Practice Exam Questions

Question 1

Which of the following statements regarding covered service providers under ERISA 408(b)(2) fee disclosure regulations is/are TRUE?

1. A covered service provider must be providing services to the plan.
2. A covered service provider must expect to recieve $1,000 or more in compensation.
3. Fiduciaries may be covered service providers.

A. 1

B. 2

C. 1 & 3

D. 2 & 3

E. 1, 2, & 3

Answer 1

E. All three statements are true

Question 2

All of the following statements regarding stock distributions from an ESOP are TRUE, EXCEPT:

A. A participant may elect to exclude from gross income the entire amount of the net unrealized appreciation on a lump sum distribution that includes employer stock.

B. A participant must have the right to elect a distribution within one year after the fifth plan year following separation for reasons other than NRA, diability or death.

C. A participant may demand that privately held employer stock distributed by the plan be purchased by the company at any time during two option periods.

D. A participant must have the right to elect a distribution within one year after the close of the plan year in which they seperate from service at NRA.

E. A participant of an S corporation ESOP has the right to demand that the entire vested account balance be distributed in the form of employer securities.

Answer 2

E.

IRC regulations exempt S corporation ESOPs from the requirement of distributing benefits in the form of stock, and S corporation ESOPs generally distribute cash in lieu of stock.

Question 3

All of the following stsatements regarding ASGs are TRUE, EXCEPT:

A. Each plan is considered invdividually when determining if the maximum annual addition limit has been exceeded.

B. Plans must apply the compensation limit under IRC 401(a)(17) based on total compensation received from all members of the ASG.

C. An employee who works for more than one member of the ASG may participate in a plan sponsered by each of his/her employers.

D. The top-heavy determination is made by considering all plans maintained by an ASG.

E. Plans must credit service with all members of the ASG for both eligibility and vesting purposes.

Answer 3

A. Annual additions under all defined contribution sponsored by members of the ASG plans must be aggregated to apply the annual addition limitation under IRC 415(c).

Question 4

All of the following statements regarding fiduciary liability are TRUE, EXCEPT:

A. A fiduciary must restore losses incurred by the plan because of their breach

B. A fiduciary breach may result in a prohibited transaction.

C. A 20% civil penalty may arise when a ficuciary breaches fiduciary responsibility

D. A fiduciary may be required to pay the plan any profits he or she earched through the use of plan assests.

E. A plan may offset damages against a fiduciary particiapant’s benefit under the plan only if the ficuciary is a 5% owner.

Answer 4

E.

Under certain circumstances, a plan may offset damages against a fiduciary-participant’s benefit, regardless of ownership, under the plan in which the breach occurred.

Question 5

Which of the following statements regarding S corporations sponsoring ESOPs is/are TRUE?

1. They are exempt from the requirement of offering a put option.
2. The ESOP may not provide for deductible dividends.
3. They are exempt from diversification rules.

A. 1

B. 2

C. 1 & 2

D. 2 & 3

E. 1, 2, & 3

Answer 5

C. 1 & 2

S coroporation ESOPs are not exempt from the ESOP diversifications rules.

Question 6

Which of the following statements regarding stock bonus plans is/are TRUE?

1. Benefits are distributable in employee stock.
2. Contributions may be made in the forms of plan sponer’s stock.
3. Put options are available to the participants.

A. 1

B. 2

C. 1 & 3

D. 2 & 3

E. 1, 2, & 3

Answer 6

E. 1, 2, & 3

All statements are true.

Question 7

All of the following statements regarding distributions of employer securities from an ESOP are TRUE, EXCEPT:

A. The method used to calculate the plan’s cost basis in the emloyer securities affects the NUA.

B. Generally, gain on the sale of employer securities is taxed as long-term capital gain.

C. Cost basis is the amount included as taxable income when the participant received the distribution of emlopyer securities.

D. Net unrealized appreciation excluded from gross income is not part of the cost basis for the participant on the sale of the securities.

E. The calculation of the plan’s cost basis will affect the participant’s cost basis when the participant sells the employer securities.

Answer 7

E.

When the employee sells the shares, all of the shares will ave the same cost bassis with regard to that employee, regardless of how the plan’s cost basis was calculated. The calculation of the plan’s cost basis will not affect the participant’s cost basis hen the particiapnt sells the employer securities.

Question 8

Which of the following statements regarding prohibited transactions is/are TRUE?

1. The second tier tax may be imposed if the prohibited transaction is not corrected.
2. The second tier tax is 100% of the amount involved.
3. The initial excise tax on a prohibited transaction is 15% of the amount involved for each year included in the taxable period.

​A. 1

B. 2

C. 1 & 3

D. 2 & 3

E. 1, 2, &3

Answer 8

E. All three statements are true.

Question 9

All of the following statements regarding multiemployer plans are TRUE, EXCEPT:

A. For coverage testing, a plan covering nonunion employees is disaggregated from the portion covering union employees.

B. If the multiemployer plan also covers nonunion employees, the portion covering nonunion employees must be disaggregated and tested for coverage.

C. A multiemployer plan requires a collective bargaining agreement between an employee organization and two or more unrelated employers.

D. A muliemployer plan may use a prototype plan or a volume submitter plan as they both accomodate multiemployer plans.

E. One Form 5500 is filed for a multiemployer plan rather than for each participating employer.

Answer 9

D. Multiemployer plans will always be individually designed plans because prototype and volume submitter plan procedures do not accommodate them.

Question 10

All of the following forms of compensation are reasonable exclusions under IRC 414(s), EXCEPT:

A. 10% of each employee’s regular compensaion

B. Elective deferrals

C. Moving expenses

D. Fringe benefits

E. Expense allowances

Answer 10

A. Excluding 10% of each employee’s regular compensation is NOT a reasonable exclusion under IRC 414(s)

Question 11

All of the following are responsibilities of a plan fiduciary, EXCEPT:

A. Meeting the rates of return outlined in the plan’s investment policy statement

B. Acting solely in the intrest of plan participants

C. Diversifying plan assests to minimize the risk of large losses

D. Complying with the provisions of the plan document

E. Remedying a ficuciary breach immediately

Answer 11

A.

A fiduciary does not need to meet specific rates of return for investment provisions.

Question 12

All of the following information must be provided before distributing benefits to a plan participant, EXCEPT:

A. Explanation of the different forms of payment available

B. Explanation of direct rollover options is distribution is in excess of $200

C. List of approved plan representatives for QJSA notice

D. Explanation of the relative values of each optional form of benefit

E. Information about the right to delay distribution

Answer 12

C.

There is no requirement that a plan provide a listing of approved plan representatives when processing a distribution from the plan.

