Exam Questions Flashcards

Question

Based on the following information, determine the due date of Form 5330: * The plan fails the ADP test for the plan year ending December 31, 2010. * Corrective distributions are made after March 15, 2011. * The plan does not include an automatic enrollment feature. A. March 31, 2011 B. July 31, 2011 C. October 15, 2011 D. March 31, 2012 E. April 15, 2012

Answer 1

D - Corrective distributions must be made no later than 2½ months after the close of the plan year in order to avoid the excise tax. The employer pays the excise tax by filing Form 5330. The due date for payment is the last day of the 15th month following the close of the plan year. March 31, 2012 is the due date for Form 5330. (Syllabus Topic 3)

Answer 2

C - An investment fund product or model portfolio that is based on a participant’s age, target retirement date, or life expectancy satisfies the safe harbor default fund requirements. A life cycle fund or a targeted-retirement date fund would meet this requirement. A balanced fund, which provides for a reasonable mix between debt and equity securities also satisfies the safe harbor default fund requirements. Stable value funds do not satisfy the safe harbor default fund requirements. A money market or stable value fund is only available as a safe harbor default for a limited period of time. These options may be used only for the first 120 days after the date of the participant’s first deferral. After that time, the account must be moved to the normal QDIA. (Syllabus Topic 6)

Answer 3

B - It is not required to notify employees of their right to make catch-up contributions at least 30 days prior to the beginning of the plan year. (Syllabus Topic 1)

Answer 4

C - Employer defined benefit contributions may not be made to a 401(k) plan. (Syllabus Topic 1)

Answer 5

A - It is permissible to use participation compensation for the ADP test. The definition of ADP test compensation is not required to be the same definition that was used to determine compensation eligible for deferral. ADP test compensation is subject to the compensation dollar limit under IRC §401(a)(17). (Syllabus Topic 2)

Answer 6

A - Corrective distributions are not eligible for rollover. (Syllabus Topic 9)

Answer 7

D - QDROs must contain the name and last known mailing address of the participant and the alternate payee covered by the order, but there is no requirement that the name and last known mailing address of the plan administrator be included. (Syllabus Topic 8)

Answer 8

A - The basic formula provides the following match: 100% match on the first 3% of compensation deferred plus 50% match on the next 2% of compensation deferred. Part, Comp, Deferral, %Def, 100%-3%, 50%-2% A, $100,000, $10,000, 10%, $100,000 \* 3% = $3,000, $100,000 \* 2% \* 50% = $1,000 B, $80,000, $0, 0%, $0, $0 C, $75,000, $4,500, 6%, $75,000 \* 3% = $2,250, $75,000 \* 2% \* 50%= $750 D, $40,000, $1,200, 3%, $40,000 \* 3% = $1,200, $0 $3,000 + $1,000 + $2,250 + $750 + $1,200 = $8,200 (Syllabus Topic 5)

Answer 9

B - All eligible employees are included in the ADP test except the employee that made a one-time irrevocable election not to participate in the 401(k) plan or any other plan of the employer. Employees that are suspended from deferring during a portion of the plan year due to a hardship withdrawal are included in the ADP test. Employees that elect to defer $0 are included in the ADP test. The NHCE ADRs are determined as follows: Elective Deferral / Gross Compensation = ADR Part, GrComp, ElectDef, ADR A, $50,000, $5,000, $5,000 / $50,000 = 10% B, $40,000, $2,000, $2,000 / $40,000 = 5% C, $30,000, $0, Excluded from test D, $20,000, $800, $800 / $20,000 = 4% E, $20,000, $0, $0 / $20,000 = 0% The NHCE ADP is 4.75% ((10% + 5% + 4% +0%) / 4). (Syllabus Topic 2)

Answer 10

D - ERISA §404(c) does not require disclosure to participants regarding the beneficial interest of each participant in the plan. (Syllabus Topic 6)

Answer 11

E - The employee’s balance to the credit is the entire value of his accrued benefit, including amounts that are not includible in income (basis). The balance to the credit is determined at the time the distribution is made. If the participant has separated from service, the balance to the credit does not include nonvested amounts. If the participant is still employed by the employer, the balance to the credit includes nonvested amounts. Since the nonvested amount will not be paid to the participant, a partially vested participant must have a separation from service before receiving a lump sum distribution. To be considered a lump sum distribution, the must generally be made within one taxable year. However, if contributions or trust earnings are allocated to the participant after the distribution, such amounts need not be distributed in the same taxable year for lump sum distribution purposes. (Syllabus Topic 9)

Answer 12

E - Participants receiving a hardship withdrawal are suspended from making elective deferrals for a minimum of six months. (Syllabus Topic 8)

Answer 13

E - Excess contribution of $2,000 must be adjusted for allocable earnings (the $60 gain). $2,000 + $60 = $2,060. The entire $2,060 distribution is taxable to the participant. (Syllabus Topic 3)

Answer 14

B - Because age-weighted plans are designed specifically to be cross-tested (i.e., allocations are converted to EBARs for IRC §401(a)(4) testing purposes), these plans are subject to the gateway rules. However, most age-weighted plans are able to satisfy an age-based allocation schedule exception to the minimum allocation gateway, because the allocation rates differ solely on the basis of age. An HCE's rate group includes all employees (HCEs and NHCEs) who have an EBAR equal to or greater than the HCE's rate. If all participants have the same EBAR, there is only one rate group to test for nondiscrimination. (Syllabus Topic 7)

Answer 15

E - Not all distributions are eligible for rollover. (Syllabus Topic 9)

Answer 16

A - If the plan permits catch-up contributions and an HCE is a catch-up eligible participant, a portion of the HCE’s corrective distribution must be recharacterized as a catch-up contribution if the catch-up limit has not yet been reached. Under the leveling method, the percentages of the HCEs are not actually being reduced to the levels that would be needed to pass the ADP test. The percentage reductions are used only in the first step of the process, to determine the total correction amount, but the total correction amount is divided up by dollar amounts of deferrals to determine who receives the corrective distributions. If the deferral percentages of the HCEs are recalculated after the distributions are made, the ADP test would still not pass. However, the test is deemed to be passed. If an HCE’s elective deferrals for a plan year include both pre-tax and Roth contributions, the designated Roth contributions are not necessarily the first to be refunded. The plan may permit the HCE to elect make an election as to which type of contribution is attributable to the excess contributions being refunded. It is also permissible for the plan to specify the ordering preference for distributed or recharacterized excess contributions, not giving the HCE an option. (Syllabus Topic 3)

Answer 17

A - If the QJSA rule applies to a participant, the QJSA form of payment is mandatory unless the participant elects a different form of payment available under the plan. The participant may elect another form of benefit, if desired. (Syllabus Topic 8)

Answer 18

B - Every rate group needs to satisfy the coverage rules of IRC §410(b). (Syllabus Topic 7)

Answer 19

E - All of the statements regarding coverage testing in a 401(k) plan are true. When testing the 401(m) plan, the employee is benefiting if he or she is an eligible employee under the 401(m) plan. (Syllabus Topic 2)

Answer 20

B - Hardship withdrawals do not qualify for an exemption from the 10% tax on early distributions. (Syllabus Topic 9)

Answer 21

A - The definition of RBD differs for participants who are 5 percent owners than for participants who are not 5 percent owners. For a participant who is not a 5 percent owner, the RBD is April 1st of the year following the later of the calendar year in which the participant attains age 70½ or retires. For a participant who is a 5 percent owner, the RBD is April 1st following the close of the calendar year in which he or she attains age 70½, regardless of whether he or she retires by the end of that year. It is possible for two minimum distributions to occur in the same distribution calendar year. If a participant opts to take the first RMD on April 1st of the year following the calendar year in which the participant attains age 70½ or retires, a second RMD will be due by December 31st of the same calendar year. (Syllabus Topic 8)

Answer 22

D - The following may result in a refund to a participant in a 401(k) plan: * Excess deferrals (elective deferrals that exceed the IRC §402(g) dollar limit) * Excess aggregate contributions (matching contributions that cause the plan to fail the ACP test) * Excess contributions (elective deferrals that cause the plan to fail the ADP test) * Excess annual additions (amounts allocated to a plan participant that exceed the IRC §415 limit) (Syllabus Topic 1)

Answer 23

C - Loan limit under IRC §72(p) is $5,000, as follows: First limit: 1. Highest outstanding loan in last 12 months = $7,000 2. Current outstanding loan balance = $5,000 3. Lesser of 1 and 2 = $2,000 4. $50,000 less line 3 = $48,000 Second limit: 50% of the vested balance = $10,000 Note: The $10,000 minimum only applies to the second if the plan allows for collateral in addition to the participant’s vested interest. In this scenario, the plan does not permit the use of outside collateral to secure the loan. Participant’s loan limit: 1. The lesser of the first and second limits = $10,000 2. Current outstanding loan balance = $5,000 3. Current amount available (1 – 2) = $5,000 (Syllabus Topic 10)

Answer 24

D - A member who pleads guilty to or is found guilty of any misdemeanor related to financial matters or any felony is in violation of ASPPA’s Code of Professional Conduct. Since the misdemeanor reckless driving charge is not financially-related, it does not violate the Code. The felony DWI violates the Code since any felony is in violation, regardless of whether the action is financially-related. (Syllabus Topic 11)

Answer 25

B - The IRC §402(g) dollar limit is not pro-rated in short plan years. (Syllabus Topic 1)

Answer 26

A - A new comparability plan gives the employer the discretion to determine the annual contribution level for each allocation group, but not over the manner in which contributions are allocated within each allocation group. The manner in which the allocations are determined must be specified in the plan document. New comparability formulas do not meet safe harbor requirements and must use general testing to satisfy nondiscrimination requirements. (Syllabus Topic 7)

Answer 27

D - QNECs must be allocated under a definite allocation formula, as required for all contributions to a profit sharing plan. The employer cannot pick and choose which participants will receive an allocation of QNECs. (Syllabus Topic 3)

Answer 28

E - 7% of total compensation plus 7% of compensation in excess of the Taxable Wage Base (TWB) is not a valid permitted disparity formula. The maximum disparity allowance is the lesser of a maximum disparity percentage or the base contribution percentage. If the integration level is the TWB, the maximum disparity percentage is 5.7%. (Syllabus Topic 7)

Answer 29

A - A deemed distribution is subject to the same tax rules under IRC §72 as an actual distribution from the plan. In this regard, the amount deemed to be distributed is includible in the gross income of the participant. While a deemed distribution of a loan is treated as a distribution for IRC §72 purposes, it is not treated as an actual distribution for other plan purposes. Account balances or accrued benefits are not immediately reduced by the deemed distribution. (Syllabus Topic 10)

Answer 30

B - A safe harbor 401(k) plan does not automatically satisfy the ACP test for all matching. If a safe harbor 401(k) plan provides for the safe harbor matching contribution using the basic formula, and there are no other matching contributions in the plan, the match automatically satisfies the ACP safe harbor. The enhanced matching contribution formula under the ADP safe harbor may or may not satisfy the ACP safe harbor requirements. If a plan provides the basic or enhanced matching contributions, but also makes additional matching contributions, the employer will have to determine whether all of the matching contributions combined (including the basic or enhanced match) satisfy the formula requirements for the ACP safe harbor. If they do, then no ACP test is required on the matching contributions. If they do not, then the ACP test will need to be run. (Syllabus Topic 5)

Answer 31

E - All are acceptable ways a plan may satisfy IRC §401(a)(4). A defined contribution plan may satisfy IRC §401(a)(4) by showing that either contributions or benefits are nondiscriminatory. A defined benefit plan may satisfy IRC §401(a)(4) by showing that either benefits or contributions are nondiscriminatory. Testing defined contribution plans on a benefits basis or testing defined benefit plans on a contributions basis is referred to as cross-testing. (Syllabus Topic 7)

Answer 32

C - The ADRs are determined as follows: Elective Deferral / Gross Compensation = ADR Gross Comp ElectDef ADR HCE1 $100,000 HCE2 $50,000 $3,000 $3,000 / $50,000 = 6% NHCE1 $50,000 $2,000 $2,000 / $50,000 = 4% NHCE2 $40,000 $1,200 $1,200 / $40,000 = 3% NHCE3 $30,000 $600 $600 / $30,000 = 2% The NHCE ADP is 3.00% ((4% + 3% + 2%) / 3). First test: The NHCE ADP times 1.25 = 3.75% Second test: The NHCE ADP times 2 = 6% The NHCE ADP plus 2% = 5% The HCE ADP may equal the greater of the first test (3.75%) or the lesser result of the second test (5%). The greater of the two is 5%. Since HCE2 deferred 6%, HCE1 may defer 4% without causing the plan to fail as this would result in an HCE ADP of 5% ((6% + 4%) / 2 = 5%). With compensation of $100,000, a 4% elective deferral contribution would equal $4,000. (Syllabus Topic 2)

