Question 1 - Study Manuals



Question 1

ERISA regulation 901.20(c) provides that the enrolled actuary for a plan must provide an explanation of any information found in the plan’s actuarial report (as certified by the actuary) to the plan administrator, upon appropriate request. That would include an explanation of the actuarial assumptions used for that plan. In this question, the request is not being made by the plan administrator, but rather by an agent of the union. There is no requirement that the enrolled actuary provide this information without the request of the plan administrator. The statement is false.

Answer is B.

Question 2

Generally, the method used to allocate unfunded vested benefits in the case of the withdrawal of an employer from a multiemployer plan is one of the following: the presumptive method, the modified presumptive method, the rolling 5 method, or direct attribution. However, the PBGC has the authority to approve an alternative method upon request. See ERISA regulation 4211.22. The statement is true.

Answer is A.

Question 3

IRC section 4980(a) states that upon a reversion of assets to the employer, there is generally an excise tax payable by the employer of 20% of the amount of the reversion. However, IRC section 4980(d) provides that this percentage is increased to 50% upon plan termination unless either at least 25% of the excess assets are transferred to a qualified replacement plan or at least 20% of the excess assets are reallocated (pursuant to a plan amendment effective as of the plan termination date) to the participants through pro-rata benefit increases. It must be determined whether the second requirement is the case in this question, as there is no mention of a qualified replacement plan.

Let X = Plan liabilities

Then .5X is equal to the excess assets, since the assets are equal to 150% of the plan liabilities. The amendment increases all liabilities by 15%, so the liability associated with the plan amendment is .15X. Taking the ratio of the increased liability to the excess assets:

.15X ÷ .5X = .3, or 30%

30% of the excess assets have been reallocated to the active participants, so the employer qualifies for the 20% excise tax rate.

The statement is true.

Answer is A.

Question 4

ERISA section 101(f)(1) states that the annual funding notice must be provided each year to the plan participants, beneficiaries, the PBGC, and to each employer with an obligation to contribute in the case of a multiemployer plan. The statement is false.

Answer is B.

Question 5

There is no exemption under IRC section 436 with regard to payments of lump sum with regard to mandatory employee contributions. The statement is false.

Answer is B.

Question 6

Treasury regulation 1.401(a)(4)-3(b)(2)(v) states that a defined benefit plan does not satisfy the uniformity requirements with respect to benefits if the benefit is not accrued over the same period of service as is used in applying the benefit formula under the plan. The given benefit formula uses all years of service (to a maximum of 30) for purposes of the normal retirement benefit. However, the definition of the fractional rule accrual uses only years of service while a plan participant, not all years of service. Since the plan violates the uniformity requirement, it does not satisfy the safe harbor requirements of IRC section 401(a)(4).

The statement is false.

Answer is B.

Question 7

IRC section 411(a)(13)(B) requires that an applicable defined benefit plan (such as a cash balance plan) is required to provide 100% vesting once an employee has completed at least 3 years of service. The given vesting schedule does not satisfy this requirement. The statement is false.

Answer is B.

Question 8

A reportable event occurs when there is a merger, as described in ERISA section 4043(c)(8). However, ERISA regulation 4043.28(b) provides for a waiver of notification of the reportable event. Therefore, there is no need to file PBGC Form 10. The statement is false.

Answer is B.

Question 9

ERISA section 204(h) requires notification to the affected participants of a significant reduction in future benefit accruals (such as the freezing of benefit accruals). Treasury regulation 54.4980F-1, Q&A 9 provides deadlines for providing the notification. In general, notice must be provided at least 45 days before the effective date of the amendment. For small plans with fewer than 100 participants, the notice must be provided at least 15 days before the effective date of the amendment. Since the defined benefit plan covers 175 participants, the 45 day requirement applies, so the notice must be provided no later than 11/16/2010. The statement is false.

Answer is B.

Question 10

Treasury regulation 1.401(a)-1(b)(2) states that a plan’s normal retirement age cannot be lower than an age that is reasonably representative of the typical retirement age for the industry in which the workforce is employed, subject to a safe harbor retirement age of 62 or more. Since age 58 is lower than the typical retirement age in this company’s industry, it is not an acceptable normal retirement age for the defined benefit plan. The statement is false.

