Question 1
ERISA regulation 4041.8(a) states that plan amendments adopted after the plan termination date are taken into account in determining a participant’s accrued benefit provided the amendment does not decrease benefits. The statement is true.
Answer is A.
Question 2
Q&A 11 in section III of Revenue Notice 2008-30 states that if the QOSA is actuarially equivalent to the QJSA, then no spousal consent is required. The statement is true.
Answer is A.
Question 3
IRC section 4975(c)(1)(A) states that the sale of any property between a plan and a disqualified person is a prohibited transaction. The statement is true.
Answer is A.
Question 4
A restricted amendment that is allowed later in the year due to the final certification of the AFTAP takes effect on the original amendment effective date. In this case that is 2/1/2010. See Treasury regulation 1.436-1(c)(5). The statement is false.
Answer is B.
Question 5
A trustee is a fiduciary, and thus is a disqualified person under IRC section 4975(e)(2)(A). A prohibited transaction occurs under IRC section 4975(c)(1)(B) if there is lending of money between the plan and a disqualified person. The lending of money to the plan trustee is considered a prohibited transaction. The statement is true.
Answer is A.
Question 6
In order to satisfy the conditions of a qualified replacement plan in order to reduce the excise tax for reversion of assets upon plan termination from 50% to 20%, there is a requirement under IRC section 4980(d)(2)(A) that the replacement plan cover at least 95% of the participants from the terminating defined benefit plan. That condition is not satisfied because only 90% of the participants are covered by the defined contribution plan. Therefore, the excise tax is 50%. The statement is true.
Answer is A.
Question 7
This statement is a direct quote from ERISA section 4203(a)(1). The statement is true.
Answer is A.
Question 8
Service with all employers within a controlled group must be credited for vesting purposes (see IRC section 414(b)). Smith was hired on 1/1/1997 within the controlled group, and has 15 years of service as of 1/1/2012. Service prior to age 18 or prior to the effective date of Company A’s pension plan can be disregarded for vesting purposes, under IRC section 411(a)(4). All 15 years of service count towards vesting because Smith was hired at age 18, and the plan effective date was before Smith’s date of hire. Under the minimum required vesting schedules of IRC section 411(a)(2), Smith must be 100% vested with 7 years of service. The statement is true.
Answer is A.
Question 9
Separate accounting is required for voluntary contributions made to a defined benefit plan under IRC section 411(b)(3)(A). The statement is true.
Answer is A.
Question 10
IRC section 436 restrictions generally continue to apply upon plan termination, with the exception of payments made necessary by the plan termination. See Treasury regulation 1.436-1(a)(3)(ii). The statement is false.
Answer is B.
Question 11
Treasury regulation 1.410(b)-6(f)(1) allows terminated employees who would otherwise be nonexcludable, but who work no more than 500 hours and are not employed on the last day of the year, to be treated as excludable, but only if they are a participant in the plan for which they are being treated as excludable. In this case, Smith is not a participant in Plan A, so must be treated as nonexcludable for that plan (note that Smith would be treated as excludable for Plan B because Smith is a participant in that plan). Also see example 3 of Treasury regulation 1.410(b)-6(f)(3). The statement is false.
Answer is B.
Question 12
The plan is a mid-size plan (at least 100 but fewer than 500 participants). The 2010 comprehensive premium filing due date is 10/15/2010. Any election to use the Alternative Premium Funding Target must be made by that due date. This is true even if the filing is amended to reconcile the estimated Premium Funding Target with the Actual Premium Funding Target. The statement is false.
Answer is B.
Question 13
The purchase of a sponsoring employer’s securities by the trust maintained by that employer’s plan is generally a prohibited transaction under IRC section 4975. However, there is an exemption when the total amount invested in the employer securities does not exceed 10% of the market value of assets of the plan. 10% of the $8,500,000 of market value in this plan is $850,000. The total investment in the employer’s stock after the purchase is $450,000, so no prohibited transaction has occurred. The statement is false.
Answer is B.
Question 14
The 2010 AFTAP has been certified on 9/30/2010 as being less than 60%, so no accelerated distribution under IRC section 436(d), such as a lump sum, can be paid on 11/1/2010. Note that had the lump sum been no more than $5,000 (as a distribution paid without participant consent under IRC section 411(a)(11)), that payment could have been made as allowed by Treasury regulation 1.436-1(d)(7). The statement is false.
Answer is B.
Question 15
ERISA section 4041(b)(1)(D) states that for a plan to qualify to terminate as a standard termination, it must be sufficient to pay all benefit liabilities when the final distribution of assets occurs, not on the plan termination date. The statement is false.
