Question 1 - Study Manuals



Question 1

The minimum aggregate allocation gateway requires use of IRC section 415(c)(3) compensation, not IRC section 414(s) compensation. See IRS regulation 1.401(a)(4)-9(b)(2)(v)(D)(2). The statement is false.

Answer is B.

Question 2

The 133⅓% rule under IRC section 411(b) requires that there can be no accrual in any year that is more than 133⅓% of the accrual in any previous year (determined as a dollar amount or percentage of salary). In this example, the benefit formula is a percentage of salary that is 3.5% in each of the first 20 years and 4.5% in each subsequent year. The ratio of the percentage increase in the annual accrual is:

4.5%/3.5% = 128.57%

This satisfies the 133⅓% rule, so the statement is true.

Answer is A.

Question 3

Under IRC section 417(g)(2), if a plan’s QJSA survivor percentage is at least 75%, then the qualified optional survivor annuity percentage must be 50%. Since the QJSA percentage in this question is 100%, the qualified optional survivor annuity percentage must be 50%, not 75%. The statement is false.

Answer is B.

Question 4

IRC section 411(a)(4)(C) allows the exclusion of vesting service during years in which the employer did not maintain the current plan or a predecessor plan. A predecessor plan is defined as a plan that was terminated no more than 5 years prior to the effective date of the current plan. A plan that still exists is not considered to be a predecessor plan. Revenue Ruling 2003-65 describes a situation in which a plan suspends benefit accruals and is deemed to be partially terminated. The Revenue Ruling concludes that the partial termination is not a complete termination, and all vesting service must be granted under IRC section 411(a) for the partially terminated plan.

In this question, however, the situation is different from the revenue ruling, in that there is a new Plan B established. Since there is no predecessor plan, Plan B may exclude years of service prior to 2008 (the effective date of Plan B) for purposes of vesting. The statement is false.

Answer is B.

Question 5

IRC section 411(c) provides a method for accumulating mandatory employee contributions and converting them to an equivalent benefit at retirement age. The method involves using the accumulated contributions at a valuation date (in this case 12/31/2008) and accumulating them to retirement age using the interest rates specified in IRC section 417(e)(3), as in effect on the valuation date. The statement is true.

Answer is A.

Question 6

A participant who reaches normal retirement age must continue to receive benefit accruals under the retirement benefit formula (unless there is a maximum service requirement that the participant has reached). For participants who have begun receipt of benefits, IRC section 411(b)(1)(H)(iii)(I) allows the increases in benefit due to continued accrual after normal retirement age to be reduced by the actuarial equivalent of the benefit payments made during the year. However, that IRC section does not require a reduction, as the statement indicates. The statement is false.

Answer is B.

Question 7

ERISA section 4006(a)(3)(H) states that for small plans (plans sponsored by employers with no more than 25 employees, not participants), the variable premium is subject to a cap. The statement is false since there are more than 25 employees as of the first day of the premium payment year, so the variable premium cap does not apply.

Answer is B.

Question 8

ERISA section 4007(b)(1) states that the maximum penalty for a late premium payment is equal to 100% of the original premium. The statement is true.

Answer is A.

Question 9

ERISA section 4042(a)(4) states that the PBGC may force a plan termination if it believes that continuing the plan could result in an unreasonable increase in the long-term liability to the PBGC. The statement is true.

Answer is A.

Question 10

In a standard plan termination, ERISA section 4041(b)(2)(B) states that the Notice of Plan Benefits must be provided to all participants and beneficiaries entitled to benefits, including those in pay status. The statement is true.

Answer is A.

Question 11

Under ERISA regulation 4022.3, PBGC maximum guaranteed benefits (including the adjustments for age and form of benefits) are determined as of the plan termination date, not as of any other date such as the date of benefit commencement or the asset distribution date. The statement is true.

Answer is A.

Question 12

The standard de minimis credit under ERISA section 4209(a) towards a withdrawing employer’s share of the unfunded vested benefits can be as large as $50,000. Therefore, it is possible for a withdrawing employer with $50,000 of unfunded vested benefits to have no withdrawal liability. The statement is true.

Answer is A.

Question 13

One of the requirements under IRC section 4980(d)(2)(A) with regard to a Qualified Replacement Plan is that the plan must cover at least 95% of the active participants who were covered in the prior defined benefit plan and are still employed by the plan sponsor. The statement is true.

Answer is A.

Question 14

The excise tax upon reversion of assets from a terminating plan to the employer is 50% unless the employer satisfies the requirements of a qualified replacement plan under IRC section 4980(d)(2) or provides sufficient pro-rata benefit increases under IRC section 4980(d)(3), in which case the 50% is reduced to 20%. In order to satisfy the requirements of a qualified replacement plan, at least 25% of the amount available for employer reversion must generally be transferred to the qualified replacement plan. However, this amount can be reduced by the present value of any increase in accrued benefits attributable to a plan amendment adopted during the 60-day period ending on the plan termination date. In this question, such an amendment is made, resulting in an increase in present value of $50,000. The minimum amount that must be transferred to the qualified replacement plan in order for the excise tax to be reduced from 50% to 20% is:

(25% × ($500,000 + $50,000)) - $50,000 = $87,500

Note that the amount available for reversion without regard to the plan amendment increasing benefits is ($500,000 + $50,000).

Since $100,000 was transferred to the qualified replacement plan, the requirement of IRC section 4980(d)(2) is satisfied, and the excise tax is equal to 20% of the reversion amount. The statement is false.

Answer is B.

Question 15

ERISA regulation 2509.95-1(c) specifically states that “reliance solely on ratings provided by insurance rating services would not be sufficient” to satisfy the prudence requirement with regard to the selection of an annuity provider. The statement is false.