Answer 33

A - An eligible automatic contribution arrangement may allow employees to elect to withdraw their elective deferrals that have been made as a result of the automatic enrollment feature. A permissible withdrawal is a distribution made at the employee’s election of all contributions made by the automatic enrollment on behalf of the employee. Permissible withdrawals may be requested only in the first 90 days of an individual’s participation in an automatic contribution arrangement. (Syllabus Topic 1)

Answer 34

E - A design-based safe harbor may be limited to a specified dollar amount or percentage of plan year compensation without violating the safe harbor. The cornerstone of the design-based safe harbor plan is that the method of allocating the employer contributions must be one that provides a uniform allocation, either as a percentage of compensation or a dollar amount. The same allocation formula must apply to all employees. (Syllabus Topic 7)

Answer 35

B - In general, the plan administrator is required to give participants 30 to 60 days' advance written notice of the blackout period. Thus, the last date in which the blackout notice is due would be July 2, which is 30 days prior to August 1. (Syllabus Topic 6)

Answer 36

A - Designated Roth contributions are included when determining a participant’s annual addition limit under IRC §415. Designated Roth contributions are tested for nondiscrimination purposes in the ADP test. (Syllabus Topic 1)

Answer 37

A - It is permissible to replace more than one loan during a refinancing transaction. The interest rate on the replaced loan is not used when determining the terms of the replacement loan. The interest rate on the replacement loan must be determined as of the date of the refinancing. (Syllabus Topic 10)

Answer 38

E - Allocating a discretionary matching contribution that meets the 401(k) safe harbor requirements is not a permissible correction method for a failed ADP test. To qualify for the ADP safe harbor, a 401(k) plan must provide participants with a safe harbor notice prior to the beginning of the plan year. (Syllabus Topic 3)

Answer 39

C - The double-counting limits apply after there is a switch from using the current year testing method in one plan year to the prior year testing method in the next plan year. When a plan switches from using current year testing in one year (―Plan Year 1‖) to using prior year testing in the next year (―Plan Year 2‖), the NHCE data from Plan Year 1 is being used twice for testing purposes: once to run the test for Plan Year 1 and again to run the test for Plan Year 2, because the prior year testing method is used for that year. (Syllabus Topic 4)

Answer 40

D - A new plan may be a safe harbor 401(k) plan for the first plan year provided that the 401(k) arrangement is in effect for at least three months for that first year. (Syllabus Topic 5)

Answer 41

E - 4% of total compensation of $150,000 = $6,000 Integration level is 85% of TWB ($106,800) = $90,780 Excess compensation = $150,000 compensation less the integration level of $90,780 = $59,220 4% of excess compensation = $2,368.80 4% contribution of $6,000 + excess contribution of $2,368.80 = $8,368.80 (Syllabus Topic 7)

Answer 42

B - A deemed distribution is not eligible for rollover. (Syllabus Topic 10)

Answer 43

E - If a distribution is an eligible rollover distribution, mandatory 20% withholding is generally required if the distribution is not rolled over in a direct rollover transaction. However, if all distributions to the participant for the calendar year are less than $200, no withholding is required. Mandatory 20% withholding applies only to the portion of the eligible rollover distribution that is includible in gross income. Therefore, a nontaxable distribution is not subject to withholding. (Syllabus Topic 9)

Answer 44

B - Participants are often given the right to direct the investment of 401(k) deferrals but it is not a condition of qualification. (Syllabus Topic 1)

Answer 45

A - If the plan year is a period of less than 12 months and plan year compensation is limited to that short period, the integration level must be prorated. The proration rule applies only when the plan year comprises fewer than 12 months and the compensation period used to determine allocations for that short plan year is also less than 12 months. Even if compensation for a mid-year entrant is measured over a period of less than 12 months, the integration level is not prorated because the plan year is actually 12 months long. (Syllabus Topic 7)

Answer 46

D - Since 2011 is the first plan year and the employer has elected to use the prior year testing method, the prior year ADP for the NHCE group is deemed to be 3.00%. Therefore the maximum HCE ADP is 5.00% (3.00% + 2.00%). (Syllabus Topic 2)

Answer 47

A - Qualified Joint and Survivor Annuity (QJSA) payments made to a surviving spouse will continue until that spouse’s death and are not dependent on the marital status of the surviving spouse. (Syllabus Topic 8)

Answer 48

E - When using the prior year testing method, the NHCE Actual Deferral Percentage (ADP) is determined using the data for those participants who were NHCEs in the prior plan year. It is not determined based on whether or not they are NHCEs, or even employed, in the current plan year. A plan that uses the prior year testing method may switch to the current year testing method in any subsequent year. However, if an employer elects to use the current year testing method, it may not change back to using the prior year testing method in subsequent years, except as permitted by the IRS. A safe harbor 401(k) plan is treated as if it were using the current year testing method. (Syllabus Topic 2)

Answer 49

B - The replacement loan is a new loan. That means the interest rate, the security interest and the term on the replacement loan are generally determined as of the date of the refinancing. The term of the new loan may run for the maximum five-year period (or longer if it is a principle residence loan) from the refinancing date. However, if the sum of the replacement loan and the replaced loan exceeds the maximum loan limitations, the maximum loan term may need to be based on the timing of the original, or replaced, loan. (Syllabus Topic 10)

Answer 50

C - A participant may elect more than the mandatory 20 percent withholding amount on eligible rollover distributions. (Syllabus Topic 9)

Answer 51

D - Qualified Matching Contributions (QMACs) are tested for coverage with the 401(m) component of the plan whether or not they are tested for nondiscrimination in the ADP or ACP test. In contrast, QNECs are tested for coverage with the 401(a) component of the plan whether or not they are tested for nondiscrimination in the ADP or ACP test. (Syllabus Topic 2)

Answer 52

D - To pass responsibility for investments to the participants, there must be sufficient investment options to enable the participants to have a portfolio that covers different risk and reward characteristics. There must be at least three diversified investment options (core investments) that offer a broad range of investment opportunity. Each of the core investments must have materially different risk and return characteristics. A combination of equity funds will satisfy not the core investment requirements because the funds would not have materially different risk and return characteristics. (Syllabus Topic 6)

Answer 53

B - Confidential information refers to information not in the public domain of which the member becomes aware while providing professional services to the principal. The information need not be written down to be considered confidential. (Syllabus Topic 11)

Answer 54

B - Failed ADP or ACP tests in a 401(k) plan may be corrected using a combination of correction methods. A 401(k) sponsor may eliminate the ACP test by designating all matching contributions as QMACs provided there are no after-tax employee contributions to the plan. This is because after the QMACs are shifted, there are no contributions left to be tested under the ACP test. (Syllabus Topic 3)

Answer 55

E - All of the statements are true. A blackout period is defined in ERISA to be any period of three or more days in which participants are unable to make investment elections or diversify investments, take distributions, or obtain loans from the plan. (Syllabus Topic 6)

Answer 56

D - Fidelity bond information is not a requirement in a 401(k) safe harbor notice. (Syllabus Topic 5)

Answer 57

E - All of the formulas are design-based safe harbor allocation formulas. Use of compensation from date of participation or for the full year for mid-year entrants does not affect the formula’s status as a design-based safe harbor formula. (Syllabus Topic 7)

Answer 58

B - The ADP for the HCE group is 9.00%. (10% + 8%) / 2 = 9.00% Currently, the NHCE ADP is 5.00%. (5.00% + 5.00% + 5.00% + 5.00%) / 4 = 5.00% In order to pass the two percent spread test and satisfy the ADP testing requirements, the ADP for the NHCE group must be 7.00% since 7.00% + 2% = 9.00%. A QNEC of 2.00% for each NHCE is needed to bring the average up to 7.00%. Therefore, the necessary QNEC is $2,800. ($50,000 + $40,000 + $30,000 + $20,000) \* 2.00% = $2,800 (Syllabus Topic 3)

Answer 59

D - Designated Roth contributions may be recharacterized as catch-up contributions. Note statement E, the contributions are not taxed upon distribution but the income may be subject to taxation. (Syllabus Topic 1)

Answer 60

C - When calculating an individual’s Actual Deferral Ratio (ADR), excess deferrals are excluded from the participant’s ADR if he or she is an NHCE and the excess deferrals are included in the participant’s ADR if he or she is an HCE. If the employer makes QNECs or QMACs for the plan year, those amounts may be treated as deferral amounts to compute the participants' ADRs. (Syllabus Topic 2)

Answer 61

A - The safe harbor nonelective contribution may not be used to satisfy a plan's permitted disparity contribution formula. (Syllabus Topic 5)

Answer 62

B - Exceeding the plan’s compensation limit does not affect the characterization of catch-up contributions. (Syllabus Topic 1)

Answer 63

C - To be a lump sum distribution, the payment must constitute the balance to the credit of the employee and it must be made within one taxable year following a proper distribution event. If the participant has separated from service, the balance to the credit does not include nonvested amounts. If the participant is still employed by the employer, the balance to the credit includes nonvested amounts. (Syllabus Topic 9)

Answer 64

B - Loan limit under IRC §72(p) is $20,000, as follows: 1. 50% of the vested balance $52,500 2. Statutory maximum $50,000 3. Lesser of 1 and 2 $50,000 4. Highest outstanding loan in last 12 months $30,000 5. Current amount available (3 – 4) $20,000 (Syllabus Topic 10)

Answer 65

C - Distributions to participants who terminated past age 55 are not subject to the 10% additional income tax on early distributions. (Syllabus Topic 9)

Answer 66

E - All of the statements are true. General testing is a method of demonstrating that plan allocations or plan benefits are nondiscriminatory by dividing employees into rate groups, and then analyzing each rate group separately. To determine rate groups, a defined contribution plan first must express each participant’s allocation of employer contributions and forfeitures as an allocation rate (for an analysis on the basis of allocations) or an equivalent benefit accrual rate (EBAR) (for an analysis on a benefits basis also known as cross-testing). A separate rate group is identified for each HCE. A rate group consists of an HCE and all other participants who have an EBAR equal to or greater than the HCE's EBAR. (Syllabus Topic 7)

Answer 67

E - The required beginning date for a more than 5% owner is April 1 following the year the participant attains age 70½. Participant A attains age 70½ on January 10, 2011 so the required beginning date is April 1, 2012. (Syllabus Topic 8)

Answer 68

B - A uniform points allocation is a nondesign-based safe harbor formula. (Syllabus Topic 7)

Answer 69

D - The IRC §402(g) limit in effect in 2011 is $16,500 plus $5,500 for catch-up eligible participants. This participant is not catch-up eligible so the maximum deferral is $16,500. (Syllabus Topic 1)

Answer 70

C - Loans must be available to all participants and beneficiaries on a reasonable equivalent basis. (Syllabus Topic 10)

Answer 71

A - While it is recommended, there is no requirement that loans be repaid through payroll deductions. (Syllabus Topic 10)

Answer 72

D - The employer, or any other fiduciary or third party, may not have the discretion to choose the form of payment to be made. (Syllabus Topic 8)

Answer 73

E - There is no exception from the withholding rules merely because noncash assets are distributed. If the distribution includes noncash assets, the fair market value of the property is used to determine the taxable amount subject to withholding. Withholding must be made from the cash portion of the distribution. If the cash portion is not sufficient, the property (or a portion of the property) may be sold prior to distribution, and the proceeds used to pay the withholding tax. (Syllabus Topic 9)

Answer 74

B - Hardship withdrawals and required minimum distributions are not eligible for rollover. (Syllabus Topic 9)

Answer 75

C - The ACP is 4.13%. NHCE Match ACR A $13,000 \* 50% = $6,500 $6,500 / $205,000 = 3.17% B $10,000 \* 50% = $5,000 $5,000 / $100,000 = 5.00% C $8,000 \* 50% = $4,000 $4,000 / $95,000 = 4.21% (3.17% + 5.00% + 4.21%) / 3 = 4.13% (Syllabus Topic 2)

Answer 76

A - When the deemed three percent rule is used, there is no option to increase the three percent by making QNECs. The prior year ADP (or ACP) of the NHCEs is deemed to be three percent, and no adjustment of that deemed percentage is possible. (Syllabus Topic 4)

Answer 77

E - Form 1099-R need not be prepared for distributions of $10 or less. The other statements regarding distribution reporting are true. Form 1099-R reports distributions made from the plan and includes information regarding the applicability of the 10% additional income tax on early distributions. It must be provided to the participant by January 31st of the calendar year following the year of the distribution and a copy must be filed with the IRS by February 28th of the calendar year following the year of the distribution. Form 945 reports tax withholdings from the plan and must be filed with the IRS by January 31st of the calendar year following the year of the distribution. (Syllabus Topic 9)