Answer is B.

Question 11

All defined benefit plans must provide for an annuity form of payment. A lump sum payment can also be provided as an optional form. The statement is true.

Answer is A.

Question 12

There are two methods of distribution for missing participants under ERISA regulation 4050.3:

(1) Purchasing an irrevocable commitment to pay the benefit from an insurer, or

(2) Paying the designated benefit to the PBGC

ERISA section 4050 does not allow the payment of the lump sums for the missing participants into an irrevocable trust. The statement is false.

Answer is B.

Question 13

The PBGC termination premium does not apply to single employer plans that terminate in a distress termination and are going through a bankruptcy liquidation (ERISA section 4006(a)(7)(A) does not cross reference ERISA section 4041(c)(2)(B)(i)). However, ERISA regulation 4007.13(b) indicates that this exemption from the premium only applies if the plan sponsor’s bankruptcy proceeding was filed before October 18, 2005. Since the bankruptcy filing was on 7/1/2010, there is no exemption from the termination premium. The statement is true.

Answer is A.

Note: this question actually does not specify whether the bankruptcy filing is a liquidation filing, or a reorganization filing. The above discussion relates to a liquidation filing – if the filing is a reorganization filing, then the statement is clearly true as ERISA section 4006(a)(7)(A) does cross reference ERISA section 4041(c)(2)(B)(ii), dealing with reorganization filings.

Question 14

The annual funding notice under ERISA section 101(f) must include the fair market value of the assets as of the end of the year. This value can include any contributions receivable for the year provided they have been contributed by the date that the notice must be provided. The statement is true.

Answer is A.

Question 15

IRC section 436(d)(1) prohibits accelerated distributions when the AFTAP is less than 60%. In addition, IRC section 436(d)(3) allows for only limited accelerated distributions (partial lump sums) when the AFTAP is at least 60% but less than 80%.

The certified AFTAP was greater than 80% in each year prior to 2010. The AFTAP for 2007 was certified on 2/1/2008, and since it was certified prior to 4/1/2008, the deemed AFTAP for 2008 is 100% (special rule for first year in which IRC section 436 applies). For each year after 2007, the AFTAP is certified on 7/1. That means that for each year, the prior year AFTAP is used as the deemed AFTAP from 1/1 through 3/31, and the prior year AFTAP less 10 percentage points is used as the deemed AFTAP from 4/1 through 6/30.

The first date on which either the AFTAP or the deemed AFTAP falls below 80% is on 4/1/2010, when the deemed AFTAP for 2010 (the 2009 certified AFTAP of 85%) must be reduced by 10 percentage points to 75%. That is the first date on which Smith could not be paid a full lump sum.

The statement is false.

Answer is B.

Question 16

IRC section 401(a)(7) states that a plan is not qualified unless it satisfies the requirements under IRC section 411. IRC section 411(b)(2)(A) states that the allocation rate in a defined contribution plan cannot decrease due to the attainment of any age. The reduction in the allocation from 5% to 3% after age 64 is a violation of IRC section 411(b)(2)(A). The statement is true.

Answer is A.

Question 17

The reporting requirements of ERISA section 4010 apply if any of the following are true:

(1) The FTAP for any plan within the controlled group is less than 80% and the aggregate funding shortfall for all defined benefit plans within the controlled group exceeds $15,000,000.

(2) A required contribution for any member of the controlled group is more than 10 days late.

(3) There are outstanding waivers of the minimum required contribution of more than $1,000,000 for any member of the controlled group.

See ERISA regulations 4010.4(a) and 4010.11(a).

None of the above applies to the controlled group for 2010, so there is no ERISA 4010 reporting required for the 2010 plan year.

The statement is true.

Answer is A.

Question 18

This question was not on the syllabus and removed from the grading of this exam.

Question 19

A reportable event occurs under ERISA section 4043(c)(3) if at any time during the plan year the number of active 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.

75% of 1,000 = 750

80% of 801 = 640.8

On July 1, 2010 there are only 720 active participants, so a reportable event occurs on that date (720 is < 75% of the number of active participants on 1/1/2009).

