Lesson 1 of Retirement Planning: Introduction to Qualified Plan Flashcards

Question

**Qualification Requirements**

Answer 1

The IRC imposes requirements regarding **eligibility**, **coverage**, **vesting**, and plan funding limits for employers sponsoring qualified retirement plans.

Answer 2

Standard eligibility requirements state an employee is considered eligible to participate in the plan after completing a period of service that extends beyond the later of either the attainment of age 21 or the completion of one year of service (defined as a 12-month period in which the emplovee works at least 1,000 hours). Standard eligibility is the most stringent standard. Employers can be more generous, such as having an age requirement of 19 or 20, in lieu of age 21 or having a service requirement that is less than one year. More general eligibility rules are often found in 401(k) plans. Beginning for tax years after 12/31/2020, long-term **part-time employees** can make elective deferrals if: - Employee worked at least **500 hours** per year for three consecutive years and is age 21 by the end of the **three consecutive years**. - The twelve month periods prior to 1/1/2021 will not count towards the three consecutive years. The long-term part-time employees who meet the requirements will be able to make their first contribution in 2024. Plan Entrance Date: - The employer may require employees to wait until the next plan entrance date after the employee has become eligible to join the plan as long as the next available entrance date is not more than six months after the date of eligibility as determined above. - Because of this rule, most qualified retirement plans establish two plan entrance dates per year.

Answer 3

Both employees were required to wait for entrance into the qualified retirement plan past their exact eligibility date, but neither was required to wait for more than six months past their exact eligibility date. Thus, the plan meets IRC entrance requirements.

Answer 4

As an exception to the eligibility rule, a qualified retirement plan may require *that an employee complete two years* of service to be eligible for participation in the qualified retirement plan. - This is the employer choosing the 2 year instead of the 1 year. If the employer elects this special exception for its qualified retirement plan, then plan participants are *immediately vested* in their accrued benefit or account balance upon completion of two years of service. - This exception is not available to 401(k) plans. | Company decides 2 years instead of 1.

Answer 5

Doc in a Box sponsors a stock bonus plan (a qualified plan) that requires that its employees be 21 years old and complete two years of service before being considered eligible to participate in the stock bonus plan. To retain qualified status for the stock bonus plan, Doc in a Box's stock bonus plan must provide its plan participants with a 100 percent immediate vested account balance after completing two years of service. Therefore, any employer contributions to the plan will be automatically fully vested for the employee as of age 21 and 2 years of service.

Answer 6

Answer: B Option B is false because the employee would NOT acquire a year of service the day after he worked his 1,000th hour, but after twelve months AND 1,000 hours. While option C is correct, the exception does not apply to 401 (k) plans.

Answer 7

Answer Both 1 and 2 are correct

Answer 8

MAD can exclude anyone who has not attained age 21 and has not completed one year of service with the company with 1,000 hours during that year. - Jim is not yet 21. - Rachel has not completed a full 12 months of service. - Brian does not work at least 1,000 hours each year. - Under the new rules, Brian will be eligible after he obtains 3 years of long-term part-time employment. - Years prior to 2021 will not count towards his 3 years. He will be eligible in 2024. (a) SECURE Act changed this rule for plan years beginning after December 31, 2020. Long-term part-time employees need three consecutive years beginning 1/1/2021

Answer 9

Qualified plans are required to provide benefits under the plan to a minimum number of nonhighly compensated employees. As part of this determination, employees who do NOT meet the eligibility rules (age and service) can be excluded from coverage requirements. Employees who are part of a collective bargaining agreement (i.e., union employees) can also be excluded An employee is covered under a qualified retirement plan when he receives a benefit from the plan. The word benefit means an employer contribution, an accrued benefit, or simply the right to participate in the case of a 401(k) plan.