Answer is B.

Question 16

ERISA section 406(a)(1)(B) provides that a loan is a prohibited transaction if it is made to any party-in-interest providing services to the plan, regardless of adequate security. A service provider is defined to be a party-in-interest under ERISA section 3(14)(B). In this case, Jones provides services to the plan and is considered a party-in-interest. Unless there is an exemption obtained, the loan is a prohibited transaction. The statement is true.

Answer is A.

Question 17

ERISA section 4043(c)(3) provides that a reportable event occurs if at any time during a plan year the number of active (not retired) plan participants falls below either 80% of the number of active participants as of the first day of the current year, or 75% of the number of active participants as of the first day of the prior year. (Note that decimal results should be rounded up to the next integer.)

80% of 1/1/2007 active participants = 80% × 2,950 = 2,360

75% of 1/1/2006 active participants = 75% × 3,050 = 2,288

The greater of the two participant counts is 2,360, so that is the smallest number of active participants that the plan can have as of 12/31/2007 without triggering a reportable event.

Answer is D.

Question 18

The maximum guaranteed benefit for a terminating multiemployer plan under ERISA section 4022A(c)(1) is equal to the first $11 per month of vested accrued benefit per year of service, plus 75% of the next $33 per month of vested accrued benefit per year of service.

Smith has 20 years of service, and so must be fully vested under any of the allowable minimum vesting schedules under IRC section 411(a). Smith’s monthly accrued benefit per year of service is:

1.75% × ($35,000÷ 12) = $51.04

The guaranteed portion of the monthly accrued benefit per year of service is:

$11 + (75% × $33) = $35.75

Note that none of the accrual in excess of $44 is guaranteed.

The total guaranteed benefit for Smith (who has 20 years of service) is:

$35.75 × 20 years = $715

Answer is C.

Question 19

Plans that are aggregated for nondiscrimination testing must perform the testing either on a benefits basis or a contributions basis. In this question, the employer has elected to test on a benefits basis. The contributions and forfeitures from the defined contribution plan must be accumulated to the testing age using the testing assumptions, and converted to an equivalent life annuity. For this purpose, employee deferrals (under IRC section 401(k)) and matching contributions (under IRC section 401(m)) are ignored/disaggregated (see IRS regulations 1.401(a)(4)-1(c)(4) and 1.410(b)-7(c)). Since the measurement period is the current year, only the discretionary profit sharing contributions for 2008 are accumulated. Smith is age 60 on the 12/31/2008 testing date, so the contribution is accumulated for 5 years to testing age 65.

Equivalent profit sharing contribution = $4,000 × 1.0855 ÷ 8.38 = $718

The most valuable accrual under the defined benefit plan is deemed to be the QJSA (see IRS regulation 1.401(a)(4)-3(d)(2)(ii)). Since there is an early retirement benefit, the QJSA with regard to the benefit accrual for 2008 must be considered at each possible retirement age and “normalized” to a life annuity at the testing age of 65 using the testing assumptions. The QJSA at each possible early retirement age based upon the 2008 increase in accrued benefit of $5,000 is:

Age 62: $5,000 × .88 × .9 = $3,960

Age 63: $5,000 × .94 × .9 = $4,230

Age 64: $5,000 × .98 × .9 = $4,410

Age 65: $5,000 × .9 = $4,500

The equivalent life annuity with regard to each of the possible early and normal retirement benefits at the testing age of 65 is:

Early retirement age 62 equivalent benefit = $3,960 × 10.60 × 1.0853 ÷ 8.38 = $6,398

Early retirement age 63 equivalent benefit = $4,230 × 10.48 × 1.0852 ÷ 8.38 = $6,228

Early retirement age 64 equivalent benefit = $4,410 × 10.35 × 1.085 ÷ 8.38 = $5,910

Normal retirement age 65 equivalent benefit = $4,500 × 10.22 ÷ 8.38 = $5,488

The most valuable equivalent benefit based upon the possible retirement ages of 62, 63, 64, and 65 is $6,398, if retirement is elected at age 62.

The aggregate most valuable accrual rate is equal to the ratio of the sum of the most valuable equivalent benefit from the defined benefit plan and the equivalent profit sharing contribution, to the testing compensation. This ratio is:

($6,398 + $718)/$50,000 = 14.23%

Answer is D.

Question 20

The most valuable accrual under the defined benefit plan is deemed to be the QJSA (see IRS regulation 1.401(a)(4)-3(d)(2)(ii)). Since there is an early retirement window benefit providing an unreduced benefit at age 64 (which is clearly more valuable than the regular early retirement benefit for retirement at age 64), the QJSA for Smith (who is eligible for the early retirement window benefit) with regard to the benefit accrual for 2008 must be considered at each possible retirement age and “normalized” to a life annuity at the testing age of 65 using the testing assumptions. The QJSA at each possible retirement age based upon the 2008 increase in accrued benefit of $625 is:

Age 63: $625 × .94 × .98 = $575.75

Ages 64 and 65: $625 × .98 = $612.50

The equivalent life annuity with regard to each of the possible early retirement benefits at the testing age of 65 is:

Early retirement age 63 equivalent benefit = $575.75 × 9.44 × 1.0852 ÷ 8.38 = $764

Early retirement age 64 equivalent benefit = $612.50 × 9.27 × 1.085 ÷ 8.38 = $735

Normal retirement age 65 equivalent benefit = $612.50 × 9.09 ÷ 8.38 = $664

The most valuable equivalent benefit based upon the possible retirement ages of 63, 64, and 65 is $764, if retirement is elected at age 63.

The most valuable accrual rate is equal to the ratio of the most valuable equivalent benefit to the testing compensation. This ratio is:

$764/$50,000 = 1.53%

Answer is C.

