesting schedules. (Syllabus Topic 9)

Answer 64

A - Only employees who satisfy the plan eligibility requirements are included in the ratio percentage test. The question provides the number of nonexcluable HCEs, but the number of nonexcludable NHCEs must be determined. Of the 150 total NHCEs, only 105 met the eligibility requirements (150 total NHCEs – 20 NHCEs under age 21 – 25 NHCEs with less than one year of service). The HCE ratio is 50% ( 8 benefiting HCEs / 16 nonexcludable HCEs). In order to pass the ratio percentage 70% of the NHCEs, as compared to the percentage of HCEs must benefit. Since the HCE ratio is only 50%, only 35% of the nonexcludable NHCEs must benefit to achieve a plan ratio percentage of 70% ( 50% HCE ratio x 70% = 35% needed NHCE ratio). 35% of the nonexcluable NHCEs is 37 (105 x 35%). (Syllabus Topic 6)

Answer 65

D - The overall deduction limit for overlapping plans is generally 25 percent of the aggregate compensation of all participants under the overlapping plans. However, the overlapping plan limit is never less than the minimum funding requirement under IRC §412 with respect to a defined benefit plan included in the calculation. So, even if such minimum funding requirement is greater than the 25 percent limit, contributions to the defined benefit plan that exceed such amount but are within the minimum funding requirement are deductible. There are other exceptions to the 25 percent limit. The 25 percent limit does not apply if a defined contribution plan contribution does not exceed 6 percent of compensation. Also, the 25 percent limit does not apply if the defined benefit plan is covered by the PBGC. (Syllabus Topic 8)

Answer 66

E - All three are service organizations that may issue a SAS 70. (Syllabis Topic 11)

Answer 67

C - If a plan is a multiple employer plan—that is, a plan that covers more than one company and not all the companies are related to each other—top-heavy rules are applied separately to the different companies. (Syllabis Topic 5)

Answer 68

B - Since all employees met the statutory eligibility requirements, no one is excluded from the ratio percentage test based on failure to satisfy eligibility requirements. However, those NHCEs who terminated employment with less than 500 hours of service are excudable because the plan has allocation requirements. There are 220 NHCEs in the plan (240 total employees – the 20 HCEs). 20 of these NHCEs are excludable from the ratio percentage test because they terminated employment with less than 500 hours of service are excudable. Thus, there are 200 nonexcludable NHCEs in the plan. 109 of these nonexcludable NHCEs failed to satisfy the allocation requirements (60 with less than 1,000 hours of service and 49 that terminated employment with more than 500 hours of service). Thus, there are 91 nonexcludable NHCEs benefiting. The NHCE ratio is 45.50% ( 91 benefiting NHCEs / 200 nonexcludable NHCEs). Since the NHCE ratio is 45.50%, only 65.00% of the nonexcludable HCEs may benefit to achieve a plan ratio percentage of 70% ( 45.50% NHCE ratio / 70% = 65.00% needed HCE ratio). 65% of the 20 HCEs equals 13 HCEs that may benefit under Company S’s profit sharing plan and still satisfy coverage requirements using the ratio percentage test. (Syllabus topic 6)

Answer 69

D - The top-paid group election is used in the determination of HCEs, not for key employees. (Syllabis Topic 4)

Answer 70

B - ASPPA members are not required to display the ASPPA Code of Professional Conduct in their offices. (Syllabus Topic 12)

Answer 71

D - The filing deadline for the Forms 5500, 5500-SF and 5500-EZ is the last day of the seventh month following the close of the plan year. Thus, for a plan year ending May 31st, Form 5500, with extension, is due March 15th. The maximum extension is 2½ months. Thus, for a plan year ending June 30th, Form 5500, with extension, is due March 15, 2011. (Syllabus Topic 11)

Answer 72

B - Once the amount of contribution is determined, another formula, called the allocation formula, will specify how the money is to be allocated to the participants’ accounts. In some cases, the contribution formula and the allocation formula are the same: for example, an employer may decide to contribute 5 percent of compensation of the eligible participants, and to allocate that contribution by giving each participant’s account 5 percent of that participant’s compensation. On other occasions, the allocation formula is very different. (Syllabus Topic 7)

Answer 73

C - Forfeiture allocations made to participants in a plan year do not reduce an employer’s overall deduction limit. (Syllabus Topic 8)

Answer 74

E - The financial status of the employer is not a consideration in determining the discriminatory effect of the plan amendment. (Syllabus Topic 10)

Answer 75

B - Pension plans may permit distribution only upon retirement, death, disability, termination of employment and in-service distributions to a participant who has reached age 62, even if normal retirement age is later than age 62. (Syllabus Topic 2)

Answer 76

B - There are two minimum coverage tests under IRC §410(b): the ratio percentage test and the average benefit test. The average benefit test is not part of the ratio percentage test. If there are no NHCEs in the coverage testing group, the plan is deemed to satisfy coverage for the plan year. However, if there is at least one NHCE in the coverage testing group, this rule does not apply. (Syllabus Topic 6)

Answer 77

E - All of these situations may cause a plan to be disqualified. (Syllabus Topic 1)