The statement is true.

Answer is A.

Question 20

Smith has no decision-making responsibilities with regard to the plan – the position is purely administrative. ERISA regulation 2509.75-8, Q&A 2 states that such a person is not a fiduciary. The statement is false.

Answer is B.

Question 21

IRC section 410(b)(6)(C) describes special coverage rules for acquisition situations. Specifically, no coverage testing is required for the plans of each member of the controlled group for the year of acquisition, or for the following year provided there is no significant change in coverage under the plans for either year, and that coverage was satisfied for the year prior to the acquisition. That is the case in this situation, so no coverage testing under IRC section 410(b) is required for 2010. The statement is false.

Answer is B.

Question 22

The PBGC flat premium ($35 per participant) is based upon the total participant count (active and inactive) as of the last day of the prior year. So for 2010, the participant count as of 12/31/2009 is used. There are 32 total participants (all active, vested terminated, and retired) as of 12/31/2009.

Flat premium = $35 × 32 participants = $1,120

The PBGC variable rate premium is equal to 0.9% of the unfunded vested benefits. The unfunded vested benefits are equal to the difference between the Standard Premium Funding Target and the market value of the assets.

Variable premium = .009 × ($1,830,000 - $1,200,000) = $5,670

There is a small employer cap on the variable premium for employers with no more than 25 employees. As of 1/1/2010, there are only 24 employees (11 active vested and 13 active non-vested). The variable premium cap is based upon the number of plan participants (including terminated vested and retired participants) as of 1/1/2010. There are 32 such participants. The variable premium cap is:

$5 × (number of participants)2 = $5 × 322 = $5,120

The variable premium is limited to the cap of $5,120.

Total PBGC premium for 2010 = $1,120 + $5,120 = $6,240.

Answer is D.

Question 23

Under the presumptive method, the unfunded vested benefits must be determined for each year from 1979 and later, with a share assigned to Employer A. In this case, the first year that there are unfunded vested benefits is 2008. The unfunded vested benefits are multiplied by the ratio of the contributions by Employer A over the 5-year period ending on 12/31/2008 to the contributions for the same period by all employers. This is the unfunded vested liability attributable to Employer A:

$29,900,000 ( [pic]

= $1,923,817

Since Employer A withdrew in 2010, the withdrawal liability is determined as of 12/31/2009 (the last day of the year prior to the complete withdrawal). The share of unfunded vested benefits allocated to Employer A as of 12/31/2008 must be adjusted to an outstanding balance as of 12/31/2009. Under the presumptive method, it is assumed that the liability is paid off at the rate of 5% per year. So, the outstanding balance on 12/31/2009 is:

$1,923,817 ( 95% = $1,827,626

Next, the gain or loss in the total unfunded vested benefits must be determined as of 12/31/2009. The expected unfunded vested benefits are: 29,900,000 ( 95% = 28,405,000

The loss in the unfunded vested benefits is: 35,900,000 - 28,405,000 = 7,495,000

This must be allocated to Employer A. The 2009 loss in the unfunded vested benefits is multiplied by the ratio of the contributions by Employer A over the 5-year period ending on 12/31/2009 to the contributions by all employers.

$7,495,000 ( [pic]

= $451,057

The total share of unfunded vested benefits allocated to Employer A is:

$1,827,626 + $451,057 = $2,278,683

This is the complete withdrawal liability since the de minimis credit must be fully phased out once the share of unfunded vested benefits exceeds $150,000.

Answer is D.

Question 24

Smith will retire on 11/1/2014. The applicable AFTAP at that time is the 2014 AFTAP of 65% (certified by 3/31/2014). Since this is at least 60% but less than 80%, Smith cannot receive more than 50% of the lump sum value under the terms of the plan pursuant to IRC section 436(d).

Smith entered the plan on 1/1/2009, and will have 5 years of service credits (no service prior to 2009 is granted) as of the 12/31/2013 retirement date.

Retirement benefit = $500 × 5 years of service = $2,500

The present value determined as of 11/1/2014 is based upon the 3 segment interest rates. The segment 1 rate applies between ages 65 and 70 (the first 5 years of payment), the segment 2 rate applies between ages 70 and 85 (the 6th through 20th years of payment), and the segment 3 rate applies from age 85 on.