Question 21

The average benefit percentage is determined by aggregating all plans of the employer (IRS regulation 1.410(b)-7(e)(1)). Generally, under the definition of testing age in IRS regulation 1.401(a)(4)-12, testing age is normal retirement age. However, if the normal retirement age is not uniform, then testing age under that definition is age 65. Since the defined benefit plan and the 401(k) plan in this question have different normal retirement ages, there is no uniform retirement age, and testing age must be age 65.

Plans that are aggregated for coverage testing must perform the testing either on a benefits basis or a contributions basis. In this question, the employer has elected to test on a benefits basis. The profit sharing contributions and employee deferrals from the 401(k) plan must be accumulated to the testing age using the testing assumptions, and converted to an equivalent life annuity. Since the measurement period is the current year, only the profit sharing contributions and 401(k) deferrals for 2008 are accumulated. NHCE1 is age 25 on the 12/31/2008 testing date, so the contribution is accumulated for 40 years to testing age 65. HCE1 is age 55 on the 12/31/2008 testing date, so the contribution is accumulated for 10 years to testing age 65. HCE2 is age 65 on the 12/31/2008 testing date, so there is no accumulation to testing age 65. The equivalent benefits at age 65 for each participant are:

NHCE1: ($X + $1,000) × 1.08540 ÷ 9.03 = 2.89402X + 2,894

HCE1: ($35,000 + $5,000) × 1.08510 ÷ 9.03 = 10,015

HCE2: ($35,000 + $5,000) ÷ 9.03 = 4,430

The equivalent benefit rate for each participant is equal to the ratio of the sum of the defined benefit plan accrual (note that the accruals must be annualized) and the equivalent 401(k) plan benefit, to the testing compensation. This ratio for each participant is:

NHCE1: (2.89402X + 2,894 + (50 × 12))/$50,000

HCE1: (10,015 + (1,000 × 12))/$100,000 = 22.015%

HCE2: (4,430 + (1,000 × 12))/$100,000 = 16.430%

The average benefit percentage as defined in IRS regulation 1.410(b)-5 is equal to the ratio of the average of the equivalent benefit rates for the NHCE group to the average of the equivalent benefit rates for the HCE group. This ratio must be at least as large as 70% in order for the plan to pass the average benefit percentage test.

[pic] = 0.70

Solving for X, X = 1,117

The smallest allocation to NHCE1 that will allow the plans to pass the average benefit percentage test is $1,117.

Answer is B.

Question 22

The ratio percentage under IRS regulation 1.410(b)-9 is defined to be the percentage determined by dividing the percentage of nonhighly compensated employees who benefit under the plan by the percentage of highly compensated employees who benefit under the plan. The percentage of either category of employees who benefit under the plan is determined by taking the ratio of the number who benefit to the number who are nonexcludable.

An employee is considered to benefit under a plan if they have an increase in benefit accrual (see IRS regulation 1.410(b)-3(a)(1)). For each of the two plans, the number of employees benefiting is determined as follows.

Salaried plan

The eligibility requirements for this plan are a minimum age of 21 and 1 year of service. In addition, some participants are excluded by classification. The total participants benefiting is equal to the total employees less those who are excluded due to being under age 21 or with less than 1 year of service, or by classification.

HCEs benefiting: 40 – 2 – 1 – 3 = 34

NHCEs benefiting: 200 – 10 – 50 – 25 – 25 = 90

Hourly plan

The eligibility requirements for this plan are a minimum age of 18 and 6 months of service. In addition, some participants are excluded by classification. The total participants benefiting is equal to the total employees less those who are excluded due to being under age 18 or with less than 6 months of service, or by classification.

HCEs benefiting: 10 –1 = 9

NHCEs benefiting: 800 –350 – 50 = 400

The nonexcludable employees for plans that are aggregated is determined using the set of eligibility requirements that allow for the earliest entry into either plan for any participant (see IRS regulation 1.410(b)-6(b)(2)). This is clearly the eligibility requirements for the hourly plan (minimum age 18 with at least 6 months of service). Non-statutory eligibility exclusions such as classification are ignored for the purpose of determining nonexcludable employees. Applying the eligibility requirements of the hourly plan, the number of nonexcludable employees of the aggregated plan is:

HCEs: (40 + 10) – (3 + 1) = 46

NHCEs: (200 + 800) – (25 + 350) = 625

The ratio percentage for the aggregated plans is:

[pic] = 0.8387, or 83.87%

Answer is A.

Note: Otherwise excludable employees are defined in IRS regulation 1.410(b)-7(c)(3) as employees who satisfied the plan’s statutory eligibility requirements, but could have been excluded if the plan had used the strictest statutory eligibility requirements allowed under IRC section 410(a). In this problem, the hourly employees who worked between 6 months and one year, or who were between the ages of 18 and 21 would be considered otherwise excludable employees. IRS regulation 1.410(b)-6(b)(3) allows for separate coverage testing of the otherwise excludable employees. That does not apply to this question since it is stated that otherwise excludable employees are not tested separately.

Question 23

This question deals with the number of participants needed to pass the IRC section 401(a)(26) minimum participation test. Under IRC section 401(a)(26)(A), the minimum number of participants that must benefit in a defined benefit plan is equal to the smaller of 50 participants or 40% of the employees of the employer. For purposes of counting employees, certain employees can be excluded (see Treasury regulation 1.401(a)(26)-6(b)(1), (4), and (7)):

• Employees excluded due to the statutory age and service requirements under IRC 410(a).

• Employees covered under a collective bargaining agreement.

• Terminated employees, eligible to participate in the plan, who do not accrue a benefit for the year and work no more than 500 hours.