Answer 78

E - QDROs must include all three items listed. (Syllabus Topic 8)

Answer 79

A - If matching contributions are subject to a vesting schedule, they must be tested under the ACP test and cannot be characterized as QMACs for purposes of the ADP test, even those matching contributions made for a participant who is 100 percent vested under the schedule. When QMACs are shifted to the ADP test, those amounts are not tested again in the ACP test. However, when elective deferrals are shifted to the ACP test, the contributions being shifted are actually tested under both tests. Designated Roth contributions are treated the same way as pre-tax elective deferrals. Thus, if a participant has designated all or a portion of his or her elective deferrals as designated Roth contributions, the elective deferrals being shifted under this technique might, in fact, be designated Roth contributions. Shifting may be used in conjunction with other correction methods. (Syllabus Topic 3)

Answer 80

D - Failure to comply with ERISA §404(c) is not an operational violation that can be corrected using EPCRS. Failure to comply with ERISA §404(c) simply means that the fiduciaries cannot invoke ERISA §404(c) as a defense in a lawsuit for breach of fiduciary duties. It does not create any enhanced liability under ERISA. (Syllabus Topic 6)

Answer 81

B - ERISA §404(c) is not an all or nothing concept. Fiduciaries may still have relief from responsibility for the transactions that do comply with the rules. (Syllabus Topic 6)

Answer 82

B - The amount of allocable earnings is $50 ($1,000 \* 5%). (Syllabus Topic 3)

Answer 83

D - One of the conditions for permissive aggregation is that the plans being aggregated have the same plan year. (Syllabus Topic 4)

Answer 84

A - The required minimum distribution for April 1, 2012 is the 2011 required minimum distribution as is based on the account balance as of December 31, 2010. The required minimum distribution is $4,687.50 ($120,000 / 25.6). (Syllabus Topic 8)

Answer 85

C - With an integration level of 60%, the maximum disparity allowance is 4.3%. (Syllabus Topic 7)

Answer 86

C - Safe harbor 401(k) plans may include an automatic enrollment provision, but it is not a requirement. (Syllabus Topic 1)

Answer 87

A - As a general rule, a new plan may not be a safe harbor plan for the first plan year unless the first plan year is at least three months long and the 401(k) arrangement is in effect for at least three months for that first year. The other statements regarding safe harbor plans are true. The safe harbor nonelective or matching contribution can be made to a different plan and must be made no later than 12 months after the close of the plan year. The distribution restrictions that apply to elective deferrals also apply to participant withdrawals of safe harbor contributions. A plan may be amended to discontinue a safe harbor matching contribution for the rest of the plan year and run ADP and ACP testing for that year instead. (Syllabus Topic 5)

Answer 88

E - Discontinuance of employer contributions is not a distributable event for elective deferrals in a 401(k) plan. (Syllabus Topic 1)

Answer 89

A - A participant who is excludable for the 401(m) coverage test need not be included in the ACP test. (Syllabus Topic 2)

Answer 90

E - All of the statements are true. General testing is used to show nondiscrimination when a plan is not a safe harbor plan design. Elective deferrals and employer matching contributions are not considered when determining rate groups. Nondiscrimination testing for elective deferrals and matching contributions is performed using the ADP and ACP tests. A defined benefit plan that satisfies nondiscrimination on a contributions basis is said to be cross-tested. A defined contribution plan that satisfies nondiscrimination on a benefits basis is said to be cross-tested. (Syllabus Topic 7)

Answer 91

D - The double-counting limits apply after there is a switch from using the current year testing method in one plan year to the prior year testing method in the next plan year. When a plan switches from using current year testing in one year (“Plan Year 1”) to using prior year testing in the next year (“Plan Year 2”), the NHCE data from Plan Year 1 is being used twice for testing purposes: once to run the test for Plan Year 1 and again to run the test for Plan Year 2, because the prior year testing method is used for that year. The prior year ADP and/or ACP (which has already been used for testing because the current year testing method was used in Plan Year 1) must be adjusted before it can be used to set the ADP and/or ACP limits for the HCEs in Plan Year 2, if the ADP and/or ACP included QNECs made in Plan Year as those QNECs may not be counted again towards the ADP or ACP in Plan Year 2. Double-counting limits do not apply to QMACs. (Syllabus Topic 4)

Answer 92

A - IRC §401(a)(30) is a plan qualification requirement that a 401(k) plan limit elective deferrals in a calendar year to the applicable IRC §402(g) dollar limit. A plan need not consider a participant’s deferrals to an unrelated employer in determining whether it satisfies the IRC §401(a)(30) limit. Because the IRC §402(g) limit was not exceeded in either plan, it is the participant’s responsibility to request timely distributions of excess deferrals from the applicable plan(s) and the participant may choose which plan or plans to take distributions from to correct the excess deferrals. (Syllabus Topic 1)

Answer 93

E - To qualify for the ACP safe harbor, the matching formula must satisfy certain conditions. Matching contributions may not be made with respect to elective deferrals in excess of six percent of compensation. This does not mean that the amount of matching contributions is limited to six percent of compensation. It means that, in determining the amount of a participant’s matching contributions, elective deferrals that are in excess of six percent of compensation must be disregarded. The matching formula cannot provide a higher rate of match as the participant’s rate of elective deferrals or after-tax employee contributions increases. The matching contributions made for any eligible HCE at any rate of elective deferrals cannot be greater than that for any eligible NHCE who contributes at the same rate. Matching 50% of the first 10% of compensation deferred does not satisfy the ACP safe harbor requirements because it matches more than 6% of compensation deferred. (Syllabus Topic 5)

Answer 94

E - An ESOP may not use permitted disparity as an allocation formula. (Syllabus Topic 7)

Answer 95

D - Excess contributions for Participant A total $3,600. The amount of excess contribution totals $5,400. The first step is to allocation $1,800 to Participant A so that Participant A and Participant B both defer a total of $8,200. The remaining $3,600 is split $1,800 to Participant A and $1,800 to Participant B. (Syllabus Topic 3)

Answer 96

C - Safe harbor 401(k) contributions are not permitted to be distributed on account of hardship. (Syllabus Topic 8)

Answer 97

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 11)

Answer 98

C - 4% of total compensation of $95,000 = $3,800.00 Integration level is 85% of TWB ($106,800) = $90,780 Excess compensation = $95,000 compensation less the integration level of $90,780 = $4,220.00 4% of excess compensation = $168.80 4% contribution of $3,800.00 + excess contribution of $168.80 = $3,968.80 (Syllabus Topic 7)

Answer 99

B - Employees who are eligible to make after-tax employee contributions are included in the coverage testing group for the 401(**m**) plan component. Terminated participants with 500 or fewer hours are not excluded from the coverage testing group for the 401(k) plan component. These participants are not excludable employees when testing the 401(k) component because termination during the year or the failure to complete a given number of hours during the year does not affect whether the employee is eligible to participate in the 401(k) plan. Terminated participants with 500 or fewer hours may be excluded from the coverage testing group for the 401(m) plan component, but only if the 401(m) component only of employer matching contributions and hours of service and/or last-day employment condition applies to an allocation of employer matching contributions. (Syllabus Topic 2)

Answer 100

E - All three statements are true. (Syllabus Topic 7)

Answer 101

D - Excess aggregate contributions that are refunded no later than six months after the end of the plan year are not subject to an excise tax. (Syllabus Topic 3)

Answer 102

E - All three types of investments satisfy the DOL’s requirements to be considered a QDIA. A target date investment fund product or model portfolio is based on a participant’s age, target retirement date, or life expectancy. The funds change their asset mix over time, to reflect the closer retirement maturity and lessening of risk tolerance. A demographically-averaged investment fund product or model portfolio is designed to be consistent with a target level of risk appropriate for participants of the plan as a whole. With a managed account, a fiduciary allocates the assets of a participant’s account based on the individual’s age, target retirement date or life expectancy. (Syllabus Topic 6)

Answer 103

C - A rate group consists of an HCE and all other participants who have an allocation rate equal to or greater than the HCE's allocation rate, regardless of their status as HCEs or NHCEs. Participant B’s allocation rate is 9%. Thus, Participant A (allocation rate of 11%), Participant D (allocation rate 15%) and Participant E (allocation rate 9%) are included in Participant B’s rate group. (Syllabus Topic 7)

Answer 104

A - Corrective distributions do not count towards satisfying the minimum distribution requirements of IRC §401(a)(9) and are not subject to the 20 percent mandatory withholding rules. (Syllabus Topic 3)

Answer 105

B - The basic safe harbor matching contribution is 100% of the first 3% deferred and 50% of the next 2% deferred. It totals $7,650 ($4,000 + $0 + $2,450 + $1,200). Deferral % Match A 12% ($12,000 / $100,000) $4,000 ($100,000 \* 4%) B 0% $ 0 C 4% ($2,800 / $70,000) $2,450 ($70,000 \*3.5%) D 5% ($1,500 / $30,000) $1,200 ($30,000 \* 4%) (Syllabus Topic 5)

Answer 106

C - A discretionary formula that exceeds 4% of compensation will not satisfy the ACP safe harbor. Note the ACP requirements are different from the ADP safe harbor contribution requirements. (Syllabus Topic 5)

Answer 107

B - The plan may not return a participant’s elective deferrals for the plan year simply because the participant does not complete at least 1,000 hours of service during the plan year. (Syllabus Topic 1)

Answer 108

C - If one of the following elective deferral limitations is met, catch-up contributions may be made by catch-up eligible participants: * Internal Revenue Code (IRC) §402(g) dollar limit * IRC §415 limit Plan-imposed deferral limit * ADP testing limit In this case, the plan limits deferrals to 8% of compensation ($100,000 \* 8% = $8,000). The Highly Compensated Employee (HCE) may make an additional $5,500 catch-up contribution. The maximum elective deferral that can be made by the HCE is $13,500 ($8,000 + $5,500). (Syllabus Topic 1)

Answer 109

D - Excess deferrals are elective deferrals for a calendar year that exceed the IRC §402(g) dollar limit. The deadline for correcting excess deferrals is April 15th of the next calendar year. The deadline may not be extended even if the deadline for filing the individual’s tax return has been extended. (Syllabus Topic 1)

Answer 110

C - If notice is not given on a timely basis, the employer has failed to operate the plan in accordance with the terms of the document. In other words, failure to provide the safe harbor notice is considered an operational failure, rather than a document failure. The notice must be given within a reasonable time before the first day of the plan year (generally between 30 and 90 days before the beginning of the plan year). For mid-year entrants, the timing requirement is deemed satisfied if given by the mid-year entrant’s eligibility date. For a new 401(k) plan, the notice requirement is met if given by the first day of the plan year. (Syllabus Topic 5)

Answer 111

E - The participants included in the coverage testing group for the 401(k) component are not always the same as the participants included in the coverage testing group for the 401(m) component of the plan. The eligibility conditions for the disaggregated portion of the plan are applied when determining who is included in the coverage testing group for each component. If a plan has different eligibility requirements for elective deferrals and matching contributions, the coverage testing groups would be not be the same for the 401(k) and 401(m) components. In addition, when determining the coverage testing group for the 401(k) component, the exclusion category for terminated participants who complete 500 or fewer hours does not apply. These participants are not excludable employees 2010 DC-2 Practice Exam 29 when testing the 401(k) component because termination during the year or the failure to complete a given number of hours during the year does not affect whether the employee is eligible to participate in the 401(k) plan. However, this exclusion category may apply when testing the 401(m) component of the plan if the plan requires a participant to complete 1,000 hours or be employed on the last day of the plan year in order to receive an allocation of matching contributions. If the exclusion category applies to the 401(m) component, but not the 401(k) component, the coverage testing groups would be not be the same for the 401(k) and 401(m) components. (Syllabus Topic 2)

Answer 112

B - ERISA §404(c) does not require disclosure to participants regarding administrative fees paid by the plan sponsor. In order to satisfy the requirements of ERISA §404(c), the plan must provide the current (or most recent) value of the participant’s or beneficiary’s interest in the investment option, prospectuses for each investment option, past investment performance data for each investment option and information on annual operating expenses for each investment option upon request. (Syllabus Topic 6)

Answer 113

E - All of the listed items are required elements of a Qualified Domestic Relations Order (QDRO). (Syllabus Topic 8)

Answer 114

B - A Qualified Joint and Survivor Annuity (QJSA) for an unmarried participant is not payable to the participant’s beneficiary. If the participant is not married, the QJSA is simply a life annuity for the participant's life. (Syllabus Topic 8)