Question 13

All of the following are parties-in-interest, EXCEPT:

A. An officer of the plan sponser

B. The spouse of a fiduciary to the plan

C. A 15% partner of a service provider to the plan

D. A participant who may direct their investments

E. A 20% partner of the plan sponser

Answer 13

D.

A party-in-interest is defined in ERISA 3(14) for purposes of applying the prohibited transaction rules. ERISA 404(c) explicitly states that a participant who directs his or her investments in a participant-directed defined contribution plan is not a fiduciary for ERISA Title I puerposes and hence is not a party-in-interest.

Question 14

Based on the following information, determine which of the following corporations is/are members of a controlled group.

None of the individuals are related.

Employee Corp X Corp Y Corp Z

A 65% 40% 55%

B 35% 60% 0%

C 0% 0% 45%

A. None

B. Corp X and Corp Y

C. Corp X and Corp Z

D. Corp Y and Corp Z

E. Corp X, Corp Y, and Corp Z

Answer 14

B. Corp X and Y

X-Y-Z is not a brother-sister controlled gruop. In this situation, only individual A is a common owner. B and C do not own any share of X corp. Therefore, the 80% common control test is satisfied.

Corp X & Y are a brother-sister controlled group with 100% common control and 75% effective control. Individuals A and B are common owners. Corp Y and Z (with A being the only owner) cannot satisfy the 80% common control test.

Question 15

Which of the following statements regarding QSLOBS is/are TRUE?

1. To be a QSLOB the employer must be divided up into at least two seperate lines of business.
2. The plan may perform top-heavy testing seperately for each QSLOB.
3. The separate line of business must include at least 50 employees on every day of the testing year.

A. 1

B. 2

C. 1 & 3

D. 2 & 3

E. 1, 2, & 3

Answer 15

C. 1 & 3

The plan may not perform top-heavy testing separately for each QSLOB.

Question 16

Based on the following information, determine the participant’s average benefit percentage used in performing the general test for the employer’s money purchase plan.

• Benefit percentage derived from the money perchage contribution is 8.0%
• Benefit percentage derived from forfeitures allocated in the money purchase plan is 1.5%
• Benefit percentage derived from a profit-sharing contribution in the employer’s separate profit sharing plan is 5.8%
• Benefit percentage derived from pre-tax elective contribution in the employer’s separate 401(k) plan is 9.0%
• Benefit percentage derived from a matching contribution in the employer’s separate 401(k) plan is 4.5%

​A. 8.0%

B. 9.5%

C. 15.3%

D. 24.3%

E. 28.8%

Answer 16

E. 28.8 %

The sum of all contributions to the plan = Money purchase + Money Purchase Forfeitures + Profit-Sharing + Marching contributions.

8 + 1.5 + 5.8 + 9 + 4.5 = 28.8

Question 17

Which of the following statements regarding the consequences for violating the ERISA 408(b)(2) plan sponsor fee disclosure requirements is/are TRUE?

1. The service provider may have to return to the plan any fees paid.
2. The responsible plan fiduciary can be liable for a breach of fiduciary duty.
3. The service provider will be liable for a 15% excise tax on the amount of fees charged.

​​​A. 1

B. 2

C. 1 & 3

D. 2 & 3

E. 1, 2, & 3

Answer 17

E. All statements are true

Question 18

All of the following contribution types are always included in the average benefit test, EXCEPT:

A. Pre-tax elective contributions

B. Basic matching contributions in a safe harbor 401(k) plan

C. Nonelective contributions in a safe harbor plan

D. Designated Roth contributions

E. Employer profit-sharing contributions made to a plan maintained by a QSLOB other than the one being tested.

Answer 18

E. An employer may elect to test coverage separately for its qualified separate lines of business (QSLOBs). When applying the coverage tests to a plan maintained by a QSLOB, all employees not included in that QSLOB are excludable employees. Thus, employer profit-sharing contributions made to a plan maintained by a QSLOB other than the one being tested are not included in the average benefits test.

Question 19

All of the following contribution types are always included in the average benefit test, EXCEPT:

A. Pre-tax elective contributions

B. Basic matching contributions in a safe harbor 401(k) plan

C. Nonelective contributions in a safe harbor plan

D. Designated Roth contributions

E. Employer profit sharing contrubutions made to a plan maintained by a QSLOB other than the one being tested.

Answer 19

E. An employer may elect to test covereage separately for its qualified separate lines of business (QSLOBs). When applying the coverage tests to a plan maintained by QSLOB, all employees not included in that QSLOB are excluddable employees. Thus, employer profit-sharing contributions made to a plan maintained by a QSLOB other than the on being tested are not included in the average benefits test.

Question 20

All of the following statements regarding controlled group attribution rules are TRUE, EXCEPT:

A. In general, an individual’s ownership is attributed to the spouse.

B. A parent is attributed the ownership of a business held by a minor child.

C. A father-in-law is attributed the ownership of a business held by a daughter-in-law.

D. A parent who owns 75% of a business is attributed the adult child’s ownership in that business.

E. A grandparent who owns 60% of a business is attributed the grandchild’s ownership in that business.

Answer 20

C. There is no attrbution from in-law to in-law.

Question 21

All of the following statements regarding aggregation, disaggregation and restructuring of plans for nondiscrimination teting are TRUE, EXCEPT:

A. If the plan passes covereage without being aggregated with another plan of the employer, the contributions are tested for nondiscrimination separately from any other plan the employer maintains.

B. Each disaggregated portion of the plan is treated as a seperate plan.

C. The nondesign-based safe harbor uniform points plan is an available testing method for a component plan.

D. No special plan language is needed to restructure the plan into a component plans for testing purposes.

E. If you permissively aggregate two plans to pass coverage testing, you must also permissively aggregate the plans when testing nondiscrimination.

Answer 21

C.

The nondesign-based safe harbor for uniform points plans is not an available testing method for a component plan. Only general testing may be used for this type of plan.

Question 22

All of the following statements regarding controlled group attribution rules under IRC 1563 when applied to adult children (i.e. age 21 and older) are TRUE, EXCEPT:

A. Stock attribution rules are diffrent for determining controlled groups than they are for determining ASGs.

B. An adult child is attributed ownership of all businesses of the adult children if the adult child owns more than 50% of that business.

C. A parent is attributed ownership of all businesses of the adult child if attribution requirements are satisfied with regard to at least one of the businesses.

D. Both direct ownership and stock attribution apply in determining interest in a business.

E. A parent is attributed ownership of a business held by the child only if the parent owns more than 50% of that business.

Answer 22

C. A parent is not attributed ownership of all businesses of the adult child if attribution requirements are satisfired with regard to at least on the businesses. A parent is only attributed ownership of the businesses of the adult child if attribution requirements are satisfied (i.e. parent owns more than 50%) for that particular business.