The plan in this question has a one year of service requirement, so the employees hired on 1/1/2007 are not eligible to participate until 2008 and are treated as excludable employees for purposes of IRC section 401(a)(26) for the 2007 year.

The collectively bargained employees generally can (but are not required to) be treated as excludable employees under regulation 1.401(a)(26)-6(b)(4). However, if the collectively bargained employees are benefiting under the plan, then they cannot be treated as excludable.

The participants who are terminated at the end of 2007 and worked only 400 hours accrue a benefit in 2007 because the plan provides a benefit accrual of 1 cent per hour worked. So, they cannot be treated as excludable under IRS regulation 1.401(a)(26)-6(b)(7).

The only exclusion item that is generally an option is the treatment of the collectively bargained employees. Suppose that they are excluded from consideration for purposes of IRC section 401(a)(26) for the 2007 year. Then the employees who are included are the 7 non-collectively bargained active salaried employees, the 4 terminated salaried employees who worked 750 hours, the 10 terminated salaried employees who worked 400 hours, and the 80 hourly employees. The total number of non-excludable employees would be:

7 + 4 + 10 + 80 = 101

40% × 101 = 40.4, which rounded up is 41.

The number of hourly employees who would need to be covered in order to satisfy IRC section 401(a)(26) for 2007 = 41 – 7 – 4 – 10 = 20.

This is answer choice D, the official answer from the answer key.

However, the plan does not exclude the collectively bargained employees from participation in the plan, meaning that they cannot be treated as excludable. And in any case, the question is asking for the minimum number of hourly employees needed to be covered in the plan in order to satisfy IRC section 401(a)(26). So, let’s include the 12 collectively bargained employees, since it is optional to include them. The total number of non-excludable employees is now:

12 + 7 + 4 + 10 + 80 = 113

40% × 113 = 45.2, which rounded up is 46.

The number of hourly employees who would need to be covered in order to satisfy 401(a)(26) for 2007 = 46 - 12 – 7 – 4 – 10 = 13.

This is answer choice A, and should be the correct answer since it is smaller than 20 (and the collectively bargained employees cannot be treated as excludable from this plan in any case as they are participating in the plan). Upon reconsideration, the Joint Board has given credit for answer choice A as the correct answer to this question.

Question 24

IRC section 411(a)(13)(B) provides that for defined benefit plans that determine accrued benefits using hypothetical account balances, the vested percentage must be equal to 100% after 3 years of service. Under the plan’s vesting schedule, each participant is entitled to 40% vesting after 2 years of service, but IRC section 411(a)(13)(B) overrides the remainder of the vesting schedule. As a result, Jones is 40% vested and Brown is 100% vested. The total vested account balance for all plan participants as of 1/1/2008 is:

(40% × $20,000) + (100% × $30,000) = $38,000

Answer is D.

Question 25

The most restrictive vesting allowed under IRC section 411(a) using hours worked provides for crediting a year of service only in years during which the participant worked at least 1,000 hours (IRC section 411(a)(5)(A)). In addition, IRC section 411(a)(4)(A) allows a plan to ignore years of service worked prior to age 18.

Smith worked at least 1,000 hours each year from 2002 through 2006. However, Smith did not turn 18 until 1/1/2003, so the year of service worked in 2002 can be ignored. Smith has 4 years of service credit as of the date of termination.

Under the statutory graded vesting schedule in IRC section 411(a)(2)(A) for defined benefit plans, Smith is 40% vested with 4 years of service. Note that for years after 2006, the statutory graded vesting schedule for defined contribution plans under IRC section 411(a)(2)(B) is different from that for defined benefit plans, so Smith is 60% vested in the profit sharing account balance as of 3/1/2008. This vesting schedule applies even though Smith did not earn any additional vesting service after 2006.

Smith’s vested lump sum payable from both plans is:

(40% × $3,000) + (60% × $10,000) = $7,200

Answer is B.

Question 26

The preretirement death benefit payable to a spouse as a QPSA upon the death of the participant is payable at the earliest possible retirement age had the participant not died (IRC section 417(c)(1)(A)(ii)). The benefit payable to the spouse is the spousal benefit that would have been paid if the participant had elected to retire on that earliest retirement age and then died.

The earliest possible retirement age under the terms of the plan is age 60. The reduced accrued benefit payable at the early retirement age of 60 is:

$20,000 × (1 – [.04 × 5 years]) = $16,000

If the participant had elected a 100% Joint and Survivor annuity at age 60, the equivalent benefit using the plan’s equivalence provision would have been:

$16,000 × (.95 + [.005 × 5 years]) = $15,600

The QPSA can be waived beginning at age 35 (IRC section 417(a)(6)(B)), so the .12% reduction in the amount of the QPSA applies for 23 years (age 58, age at death, less age 35).

Amount of QPSA = $15,600 × (1 – [.0012 × 23 years]) = $15,169

Answer is C.

Question 27

I. IRC section 417(a)(2)(A)(ii) indicates that any consent by a spouse to an election in the form other than a QJSA must include a provision that the form of benefit may not be changed without further spousal consent. The statement is false.

II. IRC section 417(g)(2)(A) provides that if the qualified joint and survivor annuity is less than 75%, then the qualified optional survivor annuity percentage must be equal to 75%. So, if 50% is the QJSA survivor percentage, then a 75% joint and survivor annuity must be the qualified optional survivor annuity. The statement is true.

III. The applicable period under IRC section 417(a)(6)(A) for waiving a QJSA is no more than 180 days prior to the annuity starting date. Note that prior to 2007, the applicable period was a 90-day period. The statement is false.

Answer is C.