Lump sum = $2,500 × 12 × [pic]

= $30,000 × [pic]

= $329,996

Maximum lump sum that can be paid = 50% × $329,996 = $164,998

Answer is C.

Question 25

Excludable employees with regard to the non-collectively bargained portion of this plan under Treasury regulation 1.410(b)-6 include the following:

(1) Employees with less than one year of service

(2) Collectively bargained employees

(3) Terminated participants who work no more than 500 hours of service and do not accrue a benefit for the year

Employee I is a collectively bargained employee, and therefore is excludable in 2010.

Employee II has less than one year of service (enters the plan on 1/1/2011), and therefore is excludable in 2010.

Employee III entered the plan on 1/1/1997 and terminated employment in 2010. However, since employee III worked more than 500 hours in 2010, the employee is still considered non-excludable in 2010 (even though the employee does not accrue a benefit in 2010).

The excludable employees are I and II.

Answer is A.

Question 26

Treasury regulation 1.401(a)(4)-5(b)(3)(iv) provides that lump sum distributions payable to any of the top 25 paid HCEs can only be paid if at least one of the following is/are satisfied:

(1) The market value of the assets after the distribution is at least 110% of the current liability for the remaining plan participants.

(2) The distribution is less than 1% of the current liability before the distribution is made.

(3) The distribution does not exceed $5,000.

The lump sum for each participant exceeds both $5,000 and 1% of current liability (1% of $4,850,000 = $48,500). So only the satisfaction of item (1) above would allow a lump sum distribution for each participant.

Smith

$5,350,000 - $200,000 = $5,150,000

> [110% × ($4,850,000 - $180,000)] = $5,137,000

Lump sum distribution is allowed

Jones

$5,350,000 - $290,000 = $5,060,000

> [110% × ($4,850,000 - $260,000)] = $5,049,000

Lump sum distribution is allowed

Brown

$5,350,000 - $230,000 = $5,120,000

< [110% × ($4,850,000 - $180,000)] = $5,137,000

Lump sum distribution is not allowed

Green

$5,350,000 - $250,000 = $5,100,000

< 110% × ($4,850,000 - $200,000) = $5,115,000

Lump sum distribution is not allowed

Only Smith and Jones can receive their lump sum distributions.

Answer is C.

Question 27

For plans that are aggregated for purposes of IRC sections 401(a)(4) and 410(b) testing, if the plans are different types of plans (DB and DC) and are to be tested on a benefits basis, then the plans must satisfy one of three conditions pursuant to Treasury regulation 1.401(a)(4)-9(b)(v). One of those conditions is the satisfaction of the minimum aggregate allocation gateway test. For purposes of that test, an aggregate allocation rate is determined for each participant, and the aggregate allocation rates for each NHCE must satisfy a minimum standard. The aggregate allocation rate for each participant consists of the sum of the allocation rate for the DC plan contributions and the allocation rate for the DB plan accrual. In order to determine the allocation rate for the DB plan accrual, the present value of the accrual for the year must be determined (using testing assumptions), and divided by the testing salary. In order to determine the allocation rate for the DC plan contributions, the contributions are divided by the testing salary. For a profit sharing plan, only the profit sharing contribution is included (401(k) salary deferrals and matching contributions are required to be disaggregated – unless the average benefit percentage is being determined, which is not the case in this question). Catch-up contributions are always ignored for this purpose.

NHCE1

DB accrual present value = $1,000 × 9.77 × [pic] = $1,000 × 9.77 × 0.294140 = $2,874

DB allocation rate = 2,874/50,000 = 5.748%

DC allocation rate = 1,000/50,000 = 2%

NHCE2

DB accrual present value = $2,000 × 9.77 × [pic] = $2,000 × 9.77 × 0.086518 = $1,691

DB allocation rate = 1,691/50,000 = 3.382%

DC allocation rate = 500/50,000 = 1%

The DB allocation rates can be optionally averaged, with the average deemed to be each participant’s DB allocation rate.