Question 23

All of the following statements regarding the average benefit percentage test are TRUE, EXCEPT:

A. Benefit percentages may be computed based on an average of the current year and the prior year benefit percentages.

B. Benefit percentages may be adjusted by imputing permitted disparity.

C. When calculating an employee’s benefit percentage, generally all contributions for the year are included, even if they have been distributed due to termination of employment.

D. An employee’s benefit percentage may be an allocated rate or a benefit rate.

E. IRC 415(c)(3) compensation must be used when computing allocations rates.

Answer 23

E. 414(s) compensation must be used when computing allocation rates for the average benefit test.

Question 24

Which of the following statements regarding life insurance in DC plans is/are TRUE?

1. The total premium cost for term insurance is limited to not more than 25% of the aggregate contributions.
2. Aggregate contributions include employer contributions, forfeitures, earnings, and after-tax employee contributions.
3. The total premium cost for whole life policies is limited to less than 50% of the aggregate contributions.

A. 1

B. 2

C. 1 & 3

D. 2 & 3

E. 1, 2, & 3

Answer 24

C. 1 & 3 only

Earnings are not included in aggregate contributions.

Question 25

All of the following are performed as a single employer for controlled group members, EXCEPT:

A. IRC 410(b) coverage testing

B. Top-heavy ratio

C. IRC 401(a)(17) compensation limit

D. IRC 404 deduction limits when each member has their own plan

E. IRC 415 limits

Answer 25

D. Controlled group members are not treated as single-employer for purposes of applying deduction rules. However, single-employer treatment results when two or more members of the controlled group participate in the same plan.

Question 26

Based on the following information, determine the EBAR based on cross-testing contrubtions as benefits.

• Annual compensation: $160,000
• Allocation: $40,000
• Actuarial Factor: 008784

A. 2.50%

B. 2.85%

C. 8.78%

D. 25.00%

E. 28.46%

Answer 26

E. 28.46%

$40,000/($160,000 * .008784) =

$40,000/1,405.44 = 28.46

Question 27

All of the following statements regarding a controlled groups are TRUE, EXCEPT:

A. When one business owns at least 80% of one or more other business, a parent-subsidy controlled group excists.

B. A brother-sister controlled group may only have five or fewer common owners.

C. A person that owns 85% of two businesses satisfies the brother-sister common control test.

D. If the common control test is satisfired, a brother-sister controlled group exists.

E. An organization that owns more than 50% of a subsidiary is a parent-subsidiary controlled group for purposes of applhying the annual additions limit under IRS 415.

Answer 27

D. A brother-sister controlled group exists if five or fewer common ownders satisfy both an 80 percent common control and a 50 percent effective control test.

Question 28

Based on the following information, determine which of the following corporations is/are members of a controlled group.

None of the individuals are related.

Employee__Corp 1__Corp 2 Corp3

W 60% 40% 80%

X 20% 15% 20%

Y 20% 5% 0%

Z 0% 40% 0%

A. None

B. Corp 1 and Corp 2

C. Corp 1 and Corp 3

D. Corp 2 and Corp 3

E. Corp 1, Corp 2, and Corp 3

Answer 28

C. Corp 1 and Corp 3

A brother-sister controlled group exists when the same five or fewer owners have both common control (own at least 80%) and effective control (identical ownership is at least 50%). Employees W and X are the only owners of all three companies so only their ownership is considreed. Combined they own 80% of 1, 55% of 2, and 100% of 3. With at least 80% ownership of Corp 1 and 3, the common control test is satisfied. The effective control (identical ownership) for employee W is 60% and Employee X is 20%. The sum of these is 80% so the effective control test is satisfied.

Question 29

Based on the following information, determine the self-employed individual’s earned income for the profit-sharing plan.

• Schedule C Income: $100,000
• Self-Employment Tax: $13,578
• Contribution for Self-Employed individual: $18,642
• There are no other employees: n/a

The Schedule C income reflected above is before adjustments.

A. $74,569

B. $67,780

C. $93,211

D. $100,000

E. $86,422

Answer 29

A. $74,569

Earned income for a self-employed individual with no common law employees is their Schedule C income reduced by 1/2 of the self employment tax (i.e. Social Security tax) less the self-emploed individual’s retirement plan contribution.

$13,578 x .5 = $6,789

$100,000 - $18,642 - $6,789 = $74,569

Question 30

All of the following are considered covered service providers for purposes of ERISA 408(b)(2), EXCEPT:

A. An actuary providing one-time consulting on a project paid by the plan

B. A third party administrator billing the plan directly an annual administration fee of $1,500

C. An investment advisor receiving revenue sharing from the plan assets totaling $3,000 per quarter

D. An investment advisor billing the plan directly $4,000 for a vendor search

E. A recordkeeper collecting an asset charge of 10 basis points annually, equating to $10,000 paid from the plan.

Answer 30

A.

The actuary is not a covered service provider because an actuary does not fall in three categories of service providers and was not expected to receive a $1,000 or more in compensation.

Three categories of covered service providers: fidicuaries, platform providers to ppt-directed DC plans, and indirectly compensated service providers.

Question 31

Which of the following statements regarding the employer deduction in a short year plan is/are TURE? The employer’s taxable year is unchanged.

1. The employer will need to designate for which plan year the contribution is made.
2. The computation of the deduction is not affected.
3. The applicable compensation dollar limit under 401(a)(17) is prorated.

A. 1

B. 2

C. 1 & 2

D. 2 & 3

E. 1, 2, & 3

Answer 31

C. 1 & 2

The compensation dollar limit is not affected since the taxable year did not change.

Question 32

All of the following statements regarding fiduciary responsibility are TRUE, EXCEPT:

A. A fiduciary must satisfy pre-establised rates of return in the investment of plan assets.

B. A fiduciary must comply with the provisions of the plan document.

C. A fiduciary must act solely in the interest of the participants and beneficiaries.

D. A fiduciary must discharge his duties in a prudent manner.

E. A fiduciary managing the plan assests must diversify assets to minimize the risk of large losses.

Answer 32

A.

There is NOT a pre-established rate of return required to be attained by a fiduciary when investing plan assets.

Question 33

Which of the following is/are requirements for an employee to be deemed a leased employee?

1. Services must be performed for at least six months on a sustantially full-time basis.
2. Services must be performed under an agreement between the recipient employer and the leasing organization.
3. Services performed must be under the primary control or direction of the recipient employer.