Question 28

The QJSA is deemed to be the most valuable benefit according to IRS regulation 1.401(a)(4)-3(d)(1)(ii). The QJSA is payable at any possible retirement age. For Smith, the earliest retirement age is at age 63, when Smith first has 30 years of service. Since the early retirement benefit is fully subsidized, the early retirement benefit payable at age 63 is clearly more valuable than if Smith elects to wait until a later age. The early retirement benefit must be normalized to an equivalent life annuity at the testing age of 65.

The normal accrual rate that is given is equal to the ratio of the accrual for the year in the form of a life annuity to the testing compensation. Testing compensation is not given, and could be reflected using a variable, such as X, but for ease of calculation in this solution, we will use $100,000 as the testing compensation for Smith (the choice of testing compensation will have no bearing on the results of this solution). Given $100,000 as testing compensation and the 5% normal accrual rate, the accrual for the year can be determined as follows:

[pic] = 5% → Accrual = $5,000

Converting the accrual to a 50% J&S annuity:

50% J&S accrual = $5,000 × .95 = $4,750

Normalizing to age 65 in the form of a life annuity:

Normalized 50% J&S accrual = $4,750 × 112.533 × 1.082 ÷ 98.350 = $6,339

Most valuable accrual rate = [pic] = 6.339%

Answer is C.

Question 29

I. Professional service employers are exempt from PBGC coverage as long as there are no more than 25 active plan participants (ERISA section 4021(b)(13)). If the plan was covered by the PBGC on 1/1/2005, then there must have been more than 25 active participants at that time. ERISA section 4021(c)(3) states that once a professional service employer is covered under the PBGC, it remains covered even if the number of active participants is no longer greater than 25. Therefore, the plan is still covered by the PBGC as of 1/1/2006. The statement is false.

II. A plan is subject to the variable rate premium cap under ERISA section 4006(a)(3)(H) if there are no more than 25 employees as of the first day of the premium year. As of 1/1/2008, there are 21 participants (the employees hired in 2006 have entered the plan) and 26 employees. Since there are more than 25 employees as of 1/1/2008, the plan is not subject to the variable rate premium cap. The statement is false.

III. The flat-rate premium payable to the PBGC is based upon the participant count as of the last day of the preceding year (ERISA section 4006(a)(3)(E)(i)). As of 12/31/2007, there are 19 participants (the 15 participants from 1/1/2006 and the 4 participants hired during the first half of 2006 who entered the plan on 7/1/2007). The statement is true.

Answer is D.

Question 30

I. Professional service employers are exempt from PBGC coverage as long as there are no more than 25 active plan participants (ERISA section 4021(b)(13)). Since the plan covered 35 participants prior to 7/31/2006, the plan is not exempt from PBGC coverage, and a premium is due for the 2008 year. The statement is false.

II. The variable-rate premium cap applies to plans for which the employer has no more than 25 employees as of the first day of the premium year (ERISA section 4006(a)(3)(H)). All employees of the contributing sponsor’s controlled group must be included. There are a total of 28 employees, so the variable-rate premium cap does not apply to the plan. The statement is false.

III. ERISA section 4021(b)(9) allows plans covering only substantial owners to be exempt from PBGC coverage. A substantial owner owns more than 10% of the partnership (ERISA section 4021(d)(2)). Green owns only 5% (and is unrelated to Smith and therefore has no other constructive ownership). The plan is not exempt from PBGC coverage, and a premium is due for 2008. The statement is false.

Answer is A.

Question 31

In order to satisfy the minimum participation requirement of IRC section 401(a)(26), a defined benefit plan must benefit the smaller of 50 employees or 40% of all employees of the employer. According to IRS regulation 1.401(a)(26)-5(a)(1) and IRS regulation 1.410(b)-3(a), a participant is benefiting for the plan year if they accrue an increase in benefits for the year. Since the requirement of working 1,000 hours must be satisfied in order to accrue a benefit in this plan, the participants who accrue a benefit in 2008 are those participants (active or terminated) who worked at least 1,000 hours. 36 of the active participants, and 4 terminated participants worked at least 1,000 hours, for a total of 40 participants who are benefiting.

For purposes of being considered an employee of the employer, employees covered pursuant to a collective bargaining agreement can be excluded (IRS regulation 1.401(a)(26)-6(b)(4)). Employees who are excluded due to statutory age and service requirements can also be excluded (IRS regulation 1.401(a)(26)-6(b)(1)), as well as terminated participants who work no more than 500 hours (IRS regulation 1.401(a)(26)-6(b)(7)(E)). Therefore, the following employees must be considered for purposes of satisfying the minimum participation rules of IRC section 401(a)(26):

Active participants with 1000 hours or more 36

Active participants with 501 – 999 hours 20

Active participants with 500 hours or fewer 5

Terminated participants with 1000 hours or more 4

Terminated participants with 501 – 999 hours 5

Excluded due to job classification 45

Total employees 115

40% of total employees = 40% × 115 = 46

Since 40 participants are benefiting, an additional 6 of the employees excluded due to job classification must become participants under the corrective amendment.

Answer is C.

Question 32

The flat-rate premium under ERISA section 4006(a)(3)(A)(i), as adjusted for the cost of living increase in the flat premium for 2008 to $33 per participant, is:

2008 flat-rate premium = $33 × 20 participants = $660

The variable-rate premium under ERISA section 4006(a)(3)(E) is equal to $9.00 per $1,000 of unfunded vested benefits (.9% of the unfunded vested benefits). This is:

Preliminary variable-rate premium = .009 × $400,000 = $3,600

For employers with no more than 25 employees, there is a variable-rate premium cap under ERISA section 4006(a)(3)(H) equal to $5.00 multiplied by (the number of participants squared). It can be assumed that all employees are plan participants as described in exam general condition 9, so there are 20 employees. The variable-rate premium cap is:

Variable-rate premium cap = $5 × 202 = $2,000

The variable-rate premium is limited to the cap of $2,000.