Answer 78

C - The question provides the number of nonexcluable HCEs, but the number of nonexcludable NHCEs must be determined. Of the 200 total NHCEs, only 100 met the eligibility requirements (200 total NHCEs – 50 NHCEs under age 21 – 50 NHCEs with less than one year of service). The HCE ratio is 60% ( 6 benefiting HCEs / 10 nonexcludable HCEs). In order to pass the ratio percentage 70% of the NHCEs, as compared to the percentage of HCEs must benefit. Since the HCE ratio is only 60%, only 42% of the nonexcludable NHCEs must benefit to achieve a plan ratio percentage of 70% ( 60% HCE ratio x 70% = 42% needed NHCE ratio). 42% of the nonexcluable NHCEs is 42 (100 x 42%). (Syllabus Topic 6)

Answer 79

E - CPCs do not qualify as designated representatives on Form 2848. Only attorneys, CPAs, enrolled agents, enrolled actuaries and enrolled retirement plan agents (ERPAs) may be designated as representatives under Form 2848. (Syllabus Topic 1)

Answer 80

E - All of the statements regarding vesting schedules are true. (Syllabus Topic 9)

Answer 81

B - Compensation for purposes of determining top-heavy minimum allocations is IRC §415 compensation. IRC §415 compensation includes compensation from the beginning of the plan year, rather than from the participant’s date of entry. (Syllabus Topic 5)

Answer 82

D - Based on a six-year graded vesting schedule, Participant A is 80% vested as of December 31, 2010. As of December 31, 2008 (the end of the plan year prior to terminating employment), Participant A was 60% vested. Participant A did not earn a year of vesting credit during 2009. As a full-time employee, Participant A would not have performed 1,000 hours of service between January 1, 2009 and March 14, 2009. It typically takes a full-time employee approximately six months to perform 1,000 hours of service. Participant A worked from May 1, 2010 through December 31, 2010. An eight month period is enough time for a full-time employee to work 1,000 hours. Thus, Participant A earned a year of vesting credit during 2010. The additional year raises Participant A’s vested percentage from 60% to 80%. (Syllabus Topic 9)

Answer 83

D - Catch-up contributions are disregarded in determining a key employee’s allocation rate for top-heavy minimum contribution purposes. (Syllabus Topic 5)

Answer 84

A - A plan may exclude select classifications of employees from participation in the plan. If these types of exclusions are used, special testing applies under IRC §410(b) to show that the plan satisfies the coverage requirements. An employer is not permitted, either specifically or indirectly, to create a job category for the purpose of excluding participants who have not completed eligibility requirements that exceed the statutory requirements, even if the coverage rules are met when these individuals are excluded. In addition, a plan may not impose any eligibility conditions that on the surface appear to be unrelated to age or service, but in reality are age or service conditions that violate the minimum age or service standards prescribed by the statute. Exclusion of part-time employees or seasonal employees by category is an impermissible service condition, if the term part-time employee is defined on the basis of a customary work schedule (such as, less than 20 hours per week). This is because the exclusion relates solely to the employee’s service. Under the one year of service definition, it is possible that a part-time or seasonal employee could be credited with enough hours of service to earn a year of service. (Syllabus Topic 3)

Answer 85

C - An employee is a key employee if they are a more than 5% owner, if they are a more than 1% owner and have compensation in excess of $150,000, or if they are an includible officer satisfying the compensation test. (Syllabus Topic 5)

Answer 86

A - IRC §415 limitations are applied to the annual additions allocated to the participant’s account for the limitation year. Annual additions are: * Employer contributions [including elective deferrals under a 401(k) plan, matching contributions and nonelective contributions]; * Forfeitures allocated to the participant’s account; and * Employee contributions (i.e., after-tax employee contributions). Loan repayments, investment earnings and catch-up contributions are not included in annual additions. (Syllabus Topic 7)

Answer 87

C - The minimum top-heavy allocation required is the lesser of: 3 percent of compensation for the entire plan year or the highest rate allocated to a key employee. Since the highest rate allocated to a key employee is 7%, Participant C’s top-heavy minimum is 3% of total plan year compensation ($100,000) or $100,000 \* .03 = $3,000. (Syllabus Topic 5)

Answer 88

B - An eligibility computation period is the period during which an employee’s hours are examined to determine whether a year of service has been completed. The eligibility computation period must be a period of 12 consecutive months. The first eligibility computation period must begin on the employee’s employment commencement date. Eligibility computation periods after the first such period may be defined as either: (a) the plan year; or (b) 12-month anniversary periods of the initial eligibility computation period. The plan must define which method it will use to determine eligibility computation periods after the first period. No other method is acceptable in determining whether the statutory requirements are satisfied. (Syllabus Topic 3)

Answer 89

C - In a defined contribution plan, contribution amounts that have already been allocated may _not_ be adjusted and reallocated after a coverage failure has been identified. This is not a permissible correction method. (Syllabus Topic 6)

Answer 90

D - Employee D is age 21 on March 5, 2011. Employee D has one year of service on September 1, 2010. The later of these two dates is March 5, 2011. Employee D enters the plan on July 1, 2011, the first entry date after March 5, 2011. (Syllabus Topic 3)