Average NHCE DB allocation rate = (5.748% + 3.382%)/2 = 4.565%

Total allocation rate for NHCE1 = 4.565% + 2% = 6.565%

Answer is A.

Question 28

Employee voluntary contributions in a defined benefit plan are treated as if they were employee contributions in a defined contribution plan (IRC section 411(d)(5)). For such contributions, gains and losses are allocated to the voluntary employee contributions based upon the plan’s actual gains and losses (IRC section 411(c)(2)(A)).

The trust earnings have been 4% each year.

Value of employee contribution on 12/13/2010 = $1,000 × 1.042 = $1,081.60

Answer is B.

Question 29

The plan has been in effect for fewer than 5 full years as of the date of plan termination. As a result, the benefit under the original plan formula is subject to phase-in. The plan has been in effect for 4 years and 4 months, so the vested accrued benefit under the benefit formula is phased in over 4 years (the PBGC recognizes only complete years for purposes of guaranteed benefits). It is irrelevant when each participant was actually hired (or entered the plan) – the phase-in is still 4 years. The phase-in is equal to 20% of the vested accrued benefit (or $20 of monthly benefit if greater) multiplied by 4. In order to make it easier to determine the impact of the $20, it is helpful to convert all benefits from annual to monthly.

Smith

Vested accrued benefit = 2% × ($22,000/12) × 4 years = $146.67

Phase-in = $146.67 × 20% × 4 years = $117.34

Jones

Vested accrued benefit = 0.5% × ($70,000/12) × 3 years = $87.50

Phase-in = $20 × 4 years = $80

Total guaranteed monthly benefit = $117.34 + $80.00 = $197.34

Answer is C.

Note that the benefit for each participant is well below the PBGC maximum guaranteeable benefit, so that maximum benefit was not considered in this solution.

Question 30

Accrued benefit at retirement = 1.5% × ($50,000/12) × 29 years of service = $1,812.50

Smith has retired at age 60, so the accrued benefit must be reduced by 4% for each of the 5 years prior to age 65.

Reduced early retirement benefit = $1,812.50 × (1 – (.04 × 5)) = $1,450

In order to avoid a violation of IRC section 411(d)(6), the reduced accrued benefit cannot be smaller than what had been accrued as of 1/1/2006, the date on which the early retirement provisions were amended. As of that date, Smith had an accrued benefit of $1,650, which upon attainment of age 60 would have been unreduced. Since Smith’s accrued benefit as of 1/1/2009, reduced for early retirement, results in a benefit smaller than $1,650, Smith must receive the monthly benefit of $1,650.

Answer is C.

Question 31

I. Post-termination amendments increasing benefits are allowed under ERISA regulation 4041.8(a). The statement is true.

II. In a distress termination situation, the plan administrator must reduce benefits under ERISA sections 4022 and 4044. See ERISA section 4041(c)(3)(D)(ii) and regulation 4041.42(c). The statement is true.

III. Lump sums cannot be paid beginning on the plan termination date until the PBGC has approved the plan termination, in the case of a distress termination. However, once the termination is approved, lump sums can be paid. See ERISA regulation 4041.42(b)(2). The statement is false.

Answer is B.

Question 32

The excise tax upon the reversion of assets is 20% of the amount of the reversion (IRC section 4980(a)). The amount of reversion is:

$46,000 ÷ 0.20 = $230,000

The minimum amount needed to be transferred to the qualified replacement plan in order to qualify for the reduction of the excise tax percentage from 50% to 20% is 25% of the excess assets. That means that 75% of the excess assets would be the amount reverted to the employer.

Excess assets × 75% = $230,000

Excess assets = $306,667

The total asset value before the transfer to the qualified replacement plan is equal to the sum of the excess assets and the present value of benefits.

Total assets = $306,667 + $750,000 = $1,056,667

Answer is D.

Question 33

This question was not on the syllabus and removed from the grading of this exam.

Question 34

As of the date of retirement (7/1/2010), the AFTAP for 2010 has been certified as 75%. When the AFTAP is less than 80% but at least 60%, then the restricted distribution (such as a lump sum) is limited to the smaller of one-half of the lump sum benefit under the terms of the plan, or the present value of the PBGC maximum guaranteeable benefit, valued using IRC section 417(e)(3) assumptions. See IRC section 436(d)(3)(A).