Answer 10

Nondiscriminatory Classisifcation Coverage Tests Highly Compensated Employees

Answer 11

While all "eligible" employees must be considered, not all must be covered by the plan for it to maintain its qualified status. However the selection of nonexcludable employees who will benefit under a qualified retirement plan must be reasonable and established based on the facts and circumstances of the business under objective business criteria.

Answer 12

The general rule for coverage is that the plan must cover at least 70% of nonhighly compensated employees (defined below). However, there are exceptions (ratio percentage test an average benefits percentage test). Therefore, to be qualified, the retirement plan must meet at least **one** of the **three** following tests: - (1) the general safe harbor test, - (2) the ratio percentage test, or - (3) the average benefits test. In addition, *Defined Benefit plans* must ALSO pass an additional coverage test, know as the 50/40 test (discussed below).

Answer 13

For purposes of several retirement plan test calculations, all of the "eligible" employees are further segregated into two classifications: - Highly Compensated (HC) and - Non-Highly Compensated NHC).

Answer 14

The definition of a highly compensated employee provided by the IRC is an employee who is either: - A more than 5 percent owner (defined below) at any time during the plan year or preceding plan year, or - An employee with compensation in excess of $150,000 (2023) for the current plan year, or - An employee with compensation in excess of $135,000 (2022) for the prior plan year.

Answer 15

The IRC defines a "5-percent owner" as anyone who owns **more than five percent** of a company stock or capital. Therefore, if an employee owned five percent of his employer's stock, that employee would not be considered highly compensated. - Don't forget - In addition to direct ownership, the family attribution rules consider shares of stock owned by certain relatives, including stock owned by an individual's spouse, children, grandchildren, or parents as if owned by one owner. - Employers can elect (in the qualified plan document) to limit highly compensated employees to those with compensation in excess of the annual limit AND who are in the top 20% of paid employees, as ranked by compensation. The top 20% is simply the number of employees multiplied by 20% to identify the number of employees to satisfy the limit. This election may shift or reclassify some employees as NHC who have income above the annual limit. This reclassification may help the employer pass the coverage test or the ADP test (discussed later). - *A greater than five percent owner is ALWAYS highly compensated.*

Answer 16

Hank, his wife Willa, and his son Sammy, each own one-third of the stock of the Best Corporation. For purposes of determining the amount of stock owned by Hank, Willa, or Sammy, the amount of stock held by the other members of the family is added together. Thus, for coverage testing, each of them is deemed to own 100 percent of the stock of the Best Corporation. John, his wife Laura, his son Jeff, and his grandson (Jeff's son) Dash, own the 100 outstanding shares of JLJD, Inc. stock, each owning 25 shares, John, Laura, and Jeff are each considered as owning 100 shares of JLJD, Inc. Dash is considered as owning only 50 shares (his own and his father's).

Answer 17

Answer: C All three individuals are considered highly compensated for the current year. Even though Elizabeth does not own more than 5% in the current year, she is considered highly compensated because she owned greater than 5% in the proceeding plan year. Carol is highly compensated because she is a greater than 5% owner in the current year. David is highly compensated because his income exceeds the compensation limit ($150,000) for the current year

Answer 18

The S% owner ship for HE is not a provided number, while the dollar figures are provided on the CFP Board exam handout

Answer 19

Answer: C Only Conrad would be considered highly compensated because he is greater than a 5 percent owner. An individual is deemed highly compensated if he is either a greater than 5 percent owner, or has earnings in excess of $150,000 (2023) and is in the top 20 percent, as ranked by salary of all employees.

Answer 20

General Safe Harbor Coverage Test Ratio Percentage Test Average Benefits Test (Both Test) 50/40 Test: Only for Defined Benefit Plan

Answer 21

The general safe harbor coverage test is a straightforward test. A qualified retirement plan satisfies the general sate harbor coverage test if the plan benefits 70 percent or more of the nonexcludable (eligible), nonhighly compensated (NHC) employees. If you pass this - move on!