Answer 91

E - A compensation definition that excludes any portion of compensation earned by HCEs only is deemed to be nondiscriminatory. Generally, a plan must use a nondiscriminatory definition of compensation as the basis for allocations. The IRC defines several compensation definitions that are safe harbors. The safe harbor definitions are deemed to be nondiscriminatory compensation without a need for special testing. If one of those definitions is not used, the plan administrator must be able to demonstrate that the alternate definition is not discriminatory. IRC §414(s) provides the rules for determining whether a definition of compensation is nondiscriminatory. All of the IRC §415 compensation definitions are safe harbor definitions of IRC §414(s) compensation. The regulations also permit three safe harbor modifications to the IRC §415 compensation definition to arrive at IRC §414(s) compensation. (Syllabus Topic 7)

Answer 92

D - A defined benefit plan must satisfy the minimum participation requirements of IRC §401(a)(26), however, defined contributions are not subject to the minimum participation requirements of IRC §401(a)(26). (Syllabus Topic 1)

Answer 93

D - A profit sharing or stock bonus plan must have recurring and substantial contributions to be a qualified plan. If there is a complete discontinuance of contributions to a profit sharing or stock bonus plan, the affected participants must be 100 percent vested. Filing for a determination letter with the IRS is not required by law to maintain qualified status, but is recommended. This filing, which takes place on a Form 5310, will obtain a ruling from the IRS that the termination of the plan does not negatively affect its qualified status. A money purchase or target benefit plan is not subject to the same obligations as a profit sharing plan or a stock bonus plan to have recurring and substantial contributions to the plan. Freezing a money purchase or target benefit plan is tantamount to amending the contribution formula to zero percent of compensation, and does not require accelerated vesting. A partial plan termination causes the affected participants to become 100 percent vested in their funded benefits. The affected participants who receive the 100 percent vesting are those who are eliminated from participation, in the case of a significant reduction, or the participants affected by the plan amendment that resulted in the partial termination. Participants who are not affected by the amendment continue to be subject to the vesting schedule with respect to their benefits. Generally, a partial plan termination occurs when a significant reduction in the number of participants occurs, either by plan amendment or by involuntary termination of employment. (Syllabus Topic 10)

Answer 94

B - Permitted disparity may be used when allocating forfeitures. (Syllabus Topic 9)

Answer 95

A - It is _not_ required that existing participants be allowed to continue participation if they have not satisfied the new eligibility conditions. When the eligibility conditions are amended, the plan may (but is not required to) provide that the existing participants are grandfathered in, meaning that their participation continues even if they cannot satisfy the new eligibility conditions. If the eligibility requirements are modified in a way that the employee is no longer satisfies the requirements for participation, the participant’s accrued benefit is protected, but the employee will not accrue additional benefits until he or she first re-establishes the right to participate in the plan under the modified eligibility requirements. A change in eligibility requirements may affect the re-entry of a rehired employee who was formerly a participant in the plan. Unless the amendment grandfathered in former participants, the rehired employee would have to satisfy the new requirements before his or her participation could resume. The modification of the plan’s eligibility service condition will not cause an employee to lose participant status if the employee has already satisfied the new requirement. Just because an employee qualifies as a participant in the plan does not guarantee the employee the right to participate in the plan for the rest of his or her employment with the employer. The right to continue to participate in a plan is not a protected benefit. (Syllabus Topic 3)

Answer 96

C - The deduction limit is 25% of eligible compensation or $2,000,000 \* .25 = $500,000. Since $50,000 of the deduction limit has already been used towards employer matching contributions, $450,000 is the maximum deductible profit sharing contribution that may be made for the year ($500,000 - $50,000). (Syllabus Topic 8)

Answer 97

C - Employees who have not satisfied the plan’s age and service requirements for the portion being tested are excluded from the coverage testing for that portion of the plan. (Syllabus Topic 6)

Answer 98

A - Discussing a specific participant's investment elections with an unrelated investment advisor is a violation of the participant’s confidentiality if the participant has not given permission for you to discuss the information with the unrelated investment advisor. Discussing with a client the fees paid by other clients that the ASPPA member services is a violation of one client’s confidentiality if that client has not given permission for you to discuss the information with another client. (Syllabus Topic 12)

Answer 99

B - Participants D and E are not eligible to receive an allocation due to allocation conditions. Participant A’s compensation must be limited to the IRC §401(a)(17) limit amount of $245,000. Total includable compensation is $500,000 ($245,000 + $150,000 + 55,000 + $50,000. The profit sharing contribution is $30,000 ($500,000 x 6%). (Syllabus Topic 7)

Answer 100

D - An eligibility computation period is the period during which an employee’s hours are examined to determine whether a year of service has been completed. The eligibility computation period must be a period of 12 consecutive months. A short plan year may not be used. The first eligibility computation period must begin on the employee’s employment commencement date. Eligibility computation periods after the first such period may be defined as either: (a) the plan year; or (b) 12-month anniversary periods of the initial eligibility computation period. The plan must define which method it will use to determine eligibility computation periods after the first period. No other method is acceptable in determining whether the statutory requirements are satisfied. (Syllabus Topic 3)