Plan lump sum = $7,500 × 12 × [pic] = $7,500 × 12 × 11.67 = $1,050,300

½ of plan lump sum = 50% × $1,050,300 = $525,150

The PBGC maximum guaranteeable benefit for 2010 is $4,500 per month.

Present value of PBGC maximum = $4,500 × 12 × [pic]

= $4,500 × 12 × 11.67 = $630,180

The smaller of one-half of the plan lump sum and the value of the PBGC maximum is $525,150.

Answer is C.

Question 35

The 2010 PBGC variable rate premium is equal to 0.9% of the excess of the Standard Premium Funding Target over the market value of the assets (including receivable contributions for 2009 discounted using the plan effective rate for 2009, but not reduced for any credit balance items).

Adjusted market value of assets = $50,000,000 + ($1,500,000/1.065.5/12)

+ ($10,000,000/1.0658.5/12)

= $50,000,000 + $1,496,069 + $9,563,731

= $61,059,800

Variable rate premium = ($79,000,000 – 61,059,800) × 0.009 = $161,462

Answer is C.

Question 36

For purposes of the average benefit percentage under IRC section 410(b), all plans of the employer, including 401(k) plans, are generally aggregated (see Treasury regulation 1.410(b)-7(e)(1)). For this purpose, the normal accrual rates are generally used (see Treasury regulation 1.410(b)-5(d)(5)(i)). Since the average benefit percentage is being determined using accrual rates on a benefits basis, the 401(k) deferral and profit sharing contribution must be accumulated to testing age 65 using the testing interest rate of 8.5% and converted to a life annuity using the testing annuity rate. This will result in an equivalent benefit for the participants.

Equivalent benefit for each participant:

HCE1: ($16,500 + 32,500) × 1.0855 ÷ 9.00 = $8,187

HCE2: ($16,500 + 32,500) ÷ 9.00 = $5,444

NHCE1: $800 × 1.08540 ÷ 9.00 = $2,323

NHCE2: ($1,000 + 750) × 1.08520 ÷ 9.00 = $994

NHCE3: $300 × 1.08525 ÷ 9.00 = $256

The normal accrual rate for each participant is equal to the sum of the equivalent benefit and the defined benefit plan accrual, divided by testing compensation.

HCE1: ($8,187 + 20,000)/$245,000 = 11.505%

HCE2: ($5,444 + 20,000)/$245,000 = 10.385%

NHCE1: ($2,323 + 300)/$20,000 = 13.115%

NHCE2: $994/$15,000 = 6.627%

NHCE3: ($256 + 2,000)/$55,000 = 4.102%

The average benefit percentage (ABP) is equal to the average of the normal accrual rates for the NHCEs divided by the average of the normal accrual rates for the HCEs (see Treasury regulation 1.410(b)-5(b)).

ABP = [pic] = [pic] = 72.62%

Answer is B.

Note: In a question like this, do not be concerned about whether the plan is allowed to test on a benefits basis, since you are told to test that way.

Question 37

ERISA section 4062(e) deals with employer liability upon cessation of operations at a facility of the employer. The example in ERISA regulation 4062.8(b) describes the determination of the liability as equal to the ratio of the number of employees separated from employment due to the cessation to the total number of active plan participants immediately prior to the closure of the facility, multiplied by the amount of plan underfunding if that plan had terminated.

Liability = (3,000/8,000) × ($90,000,000 – 65,000,000) = $9,375,000

Answer is B.

Question 38

IRC section 436(c)(1)(A) states that a plan with an AFTAP that is less than 80% is subject to the limitation on plan amendments increasing liability for benefits. However, under IRC section 436(c)(2)(A), the plan is exempt from the limitation if the plan sponsor makes a contribution for purposes of IRC section 436 equal to the increase in the liability due to the plan amendment.

As of the date of the amendment (7/1/2010), the 2010 AFTAP has not been certified. Under IRC section 436(h)(3), the presumed AFTAP beginning 4/1/2010 is equal to the 2009 AFTAP reduced by 10 percentage points. That is 62% (72% - 10%). Therefore, the limitation on plan amendments applies unless the plan sponsor contributes the increase in the liability due to the plan amendment. The increase in the plan liability must take into account the at-risk status of the plan (see Treasury regulation 1.436-1(f)(4), example 2).