A. 1

B. 2

C. 1 & 3

D. 2 & 3

E. 1, 2, & 3

Answer 33

D. 1 is false. Services must be performed for at least twelve months on a substantially full-time basis.

Question 34

All of the following statements regarding distributions from an ESOP are TRUE, EXCEPT:

A, A put option permits the holder of the stock to demand that the company buy back the stock at the current fair market value.

B. The ESOP does not need to distribute stock when the company by laws limit stock ownership to the ESOP and employees of the company.

C. For seperations due to retirement the participant must have the right to elect a distribution within one year after the fifth plan year following their separation.

D. S corporations are exempt from distributing benefits in the form of stock.

E. Generally, ESOP participants have the right to demand that their entire account be distributed in the form of employer securities.

Answer 34

C.

This statement is false. A participant who terms due to retirement does not have to wait to take a distribution

Question 35

All of the following statements regarding life insurance in defined contribution plans are TRUE, EXCEPT:

A. The premium is the fee paid each year to the insurance company.

B. Net insurance proceeds paid to a beneficiary are excludable from gross income.

C. The annual term cost (PS 58 cost) of insurance is reported each year on Form 1099-R as taxable to the participants.

D. The proceeds of a participant’s life insurance policy may be payable to the plan or the participant’s beneficiary depending on how the policy is set up.

E. The reserve accululation is used to offset administrative fees associated with the terminations of the policy upon a participant’s death.

Answer 35

E.

If the insured dies, the reserve customarily is used to pay part of the face amount.

Question 36

Based on the following, determine the number of rate groups for purposes of the nondiscrimination test under IRC 401 (a)(4).

HCE 1: 5.25

HCE 2: 2.5

HCE 3: 15.50

HCE 4: 2.50

HCE 5: 5.25

A. 1

B. 2

C. 3

D. 4

E. 5

Answer 36

C. 3

There are three different rate groups as you need one rate group for each HCE who is benefiting at a different rate.

Question 37

All of the following statements regarding cross-tested defined contribution plans are TRUE, EXCEPT:

A. If a participant’s allocation is limited by IRC 415, the reduced allocation is used to convert the allocation for that participant.

B. Participants’ allocations are converted into a single life annuity payable at the participant’s testing age.

C. EBAR calculations are permitted to recognize future allocations to the participant.

D. The allocation that is converted does not normally include earnings that are attributed for the current plan year.

.E. The interest rate used to convert the allocation into a benefit must be, withing a range of 7.5% to 8.5%

Answer 37

C. A measurement period that includes future years is not permitted when allocations under a defined benefits plan are being normalized into an EBAR.

Question 38

All of the following statements regarding ESOPs are TRUE, EXCEPT:

A. The plan may pay no commissions on the sale of employer stock.

B. An ESOP may not include a 401 (k) elective deferral feature.

C. In some cases, the the tax deductivle contribution to a leveraged ESOP may exceed the 25% deductible limit.

D. Permitted disparity may not be used when allocating ESOP contributions.

E. The plan sponser of a leveraged ESOP may be able to deduct the amount of the load interest.

Answer 38

An ESOP may include a 401(k) elective deferral feature. this is commonly referred to as a KSOP.

Question 39

All of the following are steps that fiduciary should perform when choosing a service provider, EXCEPT:

A. Solicit bids from multiple service providers

B. Understand whether service provider is providing ministerial or fiduciary functions

C. Evaluate service provider’s fees

D. Automatically disregard any service provider if they have been involved in recent litigation

E. Evaluate service provider’s expertise and value of services

Answer 39

D.

The conditions of the recent litigation should be researched so that the fiduciaries may determine whether the service provider deserves further consideration.

Question 40

Which of the following is/are actions that result in a person being considered a fiduciary of a plan?

1. Exercising any discretionary authority or control over the plan’s management and administration.
2. ​ Exercising any discretionary authority or control over the decision to make contributions to the plan, based on company profitability.
3. Rendering investment advice with respect to the plan assets for a fee.

​A. 1

B. 2

C. 1 & 3

D. 2 & 3

D. 1, 2, & 3

Answer 40

C. 1 & 3 only

Exercising discretionary control over the decision to make contributions to the plan based on company profitability is a “settlor” function (employer function) and not a “fiduciary” function.

Question 41

Which of the following is/are conditions that must be satisfied in order for an individual to be treated as a leased employee under IRC 414(n)?

1. Services performed must be under the primary control or direction of the recipient employer.
2. Services must be performed under an agreement between the recipient employer and the leasing organization.
3. Services must be performed for at least six months on a substantially full- time basis.

A. 1

B. 2

C. 1 and 2

D. 2 and 3

E. 1, 2, and 3

Answer 41

C. 1 and 2

Services must be performed for at least 12 months on a substantially full-time basis.

Question 42

All of the following statements regarding calculation of excise tax relating to a PT are TRUE, EXCEPT:

A. An extension extends the time for paying the excise tax beyond the regular due date.

B. Form 5330 is due by the last day of the 7th month following the disqualified person’s taxable year for which the tax is being paid.

C. The DOL’s VFC Program is available to correct a PT.

D. Filing Form 5500 starts a three year statute of limitation for transactions reported on the form.

E. If a prohibited transaction is not corrected, the IRS may impose a second tier tax which equals 100% of the amount incolved.

Answer 42

A.

An extension does not extend the time for paying the excise tax so interest is charged if the tax is paid after the regular date.

Question 43

Which of the following statements regaring coverage testing is/are TRUE?

1. A leased employee who terminates employment before the last day of the plan year and who completed 800 hours of service is not included for covereage testing if the plan requires employment on the last day of the plan year to receive an allocation.
2. A leased employee who meets the plan’s age and one year of service requirement will be eligible for the recipient employer’s plan and considered for coverage testing.
3. The ABP testing group under the average benefit test would include the recipient employer’s plan and the leasing organization’s plan that covers the recipient’s leased employees.

​A. 1

B. 2

C. 1 & 3

D. 2 & 3

E. 1, 2, & 3

Answer 43

D. 2 & 3

If the plan being tested for coverage requires employment on the last day of the year or the completed of a minimum hours of service to benefit under the plan, a leased employee who terminates employment before the last day of the plan year may be statutorily exluded for covereage purposes if he or she has 500 or fewer hours of service with respect to the recipeint for that plan year.

Question 44

All of the following statements regarding compensation are TRUE, EXCEPT:

A. Compensation for allocation purposes may be limited to a specific dollar amount.

B. Compensation for allocation purposes must be the same compensation used in nondiscrimination testing.

C. Compensation used in nondiscrimination testing must satisfy IRC 414(s).

D. Compensation for allocation purposes may be based on compensation from date of participation.

E. Compensation used in nondiscrimination testing for 2014 cannot exceed $260,000 (as indexed).

Answer 44

B. The plan may use a different compensation definition for allocations than the definition used for testing nondiscrimination.