Answer 101

B - With a three-year cliff vesting schedule, participants are 0% vested in their first two years and achieve 100% vested after three years of service. Since the participant has only two years of vested service, the participant is 0% vested in all employer contribution accounts. Elective deferral and rollover accounts are always 100% vested. Thus, the participant’s vested balance is $14,000 ($10,000 elective deferral balance + $4,000 rollover balance). (Syllabus Topic 9)

Answer 102

E - A common accrual requirement in a defined contribution plan is that the participant must satisfy a minimum hours-of-service requirement for the plan year. This minimum requirement may not exceed 1,000 hours. Because an hours requirement for allocation purposes is a plan design issue and is not required by statute or regulation to be in the plan, there is no legal rule that demands proration of the hours requirement for short plan year. Thus, a plan may impose a 501 or even 1,000 hours of service requirement during a short plan year in order for participants to receive a contribution allocation. (Syllabus Topic 7)

Answer 103

B - Two plans that are not part of a required aggregation group may be permissively aggregated. The purpose of permissive aggregation is to show that the combined plans are not top-heavy. (Syllabus Topic 5)

Answer 104

C - Catch-up contributions are not included in annual additions. (Syllabus Topic 7)

Answer 105

D - Elective deferrals may not be used to satisfy a top-heavy minimum requirement. (Syllabus Topic 5)

Answer 106

C - Service to avoid a break in service need not be credited for employees suspended due to misconduct. (Syllabus Topic 9)

Answer 107

A - The minimum participation requirements of IRC §401(a)(26) are only applicable to defined benefit plans. The other statements regarding plan qualification are true. The plan must not discriminate in favor of HCEs, it must be maintained for the exclusive benefit of the participants and their beneficiaries, it must provide a direct rollover option for an eligible rollover distribution and it must satisfy qualification requirements in form. (Syllabus Topic 1)

Answer 108

B - An employer may correct a coverage failure by adopting a corrective amendment up to 9½ months after the close of the plan year. The corrective amendment may cure the coverage defects by expanding the group of NHCEs who benefit under the plan or by increasing the allocations or accruals for NHCEs who already benefit under the plan. A plan may not adjust contribution amounts that have already been allocated and reallocate the contribution amount. Amounts already allocated are protected from reduction under the anti-cutback rules of IRC §411(d)(6). Expanding the group of HCEs who benefit under the plan will only exacerbate the testing failure. (Syllabus Topic 6)

Answer 109

C - In order to qualify for filing Form 5500-SF, the plan must invest 100 percent of its assets in investments that have a readily ascertainable fair market value. The other statements regarding requirements a plan must meet in order to qualify for filing Form 5500-SF are true. The plan must cover fewer than 100 participants as of the first day of the plan year, it must meet eligibility requirements for the small plan audit waiver on the basis of qualifying assets, it may hold no employer securities at any time during the plan year and it may not be a multiemployer plan. (Syllabus Topic 11)

Answer 110

E - All of the statements are true. When the eligibility conditions are amended, the plan may (but is not required to) provide that the existing participants are grandfathered in, meaning that their participation continues even if they cannot satisfy the new eligibility conditions. (Syllabus Topic 3)

Answer 111

E - A plan may impose less restrictive age and service requirements for eligibility to participate (that is, a shorter service requirement or a younger age requirement than the statutory maximums), but may not impose more restrictive age and service requirements for eligibility to participate (that is, a longer service requirement or an older age requirement than the statutory maximums). An age 22 requirement is more restrictive than the statutory maximum. (Syllabus Topic 3)

Answer 112

A - Any qualified plan or SEP is subject to aggregation for top-heavy purposes. SIMPLE IRA or SIMPLE 401(k) plans are not subject to aggregation for top-heavy purposes, as they are both exempt from the top-heavy rules. If a SIMPLE 401(k) plan is later converted to a regular 401(k) plan or is replaced by another type of qualified plan, the converted or replaced plan would be includible in the required aggregation group if it covered a key employee. (Syllabus Topic 5)

Answer 113

C - The way the plan defines compensation for allocation purposes does not affect the way compensation is determined for calculating the deduction limit. It is possible for the two compensation definitions to be the same, but it is not required. For deduction purposes, compensation is determined based on the employer’s tax year, even if different than the plan year. (Syllabus Topic 8)

Answer 114

D - Years of service cannot be disregarded simply because a participant declines to make elective deferrals to a 401(k) plan. Years of service before a one-year break in service may temporarily disregarded until after the participant completes another year of service, however, the one-year break-in-service rule does not affect an employee’s vesting percentage in the benefits already accrued (i.e., benefits accrued before the break in service). An employee does not forfeit his or her vested rights simply because he or she has a break in service. (Syllabus Topic 9)

Answer 115

C - Plans are not required to use IRC §415 compensation when allocating employer contributions. (Syllabus Topic 7)

Answer 116

D - Employee A is age 21 on August 1, 2011. Employee A has one year of service on April 14, 2011. The later of these two dates is August 1, 2011. Employee A enters the plan on January 1, 2012, the first entry date after August 1, 2011. (Syllabus Topic 3)