Answer 22

% of NHC covered ≥ 70% NHC is nonhighly compensated

Answer 23

Answer: B The profit sharing plan meets the general sate harbor coverage test because it benefits 73.33 percent (55 ÷ 75) of the nonhighly compensated eligible employees. See picture for more.

Answer 24

The ratio percentage test compares the percentage of covered nonhighly compensated employees to the percentage of covered highly compensated employees. A plan satisfies the ratio percentage test if at least 70 percent of nonexcludable (eligible), nonhighly compensated employees are covered under this calculation. (Again if you pass this - the coverage requirement is met!)

Answer 25

(% of NHC Covered ÷ % of HC Covered) ≥ 70%

Answer 26

This profit sharing plans ratio percentage is 75 percent (60% ÷ 80%), and, thus, satisties the ratio percentage test. The plan would not pass the general sate harbor coverage test because the plan only covered of the nonhighly compensated employees. Remember, the plan only has to pass one test and this one passed the ratio percentage test.

Answer 27

The plan's ratio percentage is 66.67 percent (40% ÷ 60%), failing the ratio percentage test. The plan also fails the safe harbor test because the plan does not cover ≥ 70 percent of the NHC.

Answer 28

Consists of two tests: - The average benefits percentage test, and - The nondiscriminatory classisifcation test.

Answer 29

A retirement plan satisfies the average benefits percentage test if the following ratio is at least 70 percent.

Answer 30

This money purchase pension plans satisfies the average benefit percentage test of the average benetits test because the ratio of the average benefit of the nonhighly compensated (8%) to the average benefit of the highly compensated (10%) is 80 percent (8% ÷ 10%). Which is greater than the requirement of 70 percent

Answer 31

To satisfy this requirement, the method in which an employer chooses employees to cover under a qualified plan must meet both of the following requirements: The classification must be reasonable and established, based on the facts and circumstances of the business. under objective business criteria that identify the category of employees who benefit under the plan, and The classification must be nondiscriminatory. In order for the classification to be nondiscriminatory, the plan must meet one of the following two tests: * Safe harbor test - A plan satisfies the safe harbor test for a plan year if and only if the plan's ratio percentage is greater than or equal to the employer's safe harbor percentage. * Facts and circumstances test - To meet this test the plan's ratio percentage must be greater than or equal to the unsafe harbor percentage and the classification must satisfy a factual determination.

Answer 32

The nondiscriminatory classification test has a low probability of being covered on the CFP Exam. Therefore, this topic should not be your highest priority.

Answer 33

1. Classification must be reasonable and established based on the facts and circumstances of the business under objective business criteria, and 2. Must Pass either the Safe Harbor Test or Facts and Circumstances Test

Answer 34

Commissioner finds the classification nondiscriminatory and it meets the following test.

Answer 35

Need to calculate Ratio Percentage Test to calculate Safe Harbor and Unsafe Harbor Test.

Answer 36

Answer: C **The plan does not have to meet the ADP test because it is a noncontributory plan.**. The plan meets the ratio percentage test and fails the average benefits test

Answer 37

Answer: C The plan meets the ratio percentage test. The percentage of NHC employees covered by the plan is 53.33 percent (40 that benefit divided by 75 that are eligible) and the percentage of HC employees covered by the plan is 53.33% (8 that benefit divided by 15 that are eligible). The ratio percentage of the NHC employees covered by the plan compared to the ratio percentage of the HC employees covered by the plan is 100 percent (53.33% ÷ 53.33%) which is greater than the ratio requirement of at least 70 percent. **Shortcut:**: Another method of determining whether the plan meets the ratio percentage test is to determine the minimum number of nonexcludable NHC employees that must be covered by the plan to pass the ratio percentage test. This can be determined by calculating 70 percent of the percentage of HC covered by the plan multiplied by the number of nonexcludable NHC employees. In this problem, it would be calculated as follows: [((8 ÷ 15) x 70%) x 75] = 28. Twenty-eight NHC employees must be covered to pass the ratio percentage test. *The facts do not give us any information to determine if the plan meets the average benefits percentage test*. The plan does not meet the general safe harbor test which requires that at least 70 percent of the NHC employees are covered by the plan. Only 53.33% are covered.