Answer 115

B - Elective deferrals may not be withdrawn as in-service distributions prior to age 59½. (Syllabus Topic 1)

Answer 116

C - When a loan (or portion of a loan) becomes taxable because it fails to satisfy the IRC §72(p) rules, the distribution is a deemed distribution for tax purposes. A deemed distribution is subject to the same tax rules under as an actual distribution from the plan. The amount deemed to be distributed is includible in gross income, is subject to the 10 percent additional income tax on early distributions and is reported on Form 1099-R as a taxable event to the participant. The account balance of the participant may not always reflect an immediate reduction of a deemed distribution. Because the deemed distribution may not be treated as an actual distribution until there is an offset, the value of a participant’s account balance in a defined contribution plan must reflect the continued existence of the loan. A deemed distribution is not an eligible rollover distribution. (Syllabus Topic 10)

Answer 117

E - Designated Roth contributions are tested for nondiscrimination purposes in the Actual Deferral Percentage (ADP) test, rather than the Actual Contribution Percentage (ACP) test. (Syllabus Topic 1)

Answer 118

E - All of the statements regarding ASPPA’s Code of Professional Conduct are true. (Syllabus Topic 11)

Answer 119

C $50,000 less the $25,000 being rolled over = $25,000. $25,000 times the mandatory 20% federal withholding = $5,000. Because the entire distribution is not being rolled to an Individual Retirement Account (IRA), the $10,000 loan offset is taxable to the participant and is subject to the mandatory withholding rules, along with the $15,000 that was paid directly to the plan participant. (Syllabus Topic 9)

Answer 120

C - The elective deferrals of some participants and not others may be shifted to the ACP test. The regulations do not require that elective contributions be treated uniformly for testing purposes. The shifting may be done on an employee-by-employee basis. Elective deferrals shifted to the ACP test are tested in the ADP test. Elective deferrals may be included in the ACP test only if the ADP test is satisfied twice: when all deferrals are included and when only non-shifted deferrals are included. Qualified Matching Contributions (QMACs) shifted to the ADP test are not tested in the ACP test. Any QMACs used in the ADP test must be excluded from the ACP test. (Syllabus Topic 3)

Answer 121

A - The taxable wage base in effect for the plan year is the taxable wage base in effect at the beginning of the plan year. (Syllabus Topic 7)

Answer 122

E - The early participation rule allows a plan that disaggregates otherwise excludable employees for coverage purposes to perform the ADP test and the ACP test, taking into account all statutory employees and only those otherwise excludable employees who are HCEs. The otherwise excludable Nonhighly Compensated Employees (NHCEs) are left out of the ADP and ACP tests entirely. Otherwise excludable employees are those who have completed less than one year of service or are under age 21. All of the statements regarding the election to use the early participation rule for plans covering otherwise excludable employees are true. (Syllabus Topic 4)

Answer 123

A - A plan may not require employment on the last day of the plan year in order to receive the safe harbor nonelective contribution. Discretionary matching contributions are eligible for the ACP test safe harbor as long as the discretionary matching contributions made on any participant’s behalf for the plan year do not exceed 4 percent of compensation. Safe harbor matching contributions may be discontinued or reduced during the year, but the plan loses its safe harbor status for that year. Catch-up contributions are treated like any other elective deferrals and the plan may make safe harbor matching contributions on catch-ups, if desired. (Syllabus Topic 5)

Answer 124

C - If a plan complies with ERISA §404(c), plan fiduciaries have no co-fiduciary liability with regard to the investment decisions made by the participants. The frequency rule requires that the opportunity to give investment instructions must be available with a frequency that is appropriate to the volatility of the investment. The frequency rule applies to all investment options intended to comply with ERISA §404(c). If the plan fails to satisfy the volatility requirement with respect to a particular investment option, ERISA §404(c) relief is not available with respect to that option. However, ERISA §404(c) relief may still be available with respect to the other investment options for which the frequency requirement is satisfied, so long as the other requirements of ERISA §404(c) are satisfied. (Syllabus Topic 6)

Answer 125

D - Plans may satisfy the general test on the basis of either contributions or benefits, thus, the first statement is true. When a defined contribution plan satisfies IRC §401(a)(4) by testing benefits, or when a defined benefit plan satisfies IRC §401(a)(4) by testing contributions, the plan is said to be cross-tested because it is testing nondiscrimination as if it were the other type of plan. If a defined contribution plan is going to be cross-tested, it must first satisfy certain gateway conditions. These conditions grant the plan permission to do nondiscrimination testing on a benefits basis. A rate group consists of an HCE and all other participants who have an allocation rate equal to or greater than the HCE’s allocation rate. Nonelective forfeiture allocations are considered when determining rate groups. (Syllabus Topic 7)

Answer 126

B - Although they commonly accept rollover contributions, qualified plans are not required to do so. A rollover option is not available on all distributions. Examples include the following: * Hardship withdrawals * Required minimum distributions * Corrective distributions * Deemed distributions * Dividends paid on employer securities * A payment that is part of a series of substantially equal payments over one’s lifetime or a period of ten or more years (Syllabus Topic 9)

Answer 127

E - All of the listed participants are included in the ACP test. (Syllabus Topic 2)

Answer 128

C - The deemed three percent rule generally applies to a new 401(k) plan that is using prior year testing. Since there is no prior year data for the NHCE group, the NHCE group's ADP (and ACP, if applicable) is deemed to be 3 percent under the prior year testing method, unless the plan provides that it will determine the prior year ADP (and ACP, if applicable) on the basis of the actual NHCE data for the first plan year. A plan may not use the deemed three percent rule if it is a successor plan to a prior 401(k) plan. The deemed 3 percent rule applies only if the plan is using the prior year testing method. It will not apply to a new plan that is using the current year testing method. (Syllabus Topic 4)

Answer 129

D - 5% of total compensation of $150,000 = $7,500 Excess compensation = $150,000 compensation less the integration level of $106,800 = $43,200 5% of excess compensation = $2,160 5% contribution of $7,500 + excess contribution of $2,160 = $9,660 (Syllabus Topic 7)

Answer 130

A - With loan refinancing, an existing loan (or more than one existing loan) is replaced by a new loan. The loan being replaced is treated as repaid after the refinancing transaction is completed. The loan being refinanced is referred to as the replaced loan. The new loan resulting from the refinancing transaction is referred to as the replacement loan. The interest rate on the replaced loan is not used when determining the terms of the replacement loan. Instead, the interest rate on the replacement loan is determined as of the date of refinancing. The 50 percent loan limit must be re-determined to take into account the participant’s vested accrued benefit as of the date of the refinancing. (Syllabus Topic 10)

Answer 131

D - The integration level for participants who enter mid-year is not prorated. (Syllabus Topic 7)

Answer 132

A - An employee may not elect to defer compensation that is currently available. The election to defer compensation is made before it is currently available. The employee is giving up the right to receive a portion of his or her current cash compensation in exchange for a plan contribution to be made for his or her benefit in the form of an elective deferral. If the plan permits, participants may have their elective deferral rates automatically increase with future pay increases. (Syllabus Topic 1)

Answer 133

E - All of the statements regarding coverage testing in a 401(k) plan are true. The coverage rules are unique for 401(k) plans, because testing must be performed as if each contribution type (i.e., elective deferrals, employer matching contributions and employer nonelective contributions) were a separate plan. Therefore, a 401(k) plan that contains all three types of contributions will be subject to three separate coverage tests each plan year. These separate coverage tests are often referred to as the 401(k) component, the 401(m) component and the 401(a) portion. Qualified Nonelective Contributions (QNECs) are part of the nonelective contributions portion of the plan. QNECs, along with any other employer nonelective contributions allocated for the plan year, are tested in the 401(a) portion of the plan for coverage purposes. This is true regardless of whether the QNECs are included in the ADP test or ACP test. All elective deferrals are tested in the 401(k) component of the plan for coverage purposes. This includes any elective deferrals that were shifted to the ACP test. QMACs, along with any other matching contributions, are tested in the 401(m) component of the plan, regardless of whether the QMACs were included in the ADP test or the ACP test. (Syllabus Topic 2)

Answer 134

B - Elective deferrals that exceed the IRC §401(a)(30) limit are excess deferrals (except to the extent they are properly treated as catch-up contributions). Excess deferrals for an HCE are included in the Actual Deferral Ratio (ADR) calculation. In contrast, excess deferrals for an NHCE are not included in the ADR calculation. In the event that an HCE’s total annual additions exceed the IRC §415 limit, these excess annual additions for the HCE are not included in the ADR calculation. (Syllabus Topic 2)

Answer 135

D - Nonelective contributions of 2% of compensation will not enable a safe harbor 401(k) plan to be deemed non-top-heavy. (Syllabus Topic 5)

Answer 136

C - Benefits-based testing generally favors older employees. (Syllabus Topic 7)

Answer 137

E - Prior year terminees are not included in the ADP test. (Syllabus Topic 2)

Answer 138

A - The test may not be corrected by allocating a discretionary matching contribution that meets the 401(k) safe harbor plan requirements. Participant consent is not required for corrective distributions. (Syllabus Topic 3)

Answer 139

A - The maximum loan amount available for a new loan to Participant A on January 1, 2009 is $0. When a new loan is made to a participant, the $50,000 limit is reduced by the repaid loan amount during the last 12 months. The repaid loan amount is the highest loan balance in the prior 12-month period, reduced by any outstanding loan balance at the time of the new loan. The general effect of this rule is to limit the total principal amount lent during any 12-month period to $50,000. Because Participant A borrowed $50,000 within the past 12 months, $0 is currently available for a new loan. We could also go through the steps of determining amounts available for loan: **First Limitation** 1. Participant’s highest outstanding balance during the 12 months ending on the day before the loan is to be made: $50,000 2. Participant’s outstanding loan balance on the date the second loan is to be made: $45,000 3. Difference between 1 and 2 (repaid loan amount): $5,000 4. Subtract line 3 from $50,000 (reduced $50,000 limit): $45,000 **Second Limitation** 5. Current value of participant’s vested account balance: $102,000 6. 50% of participant’s current vested account balance: $51,000 7. The greater of $10,000 or the amount on line 6: $51,000 * *Participant’s Loan Limit** 8. The lesser of line 4 or line 7: $45,000 9. Participant’s outstanding loan balance on the date the second loan is to be made: $45,000 10. Subtract line 9 from line 8 to get the Participant’s loan limit: $0 (Syllabus Topic 10)

Answer 140

D - A design-based safe harbor plan may allocate the same dollar amount per unit of service (not exceeding one week) performed by the participant during the plan year. An allocation formula that specifies a dollar amount per year of service would not be a design-based safe harbor because the unit of service exceeds one week. Thus, statement I is false. Where uniformity is satisfied as a percentage of compensation, the plan must allocate employer contributions solely on the basis of plan year compensation, and the plan must define compensation for allocation purposes in a manner that satisfies IRC §414(s). Thus, statement II is true. With a design-based safe harbor plan, a compensation period of less than the entire plan year may be used if the employee is a participant for only part of the plan year (e.g., initial entry on a date other than the first day of the plan year). In that case, plan year compensation may be defined as compensation for only the portion of the plan year in which the employee is a participant. Thus, statement III is true. (Syllabus Topic 7)

Answer 141

B - Excess contribution of $1,500 must be adjusted for allocable earnings (the $30 loss). $1,500 - $30 = $1,470. The entire $1,470 distribution is taxable to the participant. (Syllabus Topic 3)

Answer 142

C - Distributions made to participants who separate from service after attaining age 55 are not subject to the 10% additional income tax on early distributions. However, this exemption is not extended to participants under the age of 55. (Syllabus Topic 9)

Answer 143

A - Automatic enrollment is an optional feature in safe harbor 401(k) plans. It is not required. (Syllabus Topic 1)

Answer 144

D - There are three permitted correction methods for an ACP test failure: 1. Distribution or forfeiture of excess aggregate contributions; 2. Contribution of QNECs or QMACs; or 3. Shifting elective deferrals into the ACP test Allocating excess aggregate contributions to a suspense account is not a permitted method of correcting a failed ACP test. (Syllabus Topic 3)