Answer 117

E - The elapsed time method of crediting service is always based on the employee’s date of hire and does not shift to a plan year computation period. An employee incurs a break in service for eligibility purposes if he or she is credited with 500 or fewer hours of service during an eligibility computation period. The 500-hour rule is a minimum standard. The plan may be more liberal by defining a break in service using a lesser hours of service rule (for example, fewer than 250 hours of service in an eligibility computation period), or by not imposing a break-in-service rule. (Syllabus Topic 3)

Answer 118

E - A distribution made during the one-year period ending on the determination date to a participant who terminated is only included in the top-heavy determination if the terminated participant had at least one hour of service during the plan year including the distribution date. If the participant terminated employment in a prior plan year, the distribution would not be included in the top-heavy determination. If a distribution is made for a reason other than severance from employment, death or disability, the lookback is extended and the distribution is added back if it occurred within the five-year period ending on the determination date. Thus, in-service distributions to an active participant made four years before the determination date would be included in the top-heavy determination. The accrued benefit of a former key employee and distributions to a former key employee are disregarded for purposes of determining whether the plan is top-heavy in the following years. It is as if that person is not and never was covered by the plan. If a rollover is related, the plan making the distribution does not count the distribution in its top-heavy ratio, but the recipient plan includes the rollover account in its ratio. The minimum top-heavy contribution is the lesser of three percent or the highest allocation rate for any key employee including elective deferrals made by each key employee. If no employer contributions are made to the plan, no forfeitures are allocated and no key employees made elective deferrals to the plan, the top-heavy minimum contribution would be 0 percent. (Syllabus Topic 5)

Answer 119

D - Employees who satisfy the plan's age and service requirements, but are ineligible due to a job category exclusion are included in the testing group as not benefiting. (Syllabus Topic 6)

Answer 120

C - If an error has occurred historically over several years, the EPCRS correction procedures require that the error be corrected for all affected years, even if the years are closed for audit purposes. (Syllabus Topic 1)

Answer 121

B - The participant has three years of service (2009-2011) and is therefore 40 percent vested. The year of service credited in 2002 is disregarded under the rule of parity. (Syllabus Topic 9)

Answer 122

B - Five-year cliff vesting for a non-top-heavy defined contribution plan does not meet the statutory minimum vesting requirements. (Syllabus Topic 9)

Answer 123

E - All of the statements are true. If, absent the excess allocation, the amount would have been allocated to other participants, the plan should reallocate the excess amounts to other participants who are not at their IRC §415 limits. If the excess amount would not have been allocated to other participants in absence of the overallocation, the excess amount is placed in an unallocated suspense account and used (along with earnings on the unallocated amounts) in the following limitation year(s) to reduce employer contributions other than elective deferrals. If an excess amount is allocated to a participant’s account and there have been elective deferrals or after-tax employee contributions made by the participant for the limitation year, the plan may provide for the distribution of elective deferrals and/or the return of after-tax employee contributions equal to the excess amount. (Syllabus Topic 7)

Answer 124

D - Schedule A is required because the plan has life insurance policies, Schedule SB is required because the plan is a single-employer defined benefit plan, Schedule C is required because the plan is a large plan filer with a terminated accountant and Schedule H is required as a large plan filer to report financial information. (Syllabus Topic 11)

Answer 125

D - If a plan is disqualified, the employer loses its deduction for nonvested contributions made to the plan for open tax years. In addition, employees may be taxed on their vested contributions made in open tax years. Tax years that are closed for tax purposes cannot be reopened by the IRS. A distribution from a disqualified plan is not eligible for rollover. Accordingly, if a distribution is rolled over, excise taxes under IRC §4973 may apply if the bad rollover results in excess contributions to the IRA. (Syllabus Topic 1)

Answer 126

E - All of the statements are true. An ERISA §204(h) notice is required when an ERISA §204(h) amendment is adopted under a pension plan. An ERISA §204(h) amendment is one that significantly reduces or ceases the rate of future benefit accrual under the pension plan or one that eliminates, ceases or significantly reduces an early retirement benefit or retirement-type subsidy. A pension plan for this purpose means a defined benefit plan, a money purchase plan, or any other defined contribution plan that is subject to the minimum funding requirements under IRC §412. A cash balance plan is a type of defined benefit plan. A target benefit plan is a type of money purchase pension plan. (Syllabus Topic 10)

Answer 127

A - The minimum required top-heavy contribution is 3% of the total non-key compensation less any employer contribution already considered. The total non-key compensation is $135,000 ($75,000 + $60,000). $135,000 x 3% = $4,050. $4,050 – $375 in employer matching contributions = $3,675. (Syllabus Topic 5)

Answer 128

C - In order to satisfy the ratio percentage test under IRC §410(b), the plan’s ratio percentage must be at least 70%. Only the 30 HCEs from Division B will benefit under the plan. The total number of HCEs from both divisions is 80 (50 from Division A + 30 from Division B). Thus, 37.50% of the HCEs are benefiting (30 benefiting HCEs / 80 total nonexcludable HCEs). Consequently, 26.25% of the NHCEs must benefit (70% of HCE benefiting ratio of 37.50% = 26.25%). The total number of NHCEs from both divisions is 150 (100 from Division A + 50 from Division B). 26.25% of 150 = 39.38. Round up to the next whole number to conclude that 40 of the NHCEs must benefit. These figures can be confirmed based on the coverage test worksheet: HCEs NHCEs Total Coverage Testing Grp 80 150 230 Benefiting Group 30 40 70 Coverage Ratio 30/80 40/150 37.50% 26.67% Ratio Percentage 71.12% (Syllabus Topic 6)