Total premium = $660 + $2,000 = $2,660

Answer is B.

Question 33

A professional service employer is exempt from PBGC coverage as long as the number of active plan participants does not exceed 25 (ERISA section 4021(b)(13)). The active participant count first exceeds 25 on 1/1/2007, so 2007 is the first year that premiums are paid. The premium is based upon the participant count (total, not just active) as of the end of the prior year. There are 27 participants as of the end of 2006 (used for the 2007 premium), and 15 participants as of the end of 2007 (used for the 2008 premium). Note that the plan continues to be covered by the PBGC even though the active participant count drops to only 13 on 12/31/2007 (ERISA section 4021(c)(3)).

X = 27 + 15 = 42

Answer is B.

Note: Prior to the revised PBGC premium rules for 2008, newly covered plans that were not new plans were required to base the first year premium count on the count as of the last day of the prior year. This was changed for 2008 PBGC premiums so that newly covered plans based the initial premium participant count on the number of participants as of the first day of the first premium year (the same as the requirement for a new plan). Since this plan was first covered in 2007, that year is before the PPA change took affect in 2008, and the participant count for 2007 was then based upon the 12/31/2006 participant count. If the plan had first been covered by the PBGC in 2008 or later, then the initial premium would have been based upon the participant count in effect on the first day of that first premium year.

Question 34

The PBGC maximum guaranteeable benefit is equal to the smaller of the PBGC dollar maximum ($4,312.50 per month for 2008) or 100% of the high consecutive 5-year average compensation ($42,000 ÷ 12 = $3,500 for Smith). So, the maximum guaranteeable monthly benefit applicable to Smith is $3,500. However, the PBGC maximum is further reduced for forms of benefit other than a life annuity, and for retirement prior to 65. As of the plan termination date of 12/31/2008 (also Smith’s retirement date), Smith is 59. The PBGC early retirement reduction factor (provided in tables supplied with the exam) for retirement at age 59 is 0.61. In addition, the benefit is payable in the form of a 10 year certain and life annuity, for which the PBGC reduction factor is 0.925. The adjusted PBGC maximum guaranteeable monthly benefit for Smith is:

$3,500 × 0.61 × 0.925 = $1,975

The accrued benefits under the plan are phased in depending upon the effective date and adoption date of the plan benefit formulas. The phase in begins at the later of the plan formula effective date or the adoption date. Benefits under the plan formula in effect 5 years before the plan termination date are not subject to a phase in. The amount to be phased in is equal to the increase in the accrued benefits under successive benefit formulas, after applying the PBGC maximum guaranteeable benefit limit to the accrued benefit under a formula. The guaranteed portion of the benefit increase is equal to the greater of

20% of the increase, or $20 per month

multiplied by complete years since the later of the effective date or adoption date of the amendment.

The $55 benefit formula was effective (and adopted) at least 5 years before the plan termination date. The accrued benefit as of the plan termination date with regard to that benefit formula is:

$55 × 34 years of service = $1,870

Reduced to the early retirement age using the plan’s early retirement reduction factor of 5% per year prior to age 62, the monthly accrued benefit based upon the $55 benefit formula is:

$1,870 × (1 – [.05 × 3 years]) = $1,590

This does not exceed the PBGC maximum guaranteeable benefit, so it is fully guaranteed.

Next, consider the $70 benefit formula, effective 1/1/2005 and adopted on 3/1/2005. It is subject to a 3-year phase in (it has been effective for PBGC purposes for 3 years and 10 months). The accrued benefit as of the plan termination date with regard to that benefit formula (applying the plan early retirement factor) is:

$70 × 34 years of service × (1 – [.05 × 3 years]) = $2,023

This must be limited to the PBGC maximum guaranteeable benefit of $1,975. The increase in the accrued benefit under this formula is:

$1,975 - $1,590 = $385

Applying the 3-year phase-in:

20% × $385 × 3 years = $231

This is guaranteed.

The $90 benefit formula was adopted on 2/1/2008, so it has only been in effect for 10 months and there is no phase-in to do with regard to that formula.

The total guaranteed benefit for Smith is:

$1,590 + $231 = $1,821

Answer is B.

Question 35

Smith is considered a majority owner as of the plan termination date of 12/31/2008 under ERISA section 4022(b)(5)(A) because his ownership percentage during the 60-month period ending on the plan termination date was at least 50% at some point (in this case, in 2005). This means that the otherwise guaranteed benefit must be reduced pro-rata for complete years that the plan has been in existence under 10 years. Since the plan was in existence for 9 years, the otherwise guaranteed benefit must be reduced by 9/10.

Calculate the accrued benefit under the terms of the plan. This is:

8% × [pic] × 12 years of service

= $49,920 per year, or $4,160 per month

The plan has been in effect since 1/1/2000, so there is no 5-year phase-in. However, the PBGC maximum guaranteeable benefit must be considered. The monthly PBGC dollar maximum for 2008 is $4,312.50, and the plan accrued benefit is clearly smaller than this. However, consider the high 5-year average compensation:

[pic]

= $48,800 per year, or $4,067 per month

The plan accrued benefit is limited to the PBGC maximum (high consecutive 5-year average salary) of $4,067.

Finally, apply the 9/10 reduction on account of Smith being a majority owner.

Guaranteed benefit = $4,067 × (9/10) = $3,660

Answer is A.