The increase in the plan liability as of 1/1/2010 due to the plan amendment based upon the at-risk assumptions is $1,200,000.

Since the contribution to avoid the limitation on plan amendments is made on 7/1/2010, it must be discounted with interest to the 1/1/2010 valuation date. Treasury regulation 1.436-1(f)(2)(i)(A)(2) provides that the interest adjustment is generally based upon the plan’s effective rate for the year. However, if the plan effective rate has not yet been determined, then the highest of the three segment rates is to be used.

The plan effective rate for 2010 is not provided in this question, so it must be assumed that it has yet to be determined. The segment 3 interest rate for 2010 of 7.20% should be used instead.

Contribution as of 7/1/2010 = $1,200,000 × 1.0726/12

= $1,200,000 × 1.0353743 = $1,242,449

Answer is C.

Note that if the 2010 plan effective rate turns out to be less than 7.20%, then the excess IRC section 436 contribution can be re-characterized as an additional contribution for minimum funding purposes.

Question 39

The PBGC variable rate premium for the plan year beginning on 1/1/2010 is equal to 0.9% of the excess of the Alternative Premium Funding Target over the market value of the assets. Since the plan year is a short year (7 months, through 7/31/2010), the premium is pro-rated.

PBGC variable rate premium = ($2,690,000 – 2,160,000) × 0.009 × (7/12) = $2,782.50

Answer is C.

Question 40

A partial withdrawal occurs under ERISA section 4205(a) on the last day of the plan year in which there is a 70% decline. ERISA section 4205(b)(1) defines a 70% decline as having occurred if for each year during any 3 consecutive year period the contribution base units for an employer is less than 30% of the two-year average base units for the 2 years that were the highest during the 5 years preceding the 3-year period.

In this case, consider 2004 through 2006 as the possible 3-year period. During 1999 through 2003 (the prior 5 years), the base units from 2000 and 2001 are the largest. The average for those two years is:

2-year average = (1,400,000 + 1,350,000)/2 = 1,375,000

30% of 2-year average = 30% × 1,375,000 = $412,500

A 70% decline has occurred as of 12/31/2006 since the base units for each of 2004, 2005 and 2006 are less than $412,500. Therefore, a partial withdrawal occurs on 12/31/2006.

Note that prior possible 3-year periods can be tested, but it will be found that no partial withdrawal occurs until 12/31/2006.

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]

= [pic] = 0.8175

Answer is D.

Question 41

Plan X is not a safe harbor formula under IRC section 401(a)(4) because it is a unit credit formula that does not satisfy the 133⅓% rule of IRC section 411(b). Treasury regulation 1.401(a)(4)-3(b)(3) provides that a unit credit plan that satisfies the 133⅓% rule of IRC section 411(b) is a safe harbor under 401(a)(4). The 133⅓% rule provides that no accrual in any year can be more than 133⅓% of any prior year accrual (either as a dollar amount or percent of salary). Since the 2.25% accrued during each of the last 10 years of service is 150% of the 1.5% accruals during the first 10 years of service, the formula does not satisfy the 133⅓% rule.

Plan Y is a unit credit formula that does satisfy the 133⅓% rule of IRC section 411(b). However, Treasury regulation 1.410(b)-3(b)(2)(iv) states that in order for a plan to satisfy the safe harbor requirement of IRC section 401(a)(4), the plan must not be a contributory plan. This formula is not a safe harbor since there is a requirement for employees to contribute to the plan.

Plan Z satisfies the rules of permitted disparity under IRC section 401(l). Treasury regulation 1.401(a)(4)-3(b)(6)(ii) provides a plan satisfying the permitted disparity requirements is deemed to be a safe harbor under IRC section 401(a)(4).

Only Plan Z is a safe harbor benefit formula.

Answer is D.

Question 42

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.