Answer 129

D - The 2011 top-paid group election is based on the number of employees in the 2010 lookback year. To determine the maximum number in the top-paid group, the 20 percent limitation is applied to the total number of employees, disregarding certain excluded employees. The employees excluded from being counted as part of the number of employees in the top-paid group are: * employees who have not completed at least six months of service by the end of the year; * employees who normally work less than 17½ hours per week; * employees who normally work less than six months per year; and * employees younger than 21. In this example, the three employees under age 21 and the seven employees with less than six months of service may be excluded. The number of employees in the top-paid group (50 – 3 – 7) x 20% = 8. (Syllabus Topic 4)

Answer 130

C - Employee A meets the five percent owner test with ownership of 98%. Employee B meets the one percent owner test with ownership of 4% and compensation in excess of $150,000. Employee E meets the five percent ownership test through attribution of ownership from Employee A. (Syllabus Topic 5)

Answer 131

A - Full vesting upon death is often a feature of a retirement plan but it is not a requirement. Regardless of the vesting schedule provided by the plan, the plan must provide that an employee is 100 percent vested at NRA. Termination of a plan requires full vesting for affected participants. If a plan requires more than one year of service for eligibility purposes, the plan must provide for immediate vesting. Elective deferrals contributed to a 401(k) plan must always be 100 percent vested. Any vesting schedule stated in the plan will not be applicable to the portion of a participant’s account balance that is attributable to such contributions. Thus, a plan that allows for elective deferrals only would require full vesting of a participant's account balance. (Syllabus Topic 9)

Answer 132

B - Forfeiture may occur upon distribution if allowed in the plan. Five consecutive breaks in service are not always required. Forfeitures may be used to pay administrative expenses, to reduce an employer's matching contribution or to reduce an employer’s nonelective contribution. It is permissible to allocate forfeitures using permitted disparity. (Syllabus Topic 9)

Answer 133

E - The top-heavy minimum must be satisfied with employer contributions and/or forfeitures. Employer contributions include profit sharing contributions, pension contributions and matching contributions. Even contributions used to help the employer pass the nondiscrimination testing including QNECs, qualified matching contributions (QMACs), safe harbor nonelective contributions and safe harbor matching contributions may be used to satisfy the top-heavy minimum requirement. After-tax employee contributions are employee contributions and cannot be used to satisfy top-heavy minimum allocation requirements. (Syllabus Topic 5)

Answer 134

A - Under the rule of parity, the employee loses credit for prior service on a permanent basis following the break-in-service period, if certain conditions are met. As a result, the employee must start over in satisfying the service requirement, as if he or she were a new employee. For the rule of parity to apply: * the employee must be a participant when the break-in-service period begins. For this purpose, the employee is a participant if he or she has satisfied the plan’s eligibility requirements and has passed the applicable entry date under the plan; * the employee must incur a minimum of five consecutive breaks in service; and * the employee must be zero percent vested in his or her accrued benefit under the plan The rule of parity rules can apply to plans using elapsed time, it is not limited to those using the counting-hours method. (Syllabus Topic 3)

Answer 135

C - Employee A is a more than 5% owner. Employee B earned more than $110,000 in 2010 (the lookback year). Employee D is a more than 5% owner. (Syllabus Topic 4)

Answer 136

E - The calendar year data election does not impact a calendar year plan, only non-calendar year plans. (Syllabus Topic 4)

Answer 137

C - A target benefit plan is a type of defined contribution plan. The other statements are true. A SEP is subject to full and immediate vesting of employer contributions. A stock bonus plan may include a 401(k) component, if desired. In-service withdrawals are permitted in profit sharing plans. Nonprofit organizations may adopt a profit sharing plan. (Syllabus Topic 2)

Answer 138

B - The contribution deadline applicable to an LLC taxed as a corporation is 2½ months following the end of the plan year, in this example March 15, 2012. (Syllabus Topic 8)

Answer 139

C - An employer contribution is still allocable to the plan participants whether or not it is currently deductible. The other statements are true. A 10 percent excise tax may apply to nondeductible contributions. Nondeductible contributions may be carried forward 2012 DC-1 Practice Exam 33 and deducted in succeeding taxable years. Form 5330 is filed to pay the excise tax on nondeductible contributions. Tax-exempt organizations are not subject to an excise tax on nondeductible contributions. (Syllabus Topic 8)

Answer 140

D - Participant A incurs five breaks in service as of December 31, 2013 (2009, 2010, 2011, 2012, 2013) and will incur a forfeiture at that time. (Syllabus Topic 9)

Answer 141

C - A SAS 70 report, while helpful is not required. (Syllabus Topic 11)