Question 36

This is a relatively straightforward and typical PBGC plan termination guaranteed benefit question. The accrued benefits under the plan are phased in depending upon the effective date and adoption date of the plan benefit formulas. The phase in begins at the later of the plan formula effective date or the adoption date. Benefits under the plan formula in effect 5 years before the plan termination date are not subject to a phase in. The amount to be phased in is equal to the increase in the accrued benefits under successive benefit formulas, after applying the PBGC maximum guaranteeable benefit limit (not applicable in this question since the benefits are so small) to the accrued benefit under a formula. The guaranteed portion of the benefit increase is equal to the greater of

20% of the increase, or $20 per month

multiplied by complete years since the later of the effective date or adoption date of the amendment.

The guaranteed benefit for each participant can be calculated as follows.

Smith

The original plan has been in effect for at least 5 years, and is not subject to the 5-year phase-in. The accrued benefit under the original plan ($100 benefit) is:

$100 × 6 years of service = $600 (fully guaranteed)

The $110 benefit formula has been in effect (and adopted) for 3 years (since 1/1/2006). The accrued benefit under this formula is:

$110 × 6 years of service = $660

The increase in accrued benefit is: $660 - $600 = $60

Since 20% of the increase is only $12, the guaranteed portion of this is based upon the $20 phase-in.

$20 × 3 years of phase-in = $60

So, the entire $60 increase is guaranteed.

The $150 benefit formula has been in effect for 2 years (since 1/1/2007), but was not adopted until 12/31/2007, so the phase-in is for only 1 year. The accrued benefit under this formula is:

$150 × 6 years of service = $900

The increase in accrued benefit is: $900 - $660 = $240

The guaranteed portion of this is:

20% × $240 × 1 year of phase-in = $48

Total guaranteed benefit for Smith = $600 + $60 + $48 = $708

Mr. Jones

The accrued benefit under the original plan ($100 benefit) is:

$100 × 9 years of service = $900 (fully guaranteed)

The accrued benefit under the $110 formula is:

$110 × 9 years of service = $990

The increase in accrued benefit is: $990 - $900 = $90

Since 20% of the increase is only $18, the guaranteed portion of this is based upon the $20 phase-in.

$20 × 3 years of phase-in = $60

So, only $60 of the increase is guaranteed.

The accrued benefit under the $150 formula is:

$150 × 9 years of service = $1,350

The increase in accrued benefit is: $1,350 - $990 = $360

The guaranteed portion of this is:

20% × $360 × 1 year of phase-in = $72

Total preliminary guaranteed benefit for Mr. Jones = $900 + $60 + $72 = $1,032

However, Mr. Jones is a majority owner (owns at least 50% of the company). Since the plan has only been in effect for 9 years, the otherwise guaranteed benefit must be pro-rated by 9/10.

Guaranteed benefit for Mr. Jones = $1,032 × (9/10) = $929

Mrs. Jones

The accrued benefit under the original plan ($100 benefit) is:

$100 × 5 years of service = $500 (fully guaranteed)

The accrued benefit under the $110 formula is:

$110 × 5 years of service = $550

The increase in accrued benefit is: $550 - $500 = $50

Since 20% of the increase is only $10, the guaranteed portion of this is based upon the $20 phase-in.

$20 × 3 years of phase-in = $60

Since the increase is only $50 (less than the $60 phase-in) the entire $50 increase is guaranteed.

The accrued benefit under the $150 formula is:

$150 × 5 years of service = $750

The increase in accrued benefit is: $750 - $550 = $200

The guaranteed portion of this is:

20% × $200 × 1 year of phase-in = $40

Total preliminary guaranteed benefit for Mrs. Jones = $500 + $50 + $40 = $590

However, Mrs. Jones is married to Mr. Jones. The constructive ownership rules of IRC section 1563(e) apply, which means that a spouse is deemed to own the same percentage of the company as her husband. Mrs. Jones owns 20% and Mr. Jones owns 70%, which means that the deemed ownership for each of Mr. and Mrs. Jones is 90%. Mrs. Jones is a majority owner (owns at least 50% of the company). Since the plan has only been in effect for 9 years, the otherwise guaranteed benefit must be pro-rated by 9/10.

Guaranteed benefit for Mrs. Jones = $590 × (9/10) = $531

Total guaranteed benefit for all participants = $708 + $929 + $531 = $2,168

Answer is A.

Question 37

The excise tax upon reversion of excess assets to an employer is equal to 20% of the amount returned to the employer from the plan (IRC section 4980(a)), provided either at least 20% of the excess assets are reallocated to the participants through a plan amendment that provides pro-rata benefit increases (IRC section 4980(d)(3)) or at least 25% of the excess assets are transferred to a qualified replacement plan (IRC section 4980(d)(2)). If neither requirement is satisfied, then the excise tax percentage is 50% (IRC section 4980(c)(1)).

The excess assets in Plan A (before any transfer of assets to a qualified replacement plan or any allocation to the pro-rata benefit increases under the plan amendment) are:

$5,500,000 - $5,000,000 = $500,000

The increase in the benefit liability of $80,000 is less than the requirement under IRC section 4980(d)(3) of a pro-rata increase of at least 20% of the excess assets ($80,000 ÷ $500,000 = 16%). In addition, the transfer to the qualified replacement plan is less than the requirement under IRC section 4980(d)(2) of at least 25% of the excess assets ($110,000 ÷ $500,000 = 22%). However, IRC section 4980(d)(2)(B)(ii) allows the required 25% qualified replacement plan transfer to be reduced by the percentage allocated pro-rata due to the plan amendment, so that the transfer needed to only be at least 9% (25% - 16%). The plan qualifies for the 20% excise tax percentage.

The assets returned to the employer are: $500,000 - $80,000 - $110,000 = $310,000

The excise tax payable upon the reversion is: X = $310,000 × 20% = $62,000

Answer is B.