Answer 38

**In addition to meeting one of the three coverage tests**, a defined benefit plan must satisfy the 50/40 coverage test. The 50/40 coverage test requires the defined benefit plan to benefit the lesser of 50 nonexcludable (eligible) employees or 40 percent of all nonexcludable (eligible) employees on **each day **of the plan year.

Answer 39

To remember that it's 50 employees or 40%, remember "people come first."

Answer 40

Note: Since the plan passed the safe harbor test, it does not have to pass the ratio percentage test or the average benefits test. Because it is a defined benefit plan, however, it must also pass the 50/40 test. ## Footnote Exam Tip: Be able to work the tests in this chart.

Answer 41

Answer: B The 50/40 rule requires that defined benefit plans cover the lesser of 50 employees or 40 percent of all eligible employees. Here 40 percent would be 80, so 50 is less than 80. This would be the absolute minimum number of covered employees

Answer 42

Answer: A The plan must cover the lesser of 50 people or 40 percent of all employees. In this case, the lesser would be 40 percent of 60, or 24 people.

Answer 43

Vesting is the transfer of ownership of employer contributed assets to the employee over a specific period of time. As the employee accrues years of service with an employer, the employee will begin to have ownership of contributions (and the associated earnings) made by the employer, according to a vesting schedule. If an employee terminates before being fully vested, then he or she will forfeit a portion of the employer's funds (and associated earnings). An employee's elective deferral contributions are always 100 percent vested as are any related earnings. These funds are always the employee's funds because they represent a salary reduction plan, therefore, they were always owned by the employee. Employer contributions, generally vest using a cliff or graduated vesting schedule. A cliff vesting schedule provides an employee full rights to the plan's assets immediately upon the passage of certain number of years of service, usually three years. A graduated vesting schedule provides an employee with full rights to a certain percentage benefit (less than 100%) after completing a certain number of years of service and provides the employee with an additional percentage for additional years of service. The following charts detail the Defined Contribution Plan Vesting Schedules and Defined Benefit Plan Vesting Schedules for plan years after 2006. **Remember** - Deferred eligibility requires immediate vesting after two years of service. The deferred eligibility is not available for 401(k) plans.

Answer 44

Look at 2-6 Year and 3 Year Cliff. * Note: The two-year vesting schedule also applies to employer contributions under a 401 (k) plan that makes use of an Automatic Enrollment Feature, as outlined in PPA 2006 (effective for years after 2007). **Deferred eligibility is not available for 401(k) plans.**

Answer 45

**Cash Balance plans use a 3 year cliff vesting schedule.** There is no impact to the vesting for a cash balance plan if the plan is top heavy. Vesting Schedule Options: - Employers may always elect to provide employees with vested benefits faster than the standard schedules. When an employer elects a faster vesting schedule, however, the vested benefit must always be comparatively better than one of the approved vesting schedules and cannot provide a greater vested percentage as compared to one of the schedules in some years and in other years fulfill the requirement by providing a greater vested percentage as compared to another vesting schedule.

Answer 46

Needs to beat out Permitted 2-to-6 Graduated OR Permitted 3 year cliff in all years.