Question 45

Which of the following statements regarding the reporting requirement that apply to a PT is/are TRUE?

1. Form 5330 is used to transmit any excise tax due.
2. Participants are notified of any prohibited transaction prior to making correction.
3. The excise tax is due the 7th month following the disqualified person’s taxable year for which the tax is being paid.

​A. 1

B. 2

C. 1 & 3

D. 2 & 3

E. 1, 2, & 3

Answer 45

C. 1 & 3

Statement 2 is false.

Question 46

All of the following statements regarding benefits, rights, and features subject to nondiscrimination testing are TRUE, EXCEPT:

A. A benefit, right, or feature, which is currently available, satisfies the nondiscrimination requirement even if it is not effectively available.

B. An ancillary benefit must satisfy the availability test.

C. The right to make rollover contributions into a plan is an example of a right or feature.

D. The right to direct investments in a plan is an example of a right or feature.

E. Current availability is tested under the nondiscriminatory classification test of the average benefit test.

Answer 46

A.

A plan must satisfy both the current availability test and an effective availability test to demonstrate the BRFs are not discriminatory.

Question 47

Which of the following statements regarding leased employees under a multiple employer plan is/are TRUE?

1. Common ownership must be established between the recipient and the leasing organization to allow the leased employee to participate.
2. A leased employee’s years of service with all participating employers are aggregated for determining eligibility under IRC 401(a).
3. Contributions from all participating employers are aggregated for computing the leased employee’s annual addition under IRC 415.

A. 1

B. 2

C. 1 & 3

D. 2 & 3

E. 1, 2, and 3

Answer 47

B. 2 only

Participating employers in a multiple employer plan are treated as oa single employer plan for certain purposes such as eligibility, exclusive benefit rule, vesting, IRS 415 limits and Form 5500 filing.

A multiple employer plan does not require common owndership between the recipient and the leasing organization.

Question 48

All of the following statements regarding permissive aggregation for coverage testing are TRUE, EXCEPT:

A. 401(k) plans being permissively aggregated to pass coverage must also aggregate for ADP testing.

B. The benefiting group is determined by including any employee who benefits under any plan being permissively aggregated.

C. Plans must have the same plan year to permissively aggregate for coverage testing.

D. Plans permissively aggregated to satisfy the ratio percentage test for coverage must also be aggregated for IRC 401(a)(4) testing.

E. A profit-sharing plan and a SEP may be permissively aggregated to satisfy coverage testing.

Answer 48

E.

Only qualified plans under IRC 401(a) are eligible for permissive aggregation. An employer may not aggregate a qualified plan with a 403(b) plan or a SEP to demonstrate that the qualified plan passes the coverage test under IRC 410(b).

Question 49

All of the following are impacted by DOMA, EXCEPT:

A. ERISA disclosure to spouses

B. ESOP 1042 transactions

C. Right to bring benefit claims

D. ERISA definition of a one participant plan

E. Allocation of nonelective employer contribution

Answer 49

E.

Allocations of nonelective employer contributions are not impacted by DOMA

Question 50

All of the following must satisfy the availability tests for a plan’s beenfits, rights and features, EXCEPT:

A. Benefit formulas

B. Right to transfer benefits to and from plans

C. Ancillary benefits

D. Loan features

E. Optional forms of benefits.

Answer 50

A.

Benefits, rights and features do not emcompass the allocation or benefit formula under which the participants accrue benefits under the plan.

Question 51

All of the following participants must receive a gateway contribution if the plan is cross-tested, EXCEPT:

A. Participants eligible for a safe harbor nonelecive contribution in a safe harbor 401(k) plan.

B. Participants eligble for a safe harbor matching contribution in a safe harbor 401(k) plan.

C. Non-key employees eligible for a minimum top-heavy contribution.

D. Participants who are allocated a QNEC to satisfy nondiscrimination in a 401(k) plan

E. Participants eligible for a discretionary nonelective contribution.

Answer 51

B.

Participants eligible for a safe harbor match, but no other type of employer contributions are NOT required to receive the gateway contribution since an employer matching contribution is not a nonelective employer contribution.

Question 52

All of the following statements regarding ARA’s Code of Professional Conduct are TRUE, EXCEPT:

A. An ARA member shall make use of a the membership titles and credentials only where the use conforms to the practice authorized by ARA.

B. An ARA member shall perform professional services only when qualified to do so based on education, training, or experience.

C. An ARA member has an obligation to observe stadards of professional conduct in the course of providing any service to a principal.

D. An ARA member shall perform professional services with honesty, integrity, skill, and care.

E. An ARA member shall not perform any professional services involving a potential conflict of interest.

Answer 52

E.

An ARA member shall can perform professional services involving a potential conflict of interest with correct measures

Question 53

Which of the following statements regarding management groups and affliated service groups is/are TRUE?

1. The ownership requirement between a management organization and the recipient organization is 15%.
2. Setting employee compensation would be an example of a management function.
3. Comparing gross receipts for management functions to total receipts is a method that may be used to determine if the principle functions of the business are management functions.

A. 1

B. 2

C. 1 & 3

D. 2 & 3

E. 1, 2, & 3

Answer 53

D. 2 & 3

There is no ownership requirement between the management organization and recipient organization.

Question 54

Which of the following statements regarding cross-testing defined contribution plans under IRC 401(a)(4) is/are TRUE?

1. Cross-testing uses EBARs to analyze the benefit that would be generated from the allocations as if the plan were a defined benefit plan.
2. Cross-testing recognizes that a younger participant has more years for contrubutions to grow into a meaningful benefit at retirement than an older participant.
3. A participant’s EBAR is equal to the allocation for the participant divided by the participant’s compensation.

​A. 1

B. 2

C. 1 & 2

D. 2 & 3

E. 1, 2, & 3

Answer 54

C. 1 & 2

Statement 3 in this question, which is false, describes an allocation rate and not an EBAR.

Question 55

All of the following statements regarding IRC 1042 transactions are TRUE, EXCEPT:

A. Eligible shareholders may sell stock to the plan and reinvest the proceeds in equity or debt instruments.

B. IRC 1042 transactions are valuable to business owners that want to divest their stock.

C. Shareholders must own at least 10% of the stock to take advantage of this election.

D. Shareholders who sell their interest to the ESOP may be able to defer the gain for a significant period of time if the sponsoring company is a C corporation.

E. The shareholder must reinvest the proceeds of the sale of stock to the ESOP in qualified replacement property.

Answer 55

C.

Shareholders must own at least 30% of the stock to take advantage of the IRC 1042 election.