Answer 145

B - A design-based safe harbor plan may allocate the same dollar amount per unit of service (not exceeding one week) performed by the participant during the plan year. Thus, an employer contribution of $5 per week of service in the plan year qualifies as a design-based safe harbor. The dollar amount is uniform and the unit of service does not exceed the limitation of one week. A design-based safe harbor plan has a method of allocating the employer contributions that provides a uniform allocation, either as a percentage of compensation or a dollar amount. A pro rata allocation based on points for service and compensation does not satisfy the requirements of a design-based safe harbor allocation formula. A uniform points plan that uses a pro rata allocation formula based on a participant's points, rather than compensation is a non-designed based safe harbor plan. If a permitted disparity formula, as described in IRC §401(l), is used to allocate the employer contribution, the allocation is deemed to satisfy the uniformity requirement, even though the actual allocation percentages are greater for HCEs. Thus, this allocation formula qualifies as a design-based safe harbor. A design-based safe harbor plan may allocate the same dollar amount per unit of service (not exceeding one week) performed by the participant during the plan year. Thus, an employer contribution of 50¢ for every hour of service in the plan year qualifies as a design-based safe harbor. The dollar amount is uniform and the unit of service does not exceed the limitation of one week. Any plan provision that results in a lower allocation for one or more HCEs does not affect the plan's status as a design-based safe harbor plan, even though such provision does not apply uniformly to all employees. Thus, an allocation of $500 per participant for NHCEs only qualifies as a design-based safe harbor. (Syllabus Topic 7)

Answer 146

E - The HCE ADP is 7% ((7% + 8% + 6%) / 3) and the NHCE ADP is 4% ((5% + 0% + 7%) / 3). Comp Def ADR HCE $150,000 $10,500 7% HCE $100,000 $8,000 8% HCE $100,000 $6,000 6% NHCE $50,000 $2,500 5% NHCE $30,000 $0 0% NHCE $10,000 $700 7% The maximum HCE ADP is 6% (NHCE ADP of 4% + 2%). Under Step #1 of the refund calculations, the total distribution amount is calculated as if the distributions would be based on the ADRs of the HCEs, reducing them in descending order of their respective percentages. Comp RedDef AdjADR OrigDefLessRedDef HCE A $150,000 $9,000 6% ($10,500 - $9,000) = $1,500 HCE B $100,000 $6,000 6% ($8,000 - $6,000) = $2,000 HCE C $100,000 $6,000 6% ($6,000 - $6,000) = $ 0 Total Amount to be Refunded = $3,500 Under Step #2 of the refund calculations, the total amount to be distributed now must be allocated among the HCEs based on the amount of their elective deferrals. First, we reduce HCE A’s deferral amount to HCE B’s deferral amount. This accounts for the first $2,500 of the $3,500 refund to be allocated. Next, we reduce HCE A and HCE B’s deferral amounts equally until the remaining $1,000 has been allocated. OrigDef 1stRed AdjAmt 2ndRed AdjAmt HCE A $10,500 ($2,500) $8,000 ($500) $7,500 HCE B $8,000 $8,000 ($500) $7,500 HCE C $6,000 $6,000 $6,000 The total excess contributionsfor HCE A are $3,000 ($2,500 + $500). (Syllabus Topic 3)

Answer 147

C - To qualify for the ACP safe harbor, matching contributions may not be made with respect to elective deferrals in excess of 6% of compensation. Thus, a fixed matching contribution formula of 25% on the first 9% of compensation deferred would not satisfy the ACP safe harbor because matching contributions are being made on deferrals in excess of 6% of compensation. In contrast, a fixed matching contribution of 200% on the first 5% of compensation deferred would qualify for the ACP safe harbor. While the ACP safe harbor limits the percentage of deferrals that may be taken into account, it does not limit the amount of matching contributions to 6% of compensation. (Syllabus Topic 5)

Answer 148

C - Participants receiving a hardship withdrawal are suspended from making elective deferrals for a minimum of six months. (Syllabus Topic 8)

Answer 149

D - The prior year testing method uses the HCE data from the current plan year. (Syllabus Topic 2)

Answer 150

A - Rate groups are identified by reference to the rate of each HCE. An HCE's rate group includes all employees (HCEs and NHCEs) who have a rate equal to or greater than the HCE's rate. In this example, there are two rate groups for general testing purposes: one for the HCE with an 11.34% Equivalent Benefit Accrual Ratio (EBAR) and one for the two HCEs with a 9.12% EBAR. Since two HCEs have the same EBAR, a single rate group covers them both. (Syllabus Topic 7)

Answer 151

B - Matching contributions and Voluntary After-Tax Employee Contributions are both included in the ACP test. The ACRs are determined as follows: (After-Tax Employee Contributions + Matching Contributions) / Gross Compensation = ADR GrossComp AfterTax Match ACR HCE A $150,000 $0 $4,500 $4,500 / $150,000 = 3% HCE B $100,000 $5,000 $3,000 $8,000 / $100,000 = 8% HCE C $80,000 $0 $2,400 $2,400 / $80,000 = 3% The HCE ACP is 4.67% ((3% + 8% + 3%) / 3). (Syllabus Topic 2)

Answer 152

E - All of the statements regarding rollover distributions are true. A rollover can be made by the individual following payment from the plan or directly by the plan trustee. A rollover IRA may be used as a conduit to transfer distributions from one qualified plan to another. An employee that is not yet eligible for a new employer’s retirement plan could temporarily roll money into an IRA to be held until he/she is eligible to make rollover contributions to the new employer’s plan. Rollover to a traditional IRA delays the taxation of the amount rolled over. An amount that is properly rolled over is not taxable, even though the plan has made a distribution and the amount being distributed would have been includible in income had the rollover not occurred. (Syllabus Topic 9)

Answer 153

C - The basic safe harbor 401(k) matching contribution formula provides the following match: 100% match on the first 3% of compensation deferred plus 50% match on the next 2% of compensation deferred. Comp ElectDef %Def 100%=\>3% 50% =\>2% A $100K $4K 4% $100K\*3% = $3K, $100K\*1%\*50% = $500 B $75K $0 0% $0 $0 C $50K $5K 10% $50K\*3% = $1.5K, $50K\*2%\*50%= $500 D $40K $800 2% $40K\*2%=$800 $0 $3,000 + $500 + $1,500 + $500 + $800 = $6,300 (Syllabus Topic 5)

Answer 154

C - A blackout period does not occur when investment transfers are suspended for two days. A blackout period is defined in ERISA to be any period of three or more days in which participants are unable to make investment elections or diversify investments, take distributions, or obtain loans from the plan. (Syllabus Topic 6)

Answer 155

D - A plan might permit a participant to elect to receive only part of his benefits from the plan. A partial distribution of benefits is usually elected in the form of a single sum. In a defined contribution plan, the lump sum is the value of the vested account balance as of the valuation date specified in the plan. In a defined benefit plan, the lump sum is the present value of the vested accrued benefit. An installment distribution is a periodic payment that is made for a specified period of time. The installment period might be a specified number of years or it might be based on a life expectancy period. An installment period based on life expectancy is not the same as a guaranteed lifetime payment. If the participant dies before the end of the life expectancy period, the remaining payments are made to the beneficiary. If the participant outlives the life expectancy, the installment payments stop once the account balance is depleted. In contrast, if a life annuity were paid, the payments would last only as long as the participant is living and would continue beyond the life expectancy period if the participant lived longer than expected. A defined contribution plan may not make payments due under an annuity directly from the participant’s account because the account balance is subject to investment fluctuations and the annuity must be able to guarantee a stream of payments for the relevant life or lives. If an annuity is paid from a defined contribution plan, an annuity contract is purchased from an insurance company so that payments can be properly guaranteed. An installment payment election might provide for a specific dollar amount (e.g., $10,000 per year) to be distributed, with any remaining balance distributed at the end of the payment term. In contrast, an installment payment election might provide for a specific dollar amount payment (e.g., $1,000 per month), without a specified installment period. Under this latter method, the payments would continue until the vested account balance is fully distributed. (Syllabus Topic 8)

Answer 156

E All of the statements regarding QNECs are true. QNECs may not be contributed only for participants who deferred under the 401(k) arrangement. Only matching contributions can be allocated on the basis of whether a participant has deferred. QNECs may be treated as deferral amounts in the calculation of the ADRs under the ADP test, or as contribution amounts in the calculation of the ACRs under the ACP test. However, the same QNECs may not be used in both tests. QNECs used in the ACP test may not be used in the ADP test. Similarly, QNECs used in the ADP test may not be used in the ACP test. (Syllabus Topic 3)

Answer 157

B - All eligible employees are included in the ADP test except the employee that made a one-time irrevocable election not to participate in the 401(k) plan or any other plan of the employer. Employees that are suspended from deferring during a portion of the plan year due to a hardship withdrawal are included in the ADP test. Employees that elect to defer $0 are included in the ADP test. The NHCE ADRs are determined as follows: Elective Deferral / Gross Compensation = ADR GrossComp ElectDef ADR A $75,000 $7,500 $7,500 / $75,000 = 10% B $50,000 $10,000 $10,000 / $50,000 = 20% C $40,000 $0 $0 / $40,000 = 0% D $20,000 $0 Excluded from test E $15,000 $0 $0 / $15,000 = 0% The NHCE ADP is 7.50% ((10% + 20% + 0% +0%) / 4). (Syllabus Topic 2)

Answer 158

A - The loan may be secured by no more than 50% of the participant’s vested accrued benefit. (Syllabus Topic 10)

Answer 159

C - The required minimum distribution (RMD) for April 1, 2010 is the 2009 RMD and is based on the account balance as of December 31, 2008. The RMD is $13,476.56 ($345,000 / 25.6). Although the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) waived RMDs for 2009, the participant has elected to take the distribution. (Syllabus Topic 8)

Answer 160

B - Excess contributions must be distributed no later than 12 months after the close of the plan year for which testing is being performed. Certain excise taxes apply if the distribution is made more than 2½ months after the end of the tested plan year (or, in the case of a post-2008 401(k) plan with an eligible automatic contribution arrangement, made more than six months after the end of the tested plan year). The excise tax is equal to 10% of the amount of the excess contribution determined before the adjustment for allocable earnings. $20,000 \* 10% = $2,000. (Syllabus Topic 3)

Answer 161

E - All of the investments listed satisfy the safe harbor default fund requirements. Regulations issued by the DOL reflect three types of investments that meet the safe harbor requirements for being default options: 1. Target date - An investment based on a participant’s age, target retirement date, or life expectancy. The funds change their asset mix over time, to reflect the closer retirement maturity and 2010 DC-2 Practice Exam 41 lessening of risk tolerance. A life cycle fund or a targeted-retirement date fund would meet this requirement. 2. Demographically-averaged investment - An investment that is consistent with a target level of risk appropriate for participants of the plan as a whole. A balanced fund, which provides for a reasonable mix between debt and equity securities, would meet this requirement. 3. Investment management service - An investment management service arrangement with respect to which a fiduciary allocates the assets of a participant’s account based on the individual’s age, target retirement date or life expectancy. A managed account, under which an investment manager allocates the funds among assets of various types, including those intended for long-term appreciation and those that provide capital preservation, would meet this requirement. (Syllabus Topic 6)

Answer 162

E - All of the statements regarding lump sum distributions are true. The primary distribution events for a lump sum distribution are attainment of age 59½ and separation from service. To be a lump sum distribution, the payment must constitute the balance to the credit of the employee, and it must be made within one taxable year following a proper distribution event. The employee’s balance to the credit is the entire value of his accrued benefit, including amounts that are not includible in income (basis). The participant’s balance to the credit is determined at the time the distribution is made. If the participant is still employed by the employer, the participant’s balance to the credit includes nonvested amounts. If the participant has separated from service, the participant’s balance to the credit does not include nonvested amounts. (Syllabus Topic 9)

Answer 163

B - The maximum HCE ADP is 7% (NHCE ADP of 5% + 2%). GrossComp ElectDef ADR HCE X $300,000 HCE Y $150,000 $15,000 $15,000 / $150,000 = 10% HCE Z $100,000 $8,000 $8,000 / $100,000 = 8% The HCE ADR’s may total 21% (maximum HCE ADP of 7% \* 3 HCEs). The HCE ADRs currently total 18% (10% + 8%). HCE X may defer a maximum of 3%. Since HCE X’s compensation exceeds the IRC §401(a)(17) compensation limit. HCE X’s compensation must be limited to $245,000 for plan purposes. 3% of $245,000 = $7,350. (Syllabus Topic 2)

Answer 164

E - The required beginning date for a participant who is not a 5% is the later of April 1 following the end of the calendar year in which the participant attains age 70½ or retires. Participant A attains age 70½ on January 17, 2007, but did not separate from service until February 1, 2008. The calendar year ends on December 31, 2008 so the required beginning date is April 1, 2009. (Syllabus Topic 8)