Answer 142

B - A pension plan is required to have “definitely determinable benefits.” In other words, there must be either a formula for determining the participant’s benefit at retirement or a definite formula for determining the company’s annual contribution to the plan. A nonpension plan need not satisfy the definitely determinable benefits requirement that applies to pension plans, but a nonpension plan must provide for a definite allocation formula, which outlines the method by which the employer’s contribution is allocated among the plan participants’ accounts once that contribution is made to the plan. (Syllabus Topic 2)

Answer 143

A - A grandchild’s ownership interest is attributed under IRC §318 to that individual’s grandparent. However, a grandparent’s ownership interest is not attributed under IRC §318 to that individual’s grandchild. (Syllabus Topic 4)

Answer 144

E - Based on the coverage test worksheet: HCEs NHCEs Total Coverage Testing Group 3 3 6 Benefiting Group 2 2 4 Coverage Ratio 2/3 2/3 66.67% 66.67% Ratio Percentage 100.00% (Syllabus Topic 6)

Answer 145

C - No 5500 filing is required for a one-participant owner plan with assets of $250,000 or less as of the end of the plan year. A one-participant owner plan with $500,000 of plan assets will likely qualify for the simplified reporting requirements of Form 5500-EZ, but is not exempt from 5500 filing requirements altogether. (Syllabus Topic 11)

Answer 146

B - A plan amendment may not reduce an accrued benefit. As a general rule, a participant has accrued a benefit for a plan year under a defined contribution plan after he or she satisfies the plan’s allocation conditions in effect for that plan year. If a plan has a last day of employment rule, no benefit accrues until the last day of the plan year. In this instance, an employer may amend the plan allocation formula any time prior to the last day of the plan year without reducing accrued benefits. In contrast, if the plan has no last day of employment rule, participants will accrue benefits earlier in the plan year and the employer may not amend the plan allocation formula at any time prior to the last day of the plan year. (Syllabus Topic 10)

Answer 147

A - Final Form 5500 is filed for the year in which the assets have been completely distributed. In the interim, between the plan termination effective date and the final distribution of assets, regular filings must continue. (Syllabus Topic 10)

Answer 148

E - Adopting employers may get a favorable determination letter in addition to the opinion letter issued on the basic plan document, if desired. (Syllabus Topic 1)

Answer 149

E - All of the statements are true. Coverage testing must be performed separately for the 401(k) portion, the 401(m) portion and the 401(a) portion of the plan. The benefiting group includes only the employees who benefit under the disaggregated portion of the plan being tested. (Syllabus Topic 6)

Answer 150

A - Catch-up contributions are not annual additions. (Syllabus Topic 7)

Answer 151

D - The compensation limit in 2011 is $245,000. Total compensation is $325,000 ($245,000 + 50,000 + 30,000). The maximum deductible contribution is $81,250 ($325,000 \* 25%). (Syllabus Topic 8)

Answer 152

A - After-tax employee contributions are always 100% vested and are not forfeitable. Thus, only Participant A’s profit sharing account balance is subject to vesting. Participant A was 60% vested in his $32,000 account balance ($32,000 \* 60% = $19,200). The remaining 40% of Participant A’s balance is forfeited ($32,000 \* 40% = $12,800). (Syllabus Topic 9)

Answer 153

B - A participant loan feature is an ancillary benefit, right and feature. Ancillary benefits, rights and features are not protected. (Syllabus Topic 10)

Answer 154

D - Coins held in a safe deposit box are not qualifying plan assets. (Syllabus Topic 11)

Answer 155

C - A plan is not permitted to require more than 1,000 hours of service for a year of service. (Syllabus Topic 3)

Answer 156

A - Exclusion of part-time employees or seasonal employees by category is an impermissible service condition, if the term part-time employee is defined on the basis of a customary work schedule (such as, less than 20 hours per week). This is because the exclusion relates solely to the employee’s service. Under the one year of service definition, it is possible that a part-time or seasonal employee could be credited with enough hours of service to earn a year of service. For example, a part-time employee who normally works less than 20 hours of service per week might end up working substantially more hours because of a special project, overtime or busy seasons. If this employee were excluded from the plan solely because of his or her classification as a part-time 2012 DC-1 Practice Exam 35 employee, the plan would be in violation of the minimum service requirements. (Syllabus Topic 3)

Answer 157

D - Pleading guilty or being found guilty of any financially-related misdemeanor or any felony (regardless of the nature of the crime) is a violation of the professional integrity portion of ASPPA’s Code of Professional Conduct. Being found guilty of a misdemeanor that is not financially-related does not violate ASPPA’s Code of Professional Conduct. Telling a client that the prior QKA does sub-standard work and has the worst looking valuation reports you have ever seen is a violation of the courtesy and cooperation portion of ASPPA’s Code of Professional Conduct. (Syllabus Topic 12)

Answer 158

D - Employees A and B are more than five percent owners. Employee C is a more than one percent owner with compensation in excess of $150,000. (Syllabus Topic 5)

Answer 159

B - Employees who have not met the plan’s eligibility requirements may be excluded. Nonbenefiting participants who terminated with less than 500 hours of service may also be excluded since the plan has a last day requirement in order to receive a contribution. Based on the coverage test worksheet: Workforce during the plan year - 100 Number who do not satisfy age/service - (15) Number nonbenefiting who terminated with less than 500 hours of service - (5) Nonexcludable Employees - 80 (Syllabus Topic 6)