Smith has died at age 52 and had more than 5 years of service, so the earliest retirement age at which Smith could have retired had he not died is age 60. The reduced accrued benefit payable at the early retirement age of 60 is the accrued benefit reduced by 20% (4% for each of 5 years).

Accrued benefit = $1,500 × 18 years of service = $27,000

Early retirement benefit = $27,000 × 80% = $21,600

The minimum QPSA is a 50% survivor annuity. Using the given equivalence factor,

Equivalent QJSA = $21,600 × 0.86 = $18,576

The spouse is entitled to 50% of this benefit.

Amount of QPSA = $18,576 × 50% = $9,288

Answer is B.

Question 43

I. IRC section 401(a)(11) provides that a qualified plan must begin payment of a participant’s benefit no later than 60 days after the plan year end in which the latest of the following occurs:

(1) The earlier of the date the participant attains age 65 or reaches normal retirement age,

(2) The 10th anniversary of the participant’s entry into the plan, or

(3) The date that the participant terminates employment.

In addition, IRC section 401(a)(9) provides that even if a participant has not terminated employment, they may be required to begin minimum distribution in the year they attain age 70½. The statement is true.

II. Benefits that have been suspended under a suspension of benefits notice do not have to be increased actuarially under ERISA regulation 2530.203-3. Note that under Treasury regulation 1.401(a)(9)-6, Q&A 9, for purposes of post-age 70½ minimum distributions, actuarial increases must be provided. Since the statement is specific about benefits beginning prior to age 70½, there is no requirement to actuarially increase the payments. The statement is false.

III. Although payment of benefits can be suspended, continued accrual of benefits cannot stop as long as additional service accrues, or if salary increases. The statement is true.

Answer is E.

Question 44

I. ERISA section 409(a) states that a fiduciary can be held personally liable for a breach of fiduciary duty. The statement is true.

II. ERISA section 405(a)(3) states that a fiduciary can be held liable for a breach of fiduciary duty by another fiduciary if they have knowledge of the breach and do not make a reasonable effort to remedy the breach. In this situation, Jones has committed a breach of fiduciary liability because he has done nothing with the knowledge of the breach of fiduciary duty by Smith. The statement is false.

III. ERISA section 401(a)(1) states that fiduciary responsibility applies to all plans covered under ERISA section 4(a). ERISA section 4(a) states that all plans are subject to coverage under ERISA other than plans described in ERISA section 4(b). Fully insured plans are not exempt under ERISA section 4(b), so fiduciary breaches do apply to fully insured plans. The statement is false.

Answer is E.

Question 45

This question was not on the syllabus and removed from the grading of this exam.

Question 46

As of the date of distribution (May, 2010), the AFTAP for 2010 has been certified as 75%. When the AFTAP is less than 80% but at least 60%, then the restricted distribution (such as a lump sum) is limited to the smaller of one-half of the lump sum benefit under the terms of the plan, or the present value of the PBGC maximum guaranteeable benefit, valued using IRC section 417(e)(3) assumptions. See IRC section 436(d)(3)(A). In addition, the lump sum payment of up to $5,000, that can be forced by the plan under IRC section 411(a)(11), is exempt from the prohibition of IRC section 436(d) – see IRC section 436(d)(5).

The lump sum for NHCE1 does not exceed $5,000, so the full lump sum of $4,957 can be paid.

The present value of the PBGC maximum guaranteeable benefit for NHCE2 is less than half of the present value of the benefit for NHCE2, so the maximum that can be paid to NHCE2 under IRC section 436(d) is $220,000.

Half of the lump sum for NHCE3 ($650,602 ÷ 2 = $325,301) is less than the PBGC maximum guaranteeable benefit for NHCE3, so the maximum that can be paid to NHCE3 under IRC section 436(d) is $325,301.

Total lump sum = $4,957 + $220,000 + $325,301 = $550,258

Answer is D.

Question 47

Each HCE determines a rate group under Treasury regulation 1.401(a)(4)-3(c)(1), consisting of the HCE and each other participant with both a normal and most valuable accrual rate at least as large as that HCE.

The normal accrual rate for NHCE Smith is 7.59%, and the most valuable accrual rate is 8.53%. This qualifies Smith for rate groups 1, 2, and 4.

Answer is D.

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