Answer 165

E - All of the statements regarding cross-testing are true. In simplest terms, general testing is a method of demonstrating that plan allocations or plan benefits are nondiscriminatory by dividing employees into rate groups, and then analyzing each rate group separately. Cross-testing is a form of general testing. Under IRC §401(a)(4), a plan may not discriminate in the amount of benefits or contributions provided. Nondiscrimination can be evaluated on the basis of contributions and forfeitures allocated during the year (i.e., on a contributions basis), or on the basis of the projected benefits at retirement (i.e., on a benefits basis). The ability to test under either of these options extends to both defined benefit and defined contribution plans. The customary way of examining nondiscrimination in a defined contribution plan is to examine the contribution rates of participants. If a defined contribution plan uses the benefits basis analysis to determine nondiscrimination, it is called cross-testing. Similarly, a defined benefit plan that is being tested on the basis of the equivalent contributions is being cross-tested for nondiscrimination. (Syllabus Topic 7)

Answer 166

D - Double-counting limits may apply to a plan that uses shifting techniques to satisfy ACP testing. If certain conditions are met, all or a portion of the eligible employees’ elective deferrals may be included in the ACP test. Elective deferrals that are shifted to the ACP are disregarded when computing an employee’s ADR for the ADP test. They may not be counted twice. The double-counting limits also apply after there is a switch from using the current year testing method in one plan year to the prior year testing method in the next plan year. When a plan switches from using current year testing in one year (“Plan Year 1”) to using prior year testing in the next year (“Plan Year 2”), the NHCE data from Plan Year 1 is being used twice for testing purposes: once to run the test for Plan Year 1 and again to run the test for Plan Year 2, because the prior year testing method is used for that year. Prior year data must be adjusted to disregard QNECs used in the Plan Year 1 testing before the data are used in Plan Year 2 under the prior year testing method to avoid double-counting the QNECs. However, any QNECs not used in the ADP test for Plan Year 1 may be used in the ADP test in Plan Year 2. (Syllabus Topic 4)

Answer 167

A - A Form 945 filing is not required for any year in which no withholding was required. (Syllabus Topic 9)

Answer 168

D - If an HCE’s elective deferrals for a plan year include both pre-tax and Roth contributions, the plan may to permit the HCE to make an election as to which type of contribution is attributable to the excess contributions being refunded. (Syllabus Topic 3)

Answer 169

C - 6% of total compensation plus 6% of compensation in excess of the Taxable Wage Base (TWB) is not a valid permitted disparity formula. The maximum disparity allowance is the lesser of a maximum disparity percentage or the base contribution percentage. If the integration level is the TWB, the maximum disparity percentage is 5.7%. (Syllabus Topic 7)

Answer 170

D - The maximum HCE ADP is 8% (NHCE ADP of 6% + 2%). The current HCE ADP is 10% as illustrated below. GrossComp ElectDef ADR HCE 1 $150,000 $15,000 $15,000 / $150,000 = 10% HCE 2 $100,000 $10,000 $10,000 / $100,000 = 10% Under Step #1 of the refund calculations, the total distribution amount is calculated as if the distributions would be based on the ADRs of the HCEs, reducing them in descending order of their respective percentages. Comp ReducedDef Adj ADR OrigDefLessRedDef HCE 1 $150,000 $12,000 8% ($15,000 - $12,000) = $3,000 HCE 2 $100,000 $8,000 8% ($8,000 - $6,000) = $2,000 Total Amount to be Refunded = $5,000 Under Step #2 of the refund calculations, the total amount to be distributed now must be allocated among the HCEs based on the amount of their elective deferrals. First, we reduce HCE 1’s deferral amount to HCE 2’s deferral amount. This accounts for the entire $5,000 refund to be allocated. OrigDef FirstRed Adj Amount HCE 1 $15,000 ($5,000) $10,000 HCE 2 $10,000 $10,000 The total excess contributions for HCE 1 are $5,000. (Syllabus Topic 3)

Answer 171

C A design-based safe harbor plan may satisfy the uniformity requirement by allocating the same dollar amount per unit of service performed by the participant during the plan year. However, the unit of service may not exceed one week. An employer contribution of $1 for every hour of service is a design-based safe harbor because the unit of time used to compute the dollar amount does not exceed one week. In contrast, an employer contribution of $25 per month of service is not a design-based safe harbor because the unit of time used to compute the dollar amount allocation exceeds one week. In a design-based safe harbor plan, contributions for a mid-year plan entrant may be based on compensation for the entire plan year. Alternatively, contributions for a mid-year entrant may be based on compensation for only the portion of the plan year in which the employee is a participant without jeopardizing the plan’s status as a design-based safe harbor. In addition, a participant’s allocation can be limited to a specified dollar amount without jeopardizing the plan’s status as a design-based safe harbor. (Syllabus Topic 7)

Answer 172

D - State or local governmental employers are generally prohibited from adopting 401(k) plans (unless they are eligible under certain grandfather rules). This prohibition on governmental employers applies only to 401(k) plans, and not to profit sharing plans. Furthermore, Indian tribal governments and rural cooperatives may sponsor 401(k) plans. (Syllabus Topic 1)

Answer 173

B - Participants A and B are eligible to make catch-up contributions as each is age 50 or older as of December 31, 2012. Participant A’s elective contributions of $22,000 exceed the 2012 IRC §402(g) dollar limit on elective deferrals of $17,000. Thus, $5,000 of Participant A’s elective contributions will be characterized as catch-up contributions for 2012. Participant B’s elective contributions of $17,000 are within the 2012 IRC §402(g) dollar limit, but they exceed the plan-imposed deferral limit of 10% of compensation ($12,500). Thus, $4,500 of Participant B’s elective contributions will be characterized as catch-up contributions for 2012. Although Participant C’s elective contributions also exceed the plan-imposed deferral limit of 10% of compensation, Participant C is not eligible for catch-up contributions due to age. Thus, Participant C’s elective contributions may not be characterized as catch-up contributions for 2012. Instead, Participant C’s excess deferral must be corrected. (Syllabus Topic 1)

Answer 174

D - Excess deferrals are elective contributions for a calendar year that exceed the IRC §402(g) dollar limit. The deadline for correcting excess deferrals is April 15th of the next calendar year. The deadline may not be extended even if the deadline for filing the individual’s tax return has been extended. (Syllabus Topic 1)

Answer 175

B - Elective contributions may not be withdrawn as in-service distributions prior to age 59½. (Syllabus Topic 1)

Answer 176

B - Designated Roth contributions are tested for nondiscrimination purposes in the actual deferral percentage (ADP) test, rather than the actual contribution percentage (ACP) test. (Syllabus Topic 1)

Answer 177

A - An employee may not elect to defer compensation that is currently available. The election to defer compensation is made before it is currently available. The employee is giving up the right to receive a portion of his or her current cash compensation in exchange for a plan contribution to be made for his or her benefit in the form of an elective contribution. If the plan permits, participants may have their elective contribution rates automatically increase with future pay increases. Elective contributions are subject to withholding of Social Security (i.e., FICA) and federal unemployment (i.e., FUTA) taxes. This is true regardless of whether the elective contributions were made on a pre-tax or post-tax basis for federal income tax purposes. (Syllabus Topic 1)

Answer 178

A - Automatic enrollment is an optional feature in safe harbor 401(k) plans that are not qualified automatic contribution arrangements (QACAs). It is not required unless the plan is a QACA. (Syllabus Topic 1)

Answer 179

E - The participants included in the coverage testing group for the 401(k) component are not always the same as the participants included in the coverage testing group for the 401(m) component of the plan. The eligibility conditions for the disaggregated portion of the plan are applied when determining who is included in the coverage testing group for each component. If a plan has different eligibility requirements for elective contributions and matching contributions, the coverage testing groups would not be the same for the 401(k) and 401(m) components. In addition, when determining the coverage testing group for the 401(k) component, the exclusion category for terminated participants who complete 500 or fewer hours does not apply. These participants are not excludable employees when testing the 401(k) component because termination during the year or the failure to complete a given number of hours during the year does not affect whether the employee is eligible to participate in the 401(k) plan. However, this exclusion category may apply when testing the 401(m) component of the plan if the plan requires a participant to complete 1,000 hours or be employed on the last day of the plan year in order to receive an allocation of matching contributions. If the exclusion category applies to the 401(m) component, but not the 401(k) component, the coverage testing groups would not be the same for the 401(k) and 401(m) components. If the plan allows for after-tax employee contributions, all employees who are eligible to make after-tax employee contributions are included in the coverage testing group under the 401(m) component. In addition, the exclusion category for terminated participants who complete 500 or fewer hours would not apply to the 401(m) component because termination during the year or the failure to complete a given number of hours during the year does not affect whether the employee is eligible to make after-tax employee contributions and, thus, participate in the 401(m) portion of the plan. (Syllabus Topic 2)

Answer 180

E - All of the listed participants are included in the ACP test. The ACP test includes only the employees who are eligible employees under the 401(m) arrangement. The eligible employees are defined as the employees who are eligible to make after-tax employee contributions or who are eligible for an allocation of employer matching contributions for all or a portion of the plan year. (Syllabus Topic 2)

Answer 181

E - All of the statements regarding coverage testing in a 401(k) plan are true. The coverage rules are unique for 401(k) plans, because testing must be performed as if each contribution type (i.e., elective contributions, employer matching contributions and employer nonelective contributions) were a separate plan. Therefore, a 401(k) plan that contains all three types of contributions will be subject to three separate coverage tests each plan year. These separate coverage tests are often referred to as the 401(k) component, the 401(m) component and the 401(a) portion. Qualified nonelective contributions (QNECs) are part of the nonelective contributions portion of the plan. QNECs, along with any other employer nonelective contributions allocated for the plan year, are tested in the 401(a) portion of the plan for coverage purposes. This is true regardless of whether the QNECs are included in the ADP test or ACP test. All elective contributions are tested in the 401(k) component of the plan for coverage purposes. This includes any elective contributions that were shifted to the ACP test. QMACs, along with any other matching contributions, are tested in the 401(m) component of the plan, regardless of whether the QMACs were included in the ADP test or the ACP test. (Syllabus Topic 2)

Answer 182

B - Elective contributions that exceed the IRC §401(a)(30) limit are excess deferrals (except to the extent they are properly treated as catch-up contributions). Excess deferrals for an HCE are included in the actual deferral ratio (ADR) calculation. In contrast, excess deferrals for an NHCE are not included in the ADR calculation. In the event that an HCE’s total annual additions exceed the IRC §415 limit, these excess annual additions for the HCE are not included in the ADR calculation. The same holds true for an NHCE whose total annual additions exceed the IRC §415 limit. These excess annual additions for the NHCE are not included in the ADR calculation. (Syllabus Topic 2)

Answer 183

D - The prior year testing method uses the NHCE data from the prior year and HCE data from the current plan year. An employee that was an NHCE in the prior year and an HCE in the current year is reflected in both groups under the prior year testing method. The current year testing method uses NHCE data and HCE data from the current plan year. A safe harbor 401(k) plan is considered to be using the current year testing method. The default testing method under the statute is the prior year testing method. Thus, the prior year testing method applies for ADP/ACP testing purposes unless the employer elects to use the current year testing method. Note: Consistency between the ADP and ACP tests is not required. A plan may use the prior year testing method for the ADP test while using the current year testing method for the ACP test or vice versa. (Syllabus Topic 2)

Answer 184

B - Matching contributions and voluntary after-tax employee contributions are both included in the ACP test. The ACRs are determined as follows: (After-Tax Employee Contributions + Matching Contributions) / Gross Compensation = ADR Gross AfterCont Match ACR A $150K $0 $4.5K $4.5K/$150K=3% B $100K $5K $3K $8K/$100K=8% C $80K $0 $2.4K $2.4K/$80K=3% The HCE ACP is 4.67% ((3% + 8% + 3%) / 3). (Syllabus Topic 2)

Answer 185

B - To determine the maximum HCE ADP, first perform the 1.25 times test. NHCE ADP of 5% \* 1.25 = 6.25% Next perform the 2 percent spread test. NHCE ADP of 5% \* 2 = 10% NHCE ADP of 5% + 2% = 7% The lesser of the two figures from the 2 percent spread test is used. Thus, for the 2 percent spread test, 7% is the maximum percentage. Next select the greater result from the 1.25 times test and the 2 percent spread test. Since the 7% from the 2 percent spread test is greater than the 6.25% from the 1.25 times test, the maximum HCE ADP is 7%. Note: The 2 percent spread test does not always produce the greatest result so both portions of the test should be performed in order to determine the maximum HCE ADP. Emp Gross ElectDef ADR HCE X $300K - - HCE Y $150K $15K $15K/$150K=10% HCE Z $100K $8K $8K/$100K=8% The HCE ADR’s may total 21% (maximum HCE ADP of 7% \* 3 HCEs). The HCE ADRs currently total 18% (10% + 8%). HCE X may defer a maximum of 3%. Since HCE X’s compensation exceeds the IRC §401(a)(17) compensation limit. HCE X’s compensation must be limited to $250,000 for plan purposes. 3% of $250,000 = $7,500. (Syllabus Topic 2)