Question 56

All of the following statements regarding disaggregation for coverage testing are TRUE, EXCEPT:

A. If union employees are covered under a plan that also covers nonunion employees, the potions of the plan covering nonunion employees.

B. The ESOP portion of a plan must be disaggregated from the non-ESOP portion of the plan for coverage testing purposes.

C. If a plan c covers employees in more than one QSLOB, the plan may be disaggregated into seperate portions representing employees assigned to each QSLOB..

D. Multiple emplyer plans covering employers of more than one unrelated business are disaggregated into portions representing each business’s employees.

E. The portion of a plan that is a 401(k) arrangement must be disaggregated from the portion of the plan that is a 401(m) arrangement.

Answer 56

A. If union employees are covered under a plan that also covers non-union employeses, the portion of the plan covering union employees must be disaggregated from the portion of the plan covering nonunion employees.

Question 57

All of the following statements regarding the QSLOB administrative scrutiny test are TRUE, EXCEPT:

A. All QSLOBs of the employer must satisfy the same safe harbor test.

B. A QSLOB may satisfy the test by meeting the mergers and aquisitions safe harbor.

C. The QSLOB may satisfy the test by appling to the IRS for a determination.

D. The QSLOB may satisfy the test by meeting on the of the six safe harbor tests.

E. The different industries safe harbor is satisfied if the QSLOB is in a separate industry than every other QSLOB of the employer.

Answer 57

A. All of the employer’s QSLOBs are not required to meet the same administrative scrutiny test.

Question 58

All of the following statements regarding fiduciary responsibility are TRUE, EXCEPT:

A. A fiduciary’s basic duty is to act solely in the interest of the plan’s particpants.

B. A fiduciary’s duties can be delegated amond several individual fiduciaries.

C. A fiduciary must try to remedy a co-fiduciary’s breach once they are made aware of the breach.

D. A fiduciary can be held liable for a co-fiduciary’s breach under certain circumstances.

E. A fiduciary may be appointed for life.

Answer 58

E.

Appointing a fiduciary for life would be inconsistent with the ERISA fiduciary provisions.

Question 59

Based on the following information, determine the EBAR based on cross-testing contributions as benefits.

• Annual Compensation: $90,000
• Allocation: $13,500
• Actuarial Factor: .035155

​A. 0.15%

B. 0.43%

C. 4.27%

D. 15.00%

E. 35.56%

Answer 59

C. 4.27%

$13,500/($90,000 * .035155) = 4.27

Question 60

All of the following statements regarding why a plan sponser might adocpt an ESOP are TRUE, EXCEPT:

A. The plan sponser, not the participant, has a potential for favorable tax treatment of the distribution of stock from an ESOP.

B. ESOPs offer a favorable means of coporate financing to the plan sponsor.

C. The employees have an increased interest in the financial health of the company and therefore worker productivity may increase.

D. The IRC provides employers with additional tax incentives to put stock into an ESOP.

E. The ESOP provides a market for the purchase of securities that might not otherwise be available.

Answer 60

A.

The participant receives favorable tax treatment when they take a distribution of stock from the plan.

Question 61

All of the following are prohibited transactions, EXCEPT:

A. A loan between the plan and the spouse of the owner of the company

B. The failure to transmit salary deferrals in a timely manner

C. The plan selling a limited partnership interest to the plan’s attorney for 15% above fair market value

D. The contribution of a beach house owned by the employer to a profit-sharing plan

E. The employer guaranteeing a loan to the plan at fair market value.

Answer 61

D.

In a nonpension plan (profit-sharing or stock bonus plan), the contribution of property is not a prohibited transaction is the contribution is purely discretionary and the property is not unencumbered (not security for a loan.

Question 62

All of the following statements regarding a leveraged ESOP are TRUE, EXCEPT:

A. A leveraged ESOP operates in a similar manner to a nonleveraged ESOP other than the loan transactions.

B. There are two types of loans that are used for ESOP stock acquisitions: direct loans and developments loans.

C. Loan proceeds may be used to acquire qualifying employer securities.

D. A leveraged ESOP has the ability to borrow from the employer or from a third party to purchase stock.

E. When an ESOP borrows to purchase stock, the scurity for the loan is the stock that is purchased with its proceeds.

Answer 62

B.

The two types of loans that are used for ESOP stock acquisitions are direct loans and back-to-back loans.

Direct loan: employer or financial institution lends money to the plan and the plan uses that money to buy employer securities.

Back-to-back loan: employer borrows money from a financial institution. In a separate loan transaction, the employer lends the money to the ESOP, which purchases the stock.

Question 63

Which of the following statements regarding the calculation of the prohibited transaction excise tax is/are TRUE?

1. In the case of a loan the amount involve is the principal amount of the loan.
2. In the case of unreasonable compensation, the amount involved is the excess compensation paid by the plan.
3. In the case of the sale of property, the amount involved is the greater of the fair market value of the property or the amount paid for the property.

A. 1

B. 2

C. 1 & 3

D. 2 & 3

E. 1, 2, and 3

Answer 63

D. 2 & 3

Statement 1 is false. In the case of a loan, the amount involved is the greater of the fair market interest rate or the interest paid for the use of the money.

Question 64

All of the following are ethical violations under ARA Code of Professional Conduct, EXCEPT:

A. Disclosure of a participant’s salary to another plan participant

B. Disclosure to the plan sponser of fees paid to the third-party administrator by a broker that invests the plan assets

C. A third-party administrator hiding a significant conflict of interest between the plan and interest of another party

D. A third-party adminisator advertising that an enrolled actuary is on their staff, but utilizing the services of an outisde actuary

E. Use of the QPA designation who is awaiting confirmation that they have been awarded the designation

Answer 64

B. This is not an ethical violation

Question 65

All of the following statements regarding types of buisness entities are TRUE, EXCEPT:

A. Compensation for plan purposes for employees of a partnership may be Form W-2 wages.

B. Compensation for plan purposes for shareholders of an S corporation may be Form K-1 income.

C. Compensation for plan purposes for employees of an S corporation may be Form W-2 wages.
D. Compensation for plan purposes for shareholders of a C corporation may be Form W-2 wages.

E. Compensation for plan purposes for employees of C corporation may be Form W-2 wages.

Answer 65

B.

Shareholders may be employees of the S corporation and may be paid compensation as an employee, subject to W-2 reporting.

Question 66

Which of the following statements regarding QSLOBs is/are TRUE?

1. To be a QSLOB the employer must be divided up into at least two separate lines of business.
2. The plan may perform top-heavy testing separately for each QSLOB.
3. The seperate line of business must include at least 50 employees on every day of the testing year.

​A. 1

B. 2

C. 1 & 3

D. 2 & 3

E. 1, 2, & 3

Answer 66

C.