Question 38

Complete withdrawal liability is determined as of the last day of the plan year prior to the year of withdrawal. Under the Rolling 5 Method, the total unfunded vested benefits as of the end of the year prior to withdrawal is multiplied by a fraction, the numerator consisting of the total contributions made by the withdrawing employer for the 5-year period ending on the last day of that prior year, and the denominator consisting of the total contributions made by all employers for the same 5-year period. The result is the withdrawing employer’s share of unfunded vested benefits.

The unfunded vested benefits allocated to Employer A for each of the possible withdrawal dates is:

X = Unfunded vested benefits12/31/2006 × [pic]

= $20,000,000 × [pic]

= $2,137,255

Y = Unfunded vested benefits12/31/2007 × [pic]

= $20,000,000 × [pic]

= $2,152,381

Note that the mandatory de minimis rule of ERISA section 4209(a) provides a credit to be subtracted from the unfunded vested benefits allocated in order to determine the complete withdrawal liability. However, the credit is subject to a phase-out when unfunded vested benefits exceed $100,000, and the credit is fully phased-out once the unfunded vested benefits allocated to the withdrawing employer exceeds $150,000. Therefore, the amounts calculated as X and Y are not reduced by a de minimis credit and represent the complete withdrawal liability.

X – Y = $2,137,255 - $2,152,381 = -$15,126

Answer is A.

Question 39

The liability for a partial withdrawal under ERISA section 4206(a) is equal to the liability if a complete withdrawal had occurred, multiplied by the following:

1 - [pic]

The 3-year test period is the period ending with the date of partial withdrawal. In this question the 3-year test period is 2005 – 2007.

Partial withdrawal liability =

$950,000 × [pic]

= $668,268

Answer is D.

Question 40

The excess assets of the plan upon termination are equal to the difference between the market value of the assets and the present lump sum value of the accrued benefits of the plan participants. Note that the lump sum cannot exceed the maximum allowed under IRC section 415, which is not an issue in this problem.

Excess assets = $4,600,000 – ($1,300,000 + 800,000 + 1,200,000 + 400,000)

= $900,000

The excise tax upon reversion of excess assets to an employer is equal to 20% of the amount returned to the employer from the plan (IRC section 4980(a)) if at least 20% of the excess assets are reallocated to the participants through a plan amendment that provides pro-rata benefit increases (IRC section 4980(d)(3)).

The allocation of the pro-rata increase is done in proportion to the present value of the accrued benefits prior to the amendment. Amounts allocated under the pro-rata increase to any participant cannot exceed the limitation of IRC section 415 (IRC section 4980(d)(4)(A). In that case, the amount that cannot be allocated is reallocated to the other participants on a pro-rata basis (IRC section 4980(d)(5)(C)). Finally, both active participants and participants with vested benefits who terminated no earlier than 3 years prior to the plan termination date are included in the pro-rata increase (IRC section 4980(d)(5)(A)).

No date of termination is provided for Green, so it must be assumed that Green is intended to share in the reallocation.

Amount of pro-rata reallocation = 20% × $900,000 = $180,000

Initial allocation of pro-rata benefit increases:

Smith Jones Brown Green Total

Lump sum value of benefit $1,300,000 $800,000 $1,200,000 $400,000 $3,700,000

Pro-rata increase 63,243 38,919 58,378 19,460 180,000

Since the maximum lump sum value payable to Smith is $1,330,000, Smith’s allocation of the pro-rata benefit increase must be limited to $30,000. The additional $33,243 ($63,243 – $30,000) must be reallocated to the other participants.

Reallocation of Smith’s excess:

Jones Brown Green Total

Lump sum value of benefit $800,000 $1,200,000 $400,000 $2,400,000

Pro-rata increase 11,081 16,622 5,540 33,243

The total increase in the lump sum payable to Brown on account of the plan amendment is:

X = $58,378 + $16,622 = $75,000

Answer is C.

Note that the answer key to this exam was amended to allow for answer choice D, which assumes that Green terminated more than 3 years prior to the plan termination date, and does not share in the reallocation of excess assets to participants with category 2 benefits.

Question 41

I. Form 5330 is due at the same time as the Form 5500, which is 7 months after the end of the plan year, unless an extension for the Form 5500 is obtained. See the instructions for the filing of Form 5330. The statement is true.

II. The extension granted for Form 5330 upon approval of the request for an extension through form 5558 is up to a 6 month extension. However, the extension for filing the form 5330 does not apply to that actual payment of the excise tax. The payment of the excise tax is due within 7 months after the end of the taxable year, with no extensions (see the instructions to form 5330). The statement is false.

III. IRC section 4975(d)(23) provides that no penalty is imposed on certain transactions corrected within a period defined in IRC section 4975(f)(11) as 14 days. The statement is true.

Answer is C.

Question 42

I. ERISA regulation 901.20(c) provides that an enrolled actuary must provide the plan administrator, upon request, supplemental advice or explanation relative to any report signed or certified by the enrolled actuary. Schedule SB of Form 5500 qualifies as such a certification. ERISA regulation 901.31(b) states that an actuary may have their enrollment suspended or terminated for a violation of the standards of performance under ERISA regulation 901.20. This act would be grounds for suspension or termination of enrollment.

II. ERISA regulation 901.31(c)(1) states that enrollment will be suspended or terminated for anyone convicted of an offense described in ERISA section 411 (dealing with criminal offenses). Indictment without conviction will not result in grounds for suspension or termination of enrollment.

III. ERISA regulation 901.31(c)(2) states that enrollment will be suspended or terminated for knowingly filing false or altered documents, affidavits, financial statements, or other papers on matters relating to employee benefit plans or actuarial services.

Answer is B.

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