Answer 186

C - The elective deferrals of some participants and not others may be shifted to the ACP test. The regulations do not require that elective contributions be treated uniformly for testing purposes. The shifting may be done on an employee-by employee basis. Elective deferrals shifted to the ACP test are tested in the ADP test. Elective deferrals may be included in the ACP test only if the ADP test is satisfied twice: when all deferrals are included and when only non-shifted deferrals are included. Qualified Matching Contributions (QMACs) shifted to the ADP test are not tested in the ACP test. Any QMACs used in the ADP test must be excluded from the ACP test. (Syllabus Topic 3)

Answer 187

A - The test may not be corrected by allocating a discretionary matching contribution that satisfies the 401(k) safe harbor plan requirements. Participant consent is not required for corrective distributions. (Syllabus Topic 3)

Answer 188

D - The HCE ADP is 7% ((7% + 8% + 6%) / 3) and the NHCE ADP is 4% ((5% + 0% + 7%) / 3). See DC\_2\_Spring 2014\_Topic 3\_Quiz\_Q\_A.doc

Answer 189

E - All of the statements regarding QNECs are true. QNECs may not be contributed only for participants who deferred under the 401(k) arrangement. Only matching contributions can be allocated on the basis of whether a participant has deferred. QNECs may be treated as deferral amounts in the calculation of the ADRs under the ADP test, or as contribution amounts in the calculation of the ACRs under the ACP test. However, the same QNECs may not be used in both tests. QNECs used in the ACP test may not be used in the ADP test. Similarly, QNECs used in the ADP test may not be used in the ACP test. (Syllabus Topic 3)

Answer 190

B - Excess contributions must be distributed no later than 12 months after the close of the plan year for which testing is being performed. Certain excise taxes apply if the distribution is made more than 2½ months after the end of the tested plan year (or, in the case of a post-2008 401(k) plan with an eligible automatic contribution arrangement (EACA), made more than six months after the end of the tested plan year). The excise tax is equal to 10% of the amount of the excess contribution determined before the adjustment for allocable earnings. $20,000 \* 10% = $2,000. (Syllabus Topic 3)

Answer 191

D - If an HCE’s elective contributions for a plan year include both pre-tax elective contributions and designated Roth contributions, the plan may permit the HCE to elect which type of contribution (i.e., pre-tax or designated Roth) is attributable to the excess contributions being refunded. (Syllabus Topic 3)

Answer 192

D - See DC\_2\_Spring 2014\_Topic 3\_Quiz\_Q\_A.doc

Answer 193

E - All of the statements regarding the election to use the early participation rule for plans covering otherwise excludable employees are true. The early participation rule allows a plan that disaggregates otherwise excludable employees for coverage purposes to perform the ADP test and the ACP test, taking into account all statutory employees and only those otherwise excludable employees who are HCEs. The otherwise excludable nonhighly compensated employees (NHCEs) are left out of the ADP and ACP tests entirely. Otherwise excludable employees are those who have completed less than one year of service or are under age 21. (Syllabus Topic 4)

Answer 194

C - The deemed three percent rule generally applies to a new 401(k) plan that is using prior year testing. Since there is no prior year data for the NHCE group, the NHCE group's ADP (and ACP, if applicable) is deemed to be 3 percent under the prior year testing method, unless the plan provides that it will determine the prior year ADP (and ACP, if applicable) on the basis of the actual NHCE data for the first plan year. A plan may not use the deemed three percent rule if it is a successor plan to a prior 401(k) plan.

Answer 195

D - Double-counting limits may apply to a plan that uses shifting techniques to satisfy ACP testing. If certain conditions are satisfied, all or a portion of the eligible employees’ elective deferrals may be included in the ACP test. Elective deferrals that are shifted to the ACP are disregarded when computing an employee’s ADR for the ADP test. They may not be counted twice. The double-counting limits also apply after there is a switch from using the current year testing method in one plan year to the prior year testing method in the next plan year. When a plan switches from using current year testing in one year (“Plan Year 1”) to using prior year testing in the next year (“Plan Year 2”), the NHCE data from Plan Year 1 is being used twice for testing purposes: once to run the test for Plan Year 1 and again to run the test for Plan Year 2, because the prior year testing method is used for that year. Prior year data must be adjusted to disregard QNECs used in the Plan Year 1 testing before the data are used in Plan Year 2 under the prior year testing method to avoid double-counting the QNECs. However, any QNECs not used in the ADP test for Plan Year 1 may be used in the ADP test in Plan Year 2. (Syllabus Topic 4)

Answer 196

D - Fidelity bond information is not a requirement in a 401(k) safe harbor notice. (Syllabus Topic 5)

Answer 197

A - The safe harbor nonelective contribution may not be used to satisfy a plan's permitted disparity contribution formula. (Syllabus Topic 5)

Answer 198

A - As a general rule, a new plan may not be a safe harbor plan for the first plan year unless the first plan year is at least three months long and the 401(k) arrangement is in effect for at least three months for that first year. The other statements regarding safe harbor plans are true. The safe harbor nonelective or matching contribution can be made to a different plan and must be made no later than 12 months after the close of the plan year. The distribution restrictions that apply to elective deferrals also apply to participant withdrawals of safe harbor contributions. A plan may be amended to discontinue a safe harbor matching contribution for the rest of the plan year and run ADP and ACP testing for that year instead. (Syllabus Topic 5)

Answer 199

E - To qualify for the ACP safe harbor, the matching formula must satisfy certain conditions. Matching contributions may not be made with respect to elective deferrals in excess of six percent of compensation. This does not mean that the amount of matching contributions is limited to six percent of compensation. It means that, in determining the amount of a participant’s matching contributions, elective deferrals that are in excess of six percent of compensation must be disregarded. The matching formula cannot provide a higher rate of match as the participant’s rate of elective deferrals or after-tax employee contributions increases. The matching contributions made for any eligible HCE at any rate of elective deferrals cannot be greater than that for any eligible NHCE who contributes at the same rate. Matching 50% of the first 10% of compensation deferred does not satisfy the ACP safe harbor requirements because it matches more than 6% of compensation deferred. (Syllabus Topic 5)

Answer 200

B - The basic safe harbor matching contribution is 100% of the first 3% deferred and 50% of the next 2% deferred. It totals $7,650 ($4,000 + $0 + $2,450 + $1,200). Deferral % Match A 12% ($12,000 / $100,000) $4,000 ($100,000 \* 4%) B 0% $ 0 C 4% ($2,800 / $70,000) $2,450 ($70,000 \*3.5%) D 5% ($1,500 / $30,000) $1,200 ($30,000 \* 4%) (Syllabus Topic 5)

Answer 201

C - A discretionary formula that exceeds 4% of compensation will not satisfy the ACP safe harbor. Note the ACP requirements are different from the ADP safe harbor contribution requirements. (Syllabus Topic 5)

Answer 202

E - All of the statements regarding ERISA §404(c) investment requirements are true. To pass investment responsibility to the participants, there must be enough investment options to enable participants to have a portfolio that covers different risk and reward characteristics. There must be at least three diversified investment options (core investments) that offer a broad range of investment opportunity. Each of the core investments must have materially different risk and return characteristics. Because the core investment itself must be diversified, the core investment will generally need to be a look-through investment vehicle, such as a mutual fund, common or collective trust fund, guaranteed investment contracts (GICs), bank deposits, or pooled separate accounts maintained by an insurance company. (Syllabus Topic 6)

Answer 203

C - If a plan complies with ERISA §404(c), plan fiduciaries have no co-fiduciary liability with regard to the investment decisions made by the participants. The frequency rule requires that the opportunity to give investment instructions must be available with a frequency that is appropriate to the volatility of the investment. The frequency rule applies to all investment options intended to comply with ERISA §404(c). If the plan fails to satisfy the volatility requirement with respect to a particular investment option, ERISA §404(c) relief is not available with respect to that option. However, ERISA §404(c) relief may still be available with respect to the other investment options for which the frequency requirement is satisfied, so long as the other requirements of ERISA §404(c) are satisfied. (Syllabus Topic 6)

Answer 204

B - Small plans with fewer than 100 participants do not qualify for an exception to the disclosure rules for participant-directed accounts under ERISA §404(a). However, Simplified Employee Pensions (SEPs), SIMPLE retirement accounts as defined in IRC §408(p) and non-ERISA 403(b) plans, are not subject to these regulations. (Syllabus Topic 6)

Answer 205

C - A blackout period does not occur when investment transfers are suspended for two consecutive business days. A blackout period is defined in ERISA to be any period of three or more consecutive business days in which participants are unable to make investment elections or diversify investments, take distributions or obtain loans from the plan. (Syllabus Topic 6)

Answer 206

E - All of the investments listed satisfy the safe harbor default fund requirements. Regulations issued by the DOL reflect three types of investments that satisfy the safe harbor requirements for being default options: 1. Target date - An investment based on a participant’s age, target retirement date, or life expectancy. The funds change their asset mix over time, to reflect the closer retirement maturity and lessening of risk tolerance. A life cycle fund or a targetedretirement date fund would satisfy this requirement. 2. Demographically-averaged investment - An investment that is consistent with a target level of risk appropriate for participants of the plan as a whole. A balanced fund, which provides for a reasonable mix between debt and equity securities, would satisfy this requirement. 3. Investment management service - An investment management service arrangement with respect to which a fiduciary allocates the assets of a participant’s account based on the individual’s age, target retirement date or life expectancy. A managed account, under which an investment manager allocates the funds among assets of various types, including those intended for long-term appreciation and those that provide capital preservation, would satisfy this requirement. (Syllabus Topic 6)

Answer 207

B - Benchmark information for variable-return investments must be included in the required disclosures for participant-directed accounts under ERISA §404(a), but this information is not required for fixed-income investments. These disclosures may be provided as part of the plan's SPD or as part of a quarterly employee benefit statement as long as the disclosure timing rules are satisfied. The disclosures must contain general information about individual expenses that may be charged to a participant's account as well as specific information about the expenses actually charged to the participant's account. (Syllabus Topic 6)

Answer 208

A - The Taxable Wage Base (TWB) in effect for the plan year is the TWB in effect at the beginning of the plan year. The integration level may be equal to the TWB or it may be any specified amount less than the TWB, but it may not exceed the TWB. If the plan year is a period of less than 12 months, and plan year compensation is limited to that short period, the integration level must be prorated. (Syllabus Topic 7)

Answer 209

D - Plans may satisfy the general test on the basis of either contributions or benefits, thus, the first statement is true. When a defined contribution plan satisfies IRC §401(a)(4) by testing benefits, or when a defined benefit plan satisfies IRC §401(a)(4) by testing contributions, the plan is said to be cross-tested because it is testing nondiscrimination as if it were the other type of plan. If a defined contribution plan is going to be cross-tested, it must first satisfy certain gateway conditions. These conditions grant the plan permission to do nondiscrimination testing on a benefits basis. A rate group consists of an HCE and all other participants who have an allocation rate equal to or greater than the HCE’s allocation rate. Nonelective forfeiture allocations are considered when determining rate groups. (Syllabus Topic 7)

Answer 210

D - 5% of total compensation of $150,000 = $7,500 Excess compensation = $150,000 compensation less the integration level of $110,100 = $39,900 5% of excess compensation = $1,995 5% contribution of $7,500 + excess contribution of $1,995 = $9,495 (Syllabus Topic 7)

Answer 211

D - The integration level for participants who enter mid-year is not prorated because the plan year is actually 12 months long. The integration level may be defined by formula, as a percentage of the current TWB, provided the percentage does not exceed 100% the current TWB. In contrast, the integration level may be stated as a single dollar amount that applies in all plan years, provided the dollar amount does not exceed the current TWB. (Syllabus Topic 7)

Answer 212

A - Benefits-based testing generally favors older employees. The customary way of examining nondiscrimination in a defined contribution plan is to examine the participants’ contribution rates. If a defined contribution plan uses the benefits basis analysis to determine nondiscrimination, it is called cross-testing (i.e., the tester is “crossing” the line between defined contribution and defined benefit plans to use an analysis that is normally used for the other type of plan). General testing is a method of demonstrating that plan allocations or plan benefits are nondiscriminatory by dividing employees into rate groups, and then analyzing each rate group separately. . To determine rate groups, a defined contribution plan first must express each participant’s allocation of employer nonelective contributions and forfeitures as an allocation rate (for an analysis on the basis of allocations) or an equivalent benefit accrual rate (EBAR) (for an analysis on a benefits basis). Elective contributions, matching contributions, investment earnings and unrelated rollover balances are not considered when determining rate groups. (Syllabus Topic 7)