The plan may not perform top-heavy testing separately for each QSLOB.

Question 67

All of the following statements regarding multiple employer plans are TRUE, EXCEPT:

A. Leasing organizations often maintain multiple employer plans to better coordinate benefits with recipient employers.

B. The multiple employer plan may be maintained by a bona fide group or association of employers.

C. A professional employer organization may need to adopt a multiple employer plan avoid violating the exclusive benefit rule.

D. A multiple employer plan typically includes participating employers whose benefits are subject to a collectively bargained agreement.

E. Participating employers who maintain a multiple employer plan may have common ownership.

Answer 67

D.

A multiemployer plan typically includes participating employers whose benefits are subject to collectively bargained agreement while a multiple employer plan does not.

Question 68

All of the following statements regarding S Corporations are TRUE, EXCEPT:

A. Shareholders in an S corporation may be paid compensation as employee, subject to W-2 reporting.

B. An ESOP may be a shareholder of an S Corporation.

C. An S Corporation is a corporation that has made an election to be taxed as a partnership.

D. An S corporation may have more than one class of stock.

E. An S Corporation can have no more than 100 shareholders.

Answer 68

D.

An S Corporation is limited to one class of stock.

Question 69

Based on the following, determine which of the following statements regarding an ASD is/are TRUE:

• Dr. X, thourhg his corpotraion Corp X, provides medical services to ABC Med Clinic.
• Dr. K, throuhg his corporation Corp K, provides medical services to ABC Med Clinic, Corp K is owned by several other doctors however, they do not provide services to ABC Med Clinic.
• ABC Med Clinic employes nurses and other staff common to a medical practice and provides medical services to it’s patients.
• The ownership of each business is as follows:

​ Corp X__Corp K__ABC Med Clinic
Dr. X 100% 0 50%

Dr. K 0 51% 50%

1. Corp X is an A-Ord and ABC Med Clinic is a FSO in an ASG.
2. Corp K is an A-Org and ABC Med Clnic is a FSO in an ASG
3. There are two seperate ASGs.

Answer 69

Statements 1 & 2 are true. Statement 3 is false. There is one ASG that consists of Corp X, Corp K, and ABC Clinic.

Question 70

Based on the following, determine which of the following corporations are members of a controlled group. None of the individuals are related.

Individual__Corp 1__Corp 2__Corp 3

W 40% 40% 25%

X 30% 15% 10%

Y 20% 10% 20%

Z 10% 35% 45%

Answer 70

At least 80% of each company’s stock is actually owned by the same 5 or fewer persons; and the total identical ownership of Corp 1, 2, & 3 exceeds 50%. An individual must have some ownership in each company to be included in the test.

Question 71

Based on the following, determine participant K’s ownership inerest, including attribution, for an affiliated service group determination.

Individual__Ownership % in Comp Z

K 55%

K’s spouse 5%

K’s child 5%

K’s parent 10%

K’s grandparent 25%

Answer 71

75%

A grandchild’s ownership interest is attributed under IRC 318 to that individual’s grandparent. However, a grandparent’s ownership interest is not attributed under IRC 318 to that individual’s grandchild. Since K would be the grandchild K’s grandparent’s ownership would not attribute to K.

Question 72

All of the following statements regarding ASGs are TRUE, EXCEPT:

A. SEPs and SIMPLE (k) plans are exempt from ASG rules.

B. Service with all ASG members is considered for eligibility purposes.

C. All ASG members are treated as single employer when determining IRC 415 limits.

D. All ASG members are treated as a single employer when identifying HCEs.

E. With all ASG members is considered for vesting purposes.

Answer 72

A. SEPs and SIMPLE-IRA plans must cover the employees of all ASG members who satisfy the eligibility requirements of the SEP or SIMPLE-IRA, whichever applies.

Question 73

Which of the following statements regarding employer deduction in a short plan year is/are TRUE? The employer’s taxable year is unchanged.

1. The employer will need to designate for which plan year the contribution is made.
2. The computation of the deduction is not affected.
3. The application compensation dollar limit under IRC 401(a)(17) is prorated.

Answer 73

Statements 1 and 2.

The compensation dollar limit is not affected since taxable year did not change.

Question 74

Which of the following is/are relevant factors in making the facts and circumstances determination as to whether a classification is nondiscriminatory in average benefit test?

1. The underlying business reason for the classification
2. The number of employees benefiting from the plan
3. The percentage of all employees benefiting from the plan

Answer 74

Statements 1 & 3

The number of employees benefiting from the plan is not a relavent factor in determining whether a classification is nondiscriminatory in the average benefit test.

Question 75

Which of the following statements regarding otherwise excludable employees for coverage testing is/are TRUE?

1. It is permissible to use the statutory entry dates to determine otherwise excludable
2. A participant who has never met the year of service requirement may not be considered otherwise exludable.
3. It is permissible to use the plan’s entry dates to determine otherwise excludable.

Answer 75

Statements 1 and 3

A participant who has never met the year of service reuirement may be considered otherwise excludable.

Question 76

Which of the following options regarding calculating benefit percentages for an average benefit test performed for the current plan year is/are TRUE?

1. Use each employee’s benefit percentage for the current plan year.
2. Average each employee’s benefit percentages for the current and previous plan year.
3. Average each employee’s benefit percentages for the current and two previous plan years.

Answer 76

All statements represent methods for calculating benefit percentages for an average benefits test.

Question 77

All of the following statements regarding the average benefit percentage test are TRUE, EXCEPT:

A. The coverage testing group for average benefit percentage testing of two or more plans with different eligibility requirements must be tested using the least restrictive eligibility requirements.

B. The coverage testing group for the average benefit percentage test is determined by applying the excludable employee rules as if the plans in the average benefit percentage testing group constitute a single plan.

C. Participants who terminate during the year, have completed 500 or fewer hours during the plan year or fail to benefit under the plan may be disaggregated under the otherwise excludable testing option.

D. An employee who has irrevocably waiver participation in the plan is still included when computing the average benefit percentage test.

E. The average benefit percentage test must reflect the employee benefit percentages of all employees in the coverage testing group, regardless of whether they are benefiting in any plan maintained by the employer.

Answer 77

C.

Participants who terminate during the year, have completed 500 or fewer hours during the plan year AND fail to benefit under the plan may be disaggregated under the otherwise excludable testing option.

Question 78

All of the following statements regarding cross-testing defined contribution plans are TRUE, EXCEPT:

A. Age and compensation are factors considered when cross-testing.

B. A plan must pass the gateway test before it can use cross-testing to satisfy nondiscrimination.

C. Current year compensation may be used for the accrual-to-date method of computing EBARs.

D. If two participants receive the same percentage of compensation allocation, the younger participant will have a higher EBAR.