Answer 160

C - Compensation is limited to $245,000 in 2011. Total compensation is $395,000 ($245,000 + $70,000 + $50,000 + $30,000). Participant C’s allocation is $7,595 | (($50,000 / $395,000) \* $60,000). (Syllabus Topic 7)

Answer 161

A - Leased employees are not necessarily excludable employees for coverage testing. Coverage testing rules are applied by the recipient by treating the leased employees as part of the recipient employer’s workforce. Thus, leased employees must be included in coverage testing unless they are excludable from coverage testing for another reason. (Syllabus Topic 6)

Answer 162

D - Rollovers and elective deferrals are always 100% vested. $15,000 of the participant’s balance represents fully vested accounts ($3,000 rollover account + $12,000 elective deferral account). The remaining account balance of $8,000 is subject to vesting ($23,000 - $15,000 fully vested portion). The participant has four years of vesting service (2006, 2007, 2008, 2009) and is 60% vested in this portion of the account balance. $8,000 \* 60% = $4,800. 36 2012 DC-1 Practice Exam The participant’s vested balance is $19,800 ($15,000 + $4,800). (Syllabus Topic 9)

Answer 163

E - M&P plans may be sponsored by any organization that expects to have at least 30 employers adopt the basic plan document. (Syllabus Topic 1)

Answer 164

B - A plan must credit both employees on unpaid maternity leave and employees on unpaid FMLA leave with hours of service necessary to prevent a break in service that year. However, a plan need not credit an employee suspended for misconduct hours of service necessary to prevent a break in service. Under the one-year break-in-service rule, if an employee incurs at least one break in service, the plan may temporarily disregard the employee’s prior service. The employee will not receive credit for that prior service until after he or she completes another year of service. Under the rule of parity, years of service prior to a break in service may be disregarded for a nonvested participant if certain conditions are met. (Syllabus Topic 9)

Answer 165

E - All of the statements are true. The hours-of-service requirement to receive an allocation of contributions may be less than 1,000 hours, but may not exceed 1,000 hours. Plans are not required to waive allocation requirements for a participant that dies or becomes disabled during the plan year, but the plan may allow for such a waiver, if desired. No allocation conditions may be applied to a safe harbor nonelective contribution. (Syllabus Topic 7)

Answer 166

E - All of the statements are true. Employer contributions are mandatory in SIMPLE 401(k) plans and SIMPLE IRAs. Loans to participants are not permitted in SIMPLE IRAs, but they are permitted in a SIMPLE 401(k) plan. Because a SIMPLE 401(k) plan is a qualified plan, it is subject to the normal Form 5500 filing requirements that apply to other qualified plans. (Syllabus Topic 2)

Answer 167

C - Both the IRS and DOL have authority to impose penalties for late or deficient Form 5500 filings. The IRS penalty is $25 per day with a maximum penalty of $15,000 (applicable after 600 days) with respect to the filing required for a plan year. The DOL may impose a civil penalty of up to $1,100 per day with no limit. (Syllabus Topic 11)

Answer 168

D - A plan that benefits only HCEs and excludes NHCEs will not satisfy the minimum coverage requirements if there are any NHCEs that meet the eligibility requirements for the plan. In contrast, a plan that excludes HCEs would satisfy the minimum coverage requirements regardless of how many HCEs met the eligibility requirements or the percentage of NHCEs benefiting. If there are no HCEs benefiting under the plan, the plan is deemed to satisfy coverage for the plan year. A plan that benefits all NHCEs and 50% of the HCEs would satisfy the minimum coverage requirements with a plan ratio percentage of 200%. 100% NHCE ratio percentage / 50% HCE ratio percentage = 200%. This is well above the 70% ratio needed to satisfy the ratio percentage test. (Syllabus Topic 6)

Answer 169

D - There is no such requirement regarding displaying the ASPPA Code of Conduct in an ASPPA member’s office. (Syllabus Topic 12)

Answer 170

B - Failure to file Form 5500 may be resolved under the DOL’s Delinquent Filer Voluntary Compliance (DFVC) Program. (Syllabus Topic 1)

Answer 171

D - The top-heavy ratio is determined by dividing the key employee balances by the total balances for all participants includible in the test. The numerator of the ratio is the total of the includible account balances for the key employees ($205,000). The denominator of the ratio is the total of the includible account balances all key and non-key employees ($205,000 + $300,000) plus certain distributions. In-service distributions made within the five-year period ending on the determination date (2007 - 2011) are included. Only non-key employees took in-service withdrawals during this period, thus the $10,000 is included only in the denominator. Distributions made to terminated participants during the twelve-month period ending on the determination date are also included in the ratio if the terminated participants performed at least one hour of service during the plan year including the distribution date. In the example, the terminees who received distributions had no service during the 2011 plan year, thus, the $7,000 is disregarded from the top-heavy ratio. Values for former key employees ($50,000) are disregarded for both the numerator and the denominator of the ratio. The top-heavy ratio is $205,000 / ($205,000 + $300,000 + $10,000) or $205,000 / $515,000. (Syllabus Topic 5)