Answer 213

E - A design-based safe harbor plan may allocate the same dollar amount per unit of service (not exceeding one week) performed by the participant during the plan year. An employer contribution of 75¢ for every hour of service during the plan year would satisfy the criteria for a design-based safe harbor formula since the unit of service (i.e., an hour of service), does not exceed one week. A design-based safe harbor plan may satisfy the uniformity requirement by allocating the same dollar amount to each participant (i.e., per capita contribution). Thus, an allocation of $500 per participant would satisfy the criteria for a design-based safe harbor formula. Any plan provision that results in a lower allocation for one or more HCEs does not affect the plan's status as a design-based safe harbor plan, even though such provision does not apply uniformly to all employees. Thus, an allocation of $250 per participant for NHCEs only year would satisfy the criteria for a design-based safe harbor formula. (Syllabus Topic 7)

Answer 214

B - A design-based safe harbor plan may allocate the same dollar amount per unit of service (not exceeding one week) performed by the participant during the plan year. Thus, an employer contribution of $5 per week of service in the plan year qualifies as a design-based safe harbor. The dollar amount is uniform and the unit of service does not exceed the limitation of one week. A design-based safe harbor plan has a method of allocating the employer contributions that provides a uniform allocation, either as a percentage of compensation or a dollar amount. A pro rata allocation based on points for service and compensation does not satisfy the requirements of a design-based safe harbor allocation formula. A uniform points plan that uses a pro rata allocation formula based on a participant's points, rather than compensation is a non-designed based safe harbor plan. If a permitted disparity formula, as described in IRC §401(l), is used to allocate the employer contribution, the allocation is deemed to satisfy the uniformity requirement, even though the actual allocation percentages are greater for HCEs. Thus, this allocation formula qualifies as a designbased safe harbor. A design-based safe harbor plan may allocate the same dollar amount per unit of service (not exceeding one week) performed by the participant during the plan year. Thus, an employer contribution of 50¢ for every hour of service in the plan year qualifies as a design-based safe harbor. The dollar amount is uniform and the unit of service does not exceed the limitation of one week. Any plan provision that results in a lower allocation for one or more HCEs does not affect the plan's status as a design-based safe harbor plan, even though such provision does not apply uniformly to all employees. Thus, an allocation of $1,000 per participant for NHCEs only qualifies as a design-based safe harbor. (Syllabus Topic 7)

Answer 215

E - Rate groups are identified by reference to the rate of each HCE. An HCE's rate group includes all employees (HCEs and NHCEs) who have an allocation rate or EBAR equal to or greater than the HCE's rate. In this example, Participant B is an HCE with an allocation rate of 10%. Thus, all HCEs and NHCEs with an allocation rate equal to or greater than 10% are included in Participant B’s rate group. This includes Participant A (15%), Participant B (10%), Participant C (10%), Participant D (11%) and Participant E (10%). There are five participants included in Participant B’s rate group. (Syllabus Topic 7)

Answer 216

E - All of the statements regarding cross-testing are true. In simplest terms, general testing is a method of demonstrating that plan allocations or plan benefits are nondiscriminatory by dividing employees into rate groups, and then analyzing each rate group separately. Cross testing is a form of general testing. Under IRC §401(a)(4), a plan may not discriminate in the amount of benefits or contributions provided. Nondiscrimination can be evaluated on the basis of contributions and forfeitures allocated during the year (i.e., on a contributions basis), or on the basis of the projected benefits at retirement (i.e., on a benefits basis). The ability to test under either of these options extends to both defined benefit and defined contribution plans. The customary way of examining nondiscrimination in a defined contribution plan is to examine the contribution rates of participants. If a defined contribution plan uses the benefits basis analysis to determine nondiscrimination, it is called cross-testing. Similarly, a defined benefit plan that is being tested on the basis of the equivalent contributions is being cross-tested for nondiscrimination. (Syllabus Topic 7)

Answer 217

C - A design-based safe harbor plan may satisfy the uniformity requirement by allocating the same dollar amount per unit of service performed by the participant during the plan year. However, the unit of service may not exceed one week. An employer contribution of $1 for every hour of service is a design-based safe harbor because the unit of time used to compute the dollar amount does not exceed one week. In contrast, an employer contribution of $25 per month of service is not a design-based safe harbor because the unit of time used to compute the dollar amount allocation exceeds one week. In a design-based safe harbor plan, contributions for a mid-year plan entrant may be based on compensation for the entire plan year. Alternatively, contributions for a mid-year entrant may be based on compensation for only the portion of the plan year in which the employee is a participant without jeopardizing the plan’s status as a design-based safe harbor. In addition, a participant’s allocation can be limited to a specified dollar amount without jeopardizing the plan’s status as a design-based safe harbor. (Syllabus Topic 7)

Answer 218

A - Qualified domestic relations orders (QDROs) are not required to include the name and last known mailing address of the plan administrator or the alternate payee’s date of birth. A QDRO is a domestic relations order issued by a court or other state-authorized body that provides for the payment of all or a portion of the participant’s benefits to an alternate payee. The order must be a judgment, decree, or order relating to child support, alimony payments, or marital property rights, and which is made pursuant to state domestic relations law. QDROs must include the name and last known mailing address of the participant and the alternate payee covered by the order, the name of the plan involved, the amount or percentage of the participant’s benefits to be paid to the alternate payee and the number of payments or the period to which the order applies. (Syllabus Topic 8)

Answer 219

B - A qualified joint and survivor annuity (QJSA) for an unmarried participant is not payable to the participant’s beneficiary. If the participant is not married, the QJSA is simply a life annuity for the participant's life. (Syllabus Topic 8)

Answer 220

C - Participants receiving a hardship withdrawal are suspended from making elective contributions for a minimum of six months. (Syllabus Topic 8)

Answer 221

D - A plan might permit a participant to elect to receive only part of his benefits from the plan. A partial distribution of benefits is usually elected in the form of a single sum. In a defined contribution plan, the lump sum is the value of the vested account balance as of the valuation date specified in the plan. In a defined benefit plan, the lump sum is the present value of the vested accrued benefit. An installment distribution is a periodic payment that is made for a specified period of time. The installment period might be a specified number of years or it might be based on a life expectancy period. The period of time over which installment distributions can be made may be based on life expectancy. In this case, if the participant dies before the end of the life expectancy period, the remaining payments are made to the beneficiary. If the participant outlives the life expectancy, the installment payments stop once the account balance is depleted. In contrast, if a life annuity were paid, the payments would last only as long as the participant is living and would continue beyond the life expectancy period if the participant lived longer than expected. A defined contribution plan may not make payments due under an annuity directly from the participant’s account because the account balance is subject to investment fluctuations and the annuity must be able to guarantee a stream of payments for the relevant life or lives. If an annuity is paid from a defined contribution plan, an annuity contract is purchased from an insurance company so that payments can be properly guaranteed. Annuity contracts may be held by the plan with the plan acting as a conduit by receiving payments from the insurer and transmitting them to the participant or annuity contracts may be distributed to the participant, who will then receive the annuity payments directly from the insurance company. An installment payment election might provide for a specific dollar amount (e.g., $10,000 per year) to be distributed, with any remaining balance distributed at the end of the payment term. In contrast, an installment payment election might provide for a specific dollar amount payment (e.g., $1,000 per month), without a specified installment period. Under this latter method, the payments would continue until the vested account balance is fully distributed. (Syllabus Topic 8)

Answer 222

A - A required beginning date of April 1, 2013 applies to an RMD for the 2012 plan year and is based on the account balance as of December 31, 2011. Since the sole designated beneficiary is the spouse and the spouse is more than ten years younger than the participant, the life expectancy factor is the joint life expectancy found on the joint and last survivor table. The RMD is $11,500 ($345,000 / 30). (Syllabus Topic 8)

Answer 223

E - The required beginning date for a participant who is not a 5% owner is the later of April 1 following the end of the calendar year in which the participant attains age 70½ or retires. Participant A attains age 70½ on January 19, 2010. However, Participant A did not separate from service until February 1, 2011. The calendar year in which Participant A retired ended on December 31, 2011 so the required beginning date is April 1, 2012. (Syllabus Topic 8)

Answer 224

C - When a loan (or portion of a loan) becomes taxable because it fails to satisfy the IRC §72(p) rules, the distribution is a deemed distribution for tax purposes. A deemed distribution is subject to the same tax rules as an actual distribution from the plan. The amount deemed to be distributed is includible in gross income, is subject to the 10 percent tax on early distributions and is reported on Form 1099-R as a taxable event to the participant. The account balance of the participant may not always reflect an immediate reduction of a deemed distribution. Because the deemed distribution may not be treated as an actual distribution until there is an offset, the value of a participant’s account balance in a defined contribution plan must reflect the continued existence of the loan. A deemed distribution is not an eligible rollover distribution. (Syllabus Topic 10)

Answer 225

A - With loan refinancing, an existing loan (or more than one existing loan) is replaced by a new loan. The loan being replaced is treated as repaid after the refinancing transaction is completed. The loan being refinanced is referred to as the replaced loan. The new loan resulting from the refinancing transaction is referred to as the replacement loan. The interest rate on the replaced loan is not used when determining the terms of the replacement loan. Instead, the interest rate on the replacement loan is determined as of the date of refinancing. The 50 percent loan limit must be re-determined to take into account the participant’s vested accrued benefit as of the date of the refinancing. (Syllabus Topic 10)

Answer 226

A - The maximum loan amount available for a new loan to Participant A on January 1, 2012 is $0. When a new loan is made to a participant, the $50,000 limit is reduced by the repaid loan amount during the last 12 months. The repaid loan amount is the highest loan balance in the prior 12-month period, reduced by any outstanding loan balance at the time of the new loan. The general effect of this rule is to limit the total principal amount lent during any 12-month period to $50,000. Because Participant A borrowed $50,000 within the past 12 months, $0 is currently available for a new loan. We could also go through the steps of determining amounts available for loan: (See DC\_2\_Spring 2014\_Topic 10\_Quiz\_Q\_A.doc)

Answer 227

A - The loan may be secured by no more than 50% of the participant’s vested accrued benefit. (Syllabus Topic 10)

Answer 228

B - According to ASPPA’s Code of Professional Conduct, working for clients who have conflicting interests is acceptable if the member’s ability to act fairly is unimpaired, full disclosure is made and both clients agree to continue the relationship. An ASPPA member who pleads guilty to or is found guilty of any financially related misdemeanor or any felony (regardless of the nature of the crime) is in violation of the professional integrity portion of ASPPA’s Code of Professional Conduct and will be subject to ASPPA’s counseling and disciplinary procedures. Performing professional services if the member has reason to believe that the services may be used to evade the law is in violation of the “control of work product” portion of ASPPA’s Code of Professional Conduct. The section also indicates that precautions should be taken to ensure that work-related materials are clear to the intended audience and other foreseeable audiences. Openly criticizing and insulting another benefits professional when speaking to a client is a violation of the “courtesy and cooperation” portion of ASPPA’s Code of Professional Conduct which states that an ASPPA member shall perform professional services with courtesy and shall cooperate with others in the principal’s interest. (Syllabus Topic 11)

Answer 229

E - Telling a client during a plan takeover case that you disagree with the prior plan administrator’s top-heavy determination is not a violation of ASPPA’s Code of Professional Conduct, which recognizes that differences of opinion among benefits professionals may arise and indicates that discussion of such differences should be conducted objectively and with courtesy. Processing a participant hardship withdrawal in a careless manner without gathering sufficient information and providing a client with Form 5558 (Application for Extension of Time) to file along with the plan’s Form 5500, knowing that Form 5558 was not timely filed with the IRS are both actions that violate the “professional integrity” section of ASPPA’s Code of Professional Conduct, which indicates that professional services should be performed with honesty, integrity, skill and care. Telling a new client that their prior plan administrator does sub-standard work and has the ugliest receptionist that you have ever seen violates the “courtesy and cooperation” section of ASPPA’s Code of Professional Conduct, which recognizes that differences of opinion among benefits professionals may arise, but calls for a discussion of such differences to be conducted objectively and with courtesy. Being convicted of a misdemeanor related to financial matters or any felony (regardless of the nature of the crime) is a violation of the “professional integrity” section of ASPPA’s Code of Professional Conduct and may result in disciplinary action by ASPPA. (Syllabus Topic 11)

Answer 230

C - Simply waiting for the insurance company to provide the needed data without reminding the client of the filing deadline or mentioning that they may be fined for a late filing lacks the professional integrity required by ASPPA’s Code of Professional Conduct. (Syllabus Topic 11)