Answer 47

Answer: C Both Statements 1 and 2 are correct,

Answer 48

Answer: C As a result of the PPA 2006, a profit sharing plan must vest at least as rapidly as: - a 3-year cliff or - 2 to 6 year graduated schedule without regard to the plan's top-heavy status. - The profit sharing plan can follow any vesting schedule that provides a more generous vesting schedule. | IMPORTANT

Answer 49

Employees earn a certain percentage benefit based on the applicable vesting schedule and after the employee attains a certain number of years of service. The years of service determination is based on the number of years, defined as a 12-month consecutive period with at least 1,000 hours worked for the employer. The determination of years of service is based on the employee's beginning date of employment and not on the date the employee becomes eligible to participate in the plan. It is important to note that an employer does not have to count for purposes of vesting: - (1) years of service the employee acquired with the employer before reaching the age of 18 if the employee was not participating in the plan at that time, - (2) years of service the employee attained before the employer sponsored a qualified plan, or - (3) years of service the employee attained during years when he did not contribute to an employee-contributory qualified plan. Note: changes for part-time employees under SECURE Act 2019 will change for plan years after 12/31/2020. Three consecutive years of service (500+ hours) must be met prior to being eligible.

Answer 50

Answer: B Amparo's vested balance in the profit sharing plan account is $52,000. Under PPA 2006, the least generous graduated vesting schedule permitted for a profit sharing plan is a 2-to-6 year graduated vesting schedule. The fact that the plan is top-heavy does not impact the vesting schedule under PPA 2006. Therefore, Amparo is 80% vested in the contributions to the account. There were no employee deferral contributions to the plan. Thus, 80% of $65,000 = $52,000.

Answer 51

EXAM TIP: Make sure you know how to do this calculation! Most likely on the CFP Exam ## Footnote Do they give me the $32,000?

Answer 52

Why were they designed? Key Employee: - A Key Employee is? - Officer A Plan is considered top heavy under either 2 definitions. Once the Qualified retirement Plan is Determined to be top Heavy, the plan **MUST:** Top-Heavy Vesting Top-Heavy Funding: - Non Key Employees minimum level of funding - Minimum Funding for Defined Contribution Plan - Defined Benefit Plan

Answer 53

The top heavy rules were designed to ensure that qualified plans that significantly benefit owners executives of the company (the "key employees") must provide some minimum level of benefits for the rank-and-file employees.

Answer 54

A key employee (decision- makers as opposed to just highly paid) is any employee who is any one or more of the following: - A **greater than five** percent owner, or - A **greater than one percent** owner with compensation in excess of **$150,000** (not indexed), or - An officer (defined below) with compensation in excess of $215,000 for 2023. - Notice that a key employee must be an owner or an officer Compensation by itself will not make an employee a key employee.

Answer 55

Whether an individual is an officer shall be determined upon the basis of all the facts, including the source of his authority, the term for which elected or appointed, or the nature and extent of his duties. Generally, the term "officer" means an administrative executive who is in regular and continued service. No more than 50 employees must be treated as officers. If the number of officers, as defined above, exceeds 50, then only the first 50 ranked by compensation will be considered officers under the key employee definition.

Answer 56

A defined benefit plan is considered top-heavy when the present value of the total accrued benefits of key employees (defined below) in the defined benefit plan exceeds 60 percent of the present value of the total accrued benefits of the defined benefit plan for all employees. A defined contribution plan is top-heavy when the aggregate of the account balances of key employees in the plan exceeds 60 percent of the aggregate of the accounts of all employees. **Simply stated, if > 60 percent of the benefits or contribution are going to key employees-THINK top heavy!**

Answer 57

Even though Jamal is an owner, he is not considered a key employee because his ownership percentage is not greater than five percent, and even though he is a greater than one percent owner, his income is not greater than $150,000.

Answer 58

Mario is a key employee because he is an officer with compensation in excess of the annual limit of $215,000 for 2023.

Answer 59

Answer: B Only Tina and Jean are considered key employees. A key employee is anyone who is any one or more of the following: (1) a greater than five percent owner, or (2) a greater than one percent owner with compensation in excess of $150,000, or (3) an officer with compensation in excess of $215,000 (2023).

Answer 60

Once the qualified retirement plan is determined to be top heavy, the plan **MUST**: - (1) use top-heavy vesting schedules and - (2) provide a minimum level of funding to non-key employees.