E. The testing age is generally the plan’s normal retirement age.

Answer 78

C.

Average annual compensation must be used under the accrual-to-date method. The current year method may use average annual compensation or current year compensation.

Question 79

All of the following statements regarding the gateway contribution test are TRUE, EXCEPT:

A. The one-third test is satisfied if the lowest NHCE allocation rate is at least one-third of the highest HCE allocation rate.

B. The compensation definition in the one-third test may be different than the compensation definition in the five-percent test.

C. Is is a precondition for cross-testing a defined contribution plan.

D. It requires that the plan document guarentee the minimum contribution.

E. The five percent test is satisfied if the lowest NHCE allocation rate is five percent of IRC 415 compensation.

Answer 79

D.

The gateway contribution test does not require that the plan document guarantee the minimum contribution.

Question 80

Which of the following statements regarding benefits, rights, and features is/are TRUE?

1. An optional form of benefit under the plan must be currently available to a nondiscriminatory group of participants.
2. The ability to self-direct a participent’s account balance must be effectively available to a nondiscriminatory group of participants.
3. Effective availability is dertermined on a facts and circumstances basis.

Answer 80

All three statements are true.

Question 81

All of the following statemets regarding an ESOP IRC 1042 transaction are TRUE, EXCEPT:

A. The shareholder must reinvest the proceeds from the sale into equity or debt instruments of other unrelated U.S. companies.

B. The shareholder selling the stock must have owned it for at least three years prior to the sale.

C. Only stock of a C corporation that sponsor’s the ESOP is eligible for the transaction.

D. The shareholder is taxable on any gain from the initial transaction at the time of the sale.

E. At least 30% of the company stock must be sold to the ESOP to be eligible for the transaction.

Answer 81

D.

The shareholder may defer recognition of the gain until the reinvested assest are sold.

Question 82

All of the following options are not available to an S corporation that sponsers an ESOP, EXCEPT:

A. Ability to borrow money to acquire employer securities

B. Expanded deduction rule under IRC 404 provided to leverages ESOPs

C. Expanded allocation limits under IRC 415 provided to leveraged ESOPs

D. Deductible dividends

E. Tax derferral by shareholdres of the S corpoation on the sale of stock to an ESOP under IRC 1042

Answer 82

A.

An ESOP has the ability to borrow, either from the employer of from a third party with the employer’s guarantee, to purchase stock. An ESOP that does this is called a leveraged ESOP. The option is available to both a C corporation and an S corporation.

Question 83

Which of the following statements regarding stock bonus plans is/are TRUE?

1. Benefits are distributable in employer stock.
2. Contributions may be made in the form of plan sponsor’s stock.
3. Put options are available to the participants.

Answer 83

All statemetns are true.

Question 84

All of the following pesons or entities are generally not considered fiduciaries, EXCEPT:

A. Insurance company providing the investmetn contract for plan assets

B. Investment manager hired by the plan sponser

C. Plan’s accountant

D. Recordkeeper hired by the sponsor to maintain participant account balances

E. Custodian of plan assests without the discretionary investment authority

Answer 84

B.

Investment manager, also called a 3(38) fiduciary, is an ERISA term that refers to a fiduciary (other than the the trustee or named fiduciary) who has the power to manage, acquire, or dispose of any asset of the plan, and who has acknowleged in writing that he or she is a fiduciary. ERISA 3(38)(B) permits only the following persons to as an ERISA investment manager: (1) a regersted investment advisor, (2) a bank, or (3) an insurance company qualified to perform investment management services under state law.

Question 85

All of the following are considered prohibited transactions, EXCEPT:

A. The contribution of property owned by the sponsoring employer to a defined benefit plan.

B. The late deposit of elective deferrals to a plan

C. A fully secured $10,000 loan from a plan to the sponsoring employer, bearing interst at the current rate of prime plus 2%

D. The contribution of employer securities to a profit-sharing plan as the annual employer contribution

E. The lease, to the sponsoring employer, of a printing press owned by the plan.

Answer 85

D.

An employer may contribute its own securities to the plan, or a plan may acquire employer securities from a disqualified person, without engaging in a prohibited transaction, as long as the requirements of ERISA 408(e) are satisfied. Therefore, it is not a prohibited transaction for a company to contribute securities to a profit-sharing plan as the annual contribution.

Question 86

Which of the following statements regarding prohibited transactions is/are TRUE?

1. An excise tax is imposed on the disqualified person who engages in a prohibited transaction.
2. A prohibited transaction is corrected by undoing the transaction to the extent possible and placing the plan in the financial position it was prior to the transaction.
3. An additional tax of 100% is imposed if the prohibited transaction is not corrected within a certain time perios after notification by the IRS.

Answer 86

All statements are true.

Question 87

All of the following are always disqualified persons, EXCEPT:

A. A person providing services to the plan

B. The Plan Adminstrator

C. An HCE

D. An owner owning at lease 50% of an employer

E. A party-in-interest

Answer 87

E.

A party-in-interest is not alwaya a disqualified person, however, a disqualified person is always a party-in-interest.

Question 88

All of the following statemetns regarding life insurance in definted contributions are TRUE, EXCEPT:

A. A plan may allow for the purchase of whole life insurance if the premiums are less than 50% of the cumulative contributions and forfeitures allocated to the individual participant’s account.

B. Universal life insurance is considered term insurance for purposes of the percentage limitations of the incidental benefit test.

C. Insurance policies held in a participant’s account may not continue to be held in the plan after the participant retires.

D. The incidental life insurance limit does not apply to premiums that are paid with contributions that have accumulated in the trust for at least two years in a profit-sharing plan.

E. A participant’s death benefit in a defined contribution plan will be greater of the face value of the life insurance policy or the participant’s vested account balance.

Answer 88

E.

A participant’s death benefit in a defined contribution plan will be the sum of the face value of the life insurance policy and and participant’s vested account balance.

Question 89

All of the following statements regarding life insurance in a defined contribution plan are TRUE, EXCEPT:

A. The is no limit on the amount of the life insurance purchased with contributions that have been accumulated in a profit-sharing plan for at least two years.

B. Life insuance coverage may be provided in a defined contribution plan as long as it satisfies the incidental benefit rules.

C. Employer contributions used to pruchase life insurance are not deductible.

D. Proceeds from life insurance in amounts greater than the cash surrender value are not subject to federal income tax.

E. The life insurance proceeds will be paid to the disignated beneficiaries or the plan depending on how the policy is set up.

Answer 89

C.

Employer contributions are deductible as long as they satisfy the deduction rules under IRC 404 whether or not they are used to purchase life insurance.