Answer 61

If the qualified defined benefit retirement plan is top heavy, the plan must accelerate the vesting from the standard vesting schedules to either a 2-to-6-year graduated or a 3-year cliff vesting schedule to maintain qualified status. All qualified defined contribution retirement plans automatically meet these requirements as they must use a 3-year cliff or 2-to-6-year graduated vesting schedule.

Answer 62

The sponsor of a top-heavy plan MUST provide its non-key employees with a minimum level of funding.

Answer 63

A defined contribution plan that is considered top-heavy must provide each of its nonexcludable, nonkey employees a contribution equal to at least *three percent of the employee's compensation.* An exception to the three percent minimum funding requirement occurs when the largest funding made on behalf of all key employees is less than three percent. - In such a case, the employer must provide non-key employees with a contribution equal to that of the key employees

Answer 64

A top heavy defined benefit plan must provide a benefit to its nonkey employees equal to two percent per the employee's years of service multiplied by the employee's average annual compensation over the testing period.

Answer 65

Answer: B The minimum amount that Super Spa, LP must contribute to the qualified profit sharing plan on Julia's behalf is $1,950 ($65,000 x 3%) assuming that they contribute at least three percent to key employees.

Answer 66

Any qualified plan that includes a Cash Or Deferred Arrangement (CODA), such as a 401(k) plan, must also satisfy each of the two following tests: - The Actual Contribution Percentage (ACP) Test for employer-matching contributions (and employee after-tax contributions), and - The Actual Deferral Percentage (ADP) Test for employee elective deferrals. | These tests will be discussed in the section on 401(k)s.

Answer 67

Covered Compensation Defined Benefit Plans Defined Contribution Plans: - Maximum Contribution per Participant to a defined contribution plan is the lessor of: - The maximum contribution is an aggregate known as the 415c limit, consisting of: - What two things should not be confused? - Employer Contributions to the Plan - Employee Contributions to the Plan - Forfeitures from Nonvested Employees - Employer Contribution Limit

Answer 68

The maximum amount of compensation that can be considered for the plan year 2023 is **$330,000.** This is referred to as the **covered compensation** limit. As such, any plan funding formula that requires the use of the employee's compensation cannot consider any compensation amount above the covered compensation limit.

Answer 69

Statutory requirements generally limit the employer to providing an employee with a maximum annual expected benefit at retirement equal to the lesser of: - $265,000 for 2023, or - 100 percent of the average of the employee's three highest consecutive years compensation during the time of plan participation (*considering the covered compensation limit*).

Answer 70

- Maximum Contribution per Participant to a defined contribution plan is the lessor of: - The maximum contribution is an aggregate known as the 415c limit, consisting of: - What two things should not be confused? - Employer Contributions to the Plan - Employee Contributions to the Plan - Forfeitures from Nonvested Employees - Employer Contribution Limit

Answer 71

In general, the maximum contribution per participant to a defined contribution plan is the lesser of: - 100 percent of an employee's compensation for the plan year, or - $66,000 for 2023 (not including the catch-up contribution of $7,500 for 2023 for those 50 and older).

Answer 72

The maximum contribution is an aggregate amount, known as the 415c limit, consisting of: - The employer contributions to the plan, plus - The employee contributions to the plan, plus - Any forfeitures, amount to be allocated from nonvested employees who terminated employment during the year.

Answer 73

The maximum contribution discussed here should not be confused with the employer's maximum tax-deductible amount of 25 percent of the employer's total compensation paid (discussed below).

Answer 74

The total employer contributions to a defined contribution plan include: - any mandatory contributions, - discretionary contributions, and - matching contributions. If the employer maintains multiple defined contribution plans, the limit is based on the aggregate of all contributions to all of the qualified retirement plans.

Answer 75

The total employee contributions to a defined contribution plan include: - any mandatory contributions, - elective deferral contributions, and - any after-tax contributions. The maximum employee elective deferral is included within the defined contribution account maximum annual contribution. Catch-up contributions made by the participant are not limited by the $66,000 for 2023 limit and could allow an individual who is age 50 or older to have contributions over $66,000 for 2023, totaling $73,500.

Answer 76

Any forfeiture allocated to an employee's defined contribution plan account during the year is included as a contribution to the plan when determining the maximum annual limit.

Answer 77

**Generally, an employer cannot deduct contributions to defined contribution plans in excess of 25 percent of the employer's total covered compensation.** Covered compensation includes the compensation up to $330,000 (2023) for all those employees included in the plan. **The 25 percent rule does not apply to defined benefit pension plans** because the employer is required to fund the defined benefit plan to the minimum funding standard determined by the actuary.

Answer 78

What Are They, What Are they Used For? Parent-Subsidiary Relationship Brother-Sister Relationship Combined Group

Answer 79

The controlled group rules were designed to prevent an owner from **splitting** their business into multiple **parts** and creating multiple **plans** allowing for **increased retirement contributions.** A controlled group is a combination of two or more trades or businesses (whether or not incorporated) that are under common control. All employees of companies in the controlled group must be considered to determine if a plan maintained by a controlled group member meets the controlled group requirements. A control group relationship exists if the businesses have one of the following relationships: - Parent-subsidiary, - Brother-sister, anc - Combined group

Answer 80

A parent-subsidiary controlled group exists when one or more corporations are connected through stock ownership with a common parent corporation: and - 80 percent of the stock of each corporation, (except the common parent) is owned by one or more corporation in the group; and - The Parent Corporation owns 80 percent of at least one other corporation.

Answer 81

In this example Lingling is the common parent of a parent-subsidiary group consisting of Corportion A, B and D. This is because it owns 80% or more of A and B directly. Since B owns 80% or more of D, it will also be considered in the controlled group.

Answer 82

A brother-sister controlled group is a group of two or more corporations, in which five or fewer common owners (a common owner must be an individual, a trust, or an estate) own directly or indirectly a controlling interest of each group and have "effective control." - Controlling interest generally means 80 percent or more of the stock of each corporation. - Effective control generally means more than 50 percent of the stock of each corporation, but only to the extent such stock ownership is identical with respect to such corporation. - With Effective Control add the lowest amount of each shareolder for each corporation.

Answer 83

In this example there is a controlling interest because there are 3 owners that together own 80% or more of each corporation (they own together 100%). However, there is not effective control because the identical ownership in each corporation does not total 50%. (A 10% + B 5% + C 5% = 20%). Therefore, there is not a brother-sister controlled group.

Answer 84

In this example there is a controlling interest because there are 3 owners that together own 80% or more of each corporation (they own together 100%). There is also effective control because the identical ownership in each corporation is more than 50%. (A 30% + B 25% + C 25% = 80%). Therefore, there is a brother-sister controlled group.

Answer 85

A combined group consists of three or more organizations that are organized as follows: - Each organization is a member of either a parent-subsidiary or brother-sister group; and - At least one corporation is the common parent of a parent-subsidiary; and is also a member of a brother-sister group.

Answer 86

Beta, Zeta and Theta are all members of the same combined group of trades or businesses under common control because they are each members of either a parent-subsidiary or a brother-sister group. Beta is the common parent of the parent-subsidiary group consisting of Beta and Theta. Beta is also a member of the brother-sister group consisting of Beta and Zeta

Answer 87

The affiliated service group rules were established because the ownership of companies could be arranged to avoid the "controlled group rules." The affiliated service group rules treats all employees of the members of an affiliated service group as if a single employer employed them. An affiliated service group means a group consisting of a service organization ("First Service Organization" or "FSO") and one or more A or B Organizations. An affiliated service group also may involve a Management Organization.

Lesson 1 of Retirement Planning: Introduction to Qualified Plan Flashcards

(123 cards)