Answer is B.
Question 16
A distribution made to a participant who is a substantial owner is a reportable event under certain conditions as described in ERISA section 4043(c)(7). However, if the distribution is made on account of death, it is not a reportable event. The statement is false.
Answer is B.
Question 17
IRC section 411(a)(8) describes normal retirement age as not exceeding age 65, or the 5th anniversary of plan participation, if that is after age 65. Part (b) of the normal retirement age definition in this question satisfies 411(a)(8), and since the overall definition is the earlier of (a) and (b), the overall definition certainly satisfies 411(a)(8). The statement is true.
Answer is A.
Question 18
Any benefit formula that satisfies the 133⅓% rule of IRC section 411(b)(1)(B) is deemed to be a safe harbor formula under IRC section 401(a)(4). See Treasury regulation 1.401(a)(4)-3(b)(3). Under the 133⅓% rule, the benefit formula must be a unit benefit formula, and no participant in any year can accrue more than 133⅓% of what they can accrue in any prior year (either as a percentage of salary or as a flat dollar amount). The benefit formula in this question provides for a larger accrual (2%) in each of the first 5 years than in any later year, so it satisfies the 133⅓% rule. The benefit formula is a safe harbor formula under 401(a)(4). The statement is true.
Answer is A.
Question 19
ERISA regulation 901.13(f)(1)(vi) states that enrollment can be denied due to the use of abusive language. ERISA regulation 901.21(a) states that enrollment can be terminated if any requirement in regulation 901.13 is violated. Therefore, an enrolled actuary can have their enrollment terminated for abusive language in connection with matters before the Department of the Treasury. The statement is true.
Answer is A.
Question 20
The Alternative Premium Funding Target can be elected in any year following the use of the Standard Premium Funding Target. The Alternative Premium Funding Target must be used for at least 5 consecutive years once it is elected. The statement is true.
Answer is A.
Question 21
As of 1/1/2011, the AFTAP for 2011 has not yet been certified, so the presumed AFTAP is 95%. Based upon that deemed AFTAP, a presumed adjusted funding target can be determined:
= 95% → FT = 105,263
This determination of the presumed adjusted funding target is described in Treasury regulation 1.436-1(g)(2)(ii).
On 4/1/2011, the 2011 AFTAP is still not certified. The AFTAP is still presumed to be at least 80% because the 2010 AFTAP, reduced by 10% is 85%. In order to avoid the restriction on plan amendments, the presumed AFTAP must be at least 80% when the increase in the presumed adjusted funding target due to the amendment is taken into account.
= 68.84%
An additional IRC section 436 contribution can be made under Treasury regulation 1.436-1(f)(2) can be made to avoid the restriction on plan amendments, and this contribution, interest adjusted to 1/1/2011, is added to the assets.
= 80% → X = 16,210
Answer is A.
Question 22
The excise tax upon reversion of assets to the employer after a plan termination under IRC section 4980 is equal to 50% of the amount of the reversion, unless the plan satisfies either of the requirements under IRC sections 4980(d)(2) or 4980(d)(3). Those requirements are:
(1) Transfer at least 25% of the assets eligible for reversion to a Qualified Replacement Plan, or
(2) Increase benefits to the participants in an amount equal to at least 20% of the assets eligible for reversion.
If either requirement is satisfied, then the excise tax is reduced to 20% of the amount of the reversion.
Statement I is a true statement because neither requirement is satisfied, so the reversion of $1,000,000 results in a 50% excise tax of $500,000.
Statement II is a false statement because, while the $300,000 that was used to increase benefits was more than the required 20% of the $1,000,000, the excise tax is 20% of the $700,000 reverted to the employer, or $140,000.
Statement III is a true statement because the $300,000 transferred to the qualified replacement plan was more than the 25% required transfer, and the excise tax is 20% of the $700,000 reverted to the employer, or $140,000.
Answer is B.
Question 23
The mandatory contributions are accumulated using 120% of the applicable Federal mid-term rate through 12/31/2010. The accumulated contributions as of 12/31/2010 are:
(1,000 ´ 1.0248 ´ 1.0295) + (1,000 ´ 1.0295) = 2,085
The accrued benefit attributable to the mandatory contributions is equal to the actuarial equivalent of the account balance at Smith's normal retirement date, using IRC section 417(e) actuarial equivalence (the applicable interest rate and the applicable mortality table). In this question, the deferred annuity factor has been provided using the IRC section 417(e)(3) segment rates, so it is unnecessary to deal with how the segment rates are applied. The equivalent monthly benefit can be determined based on the following equation of value:
2,085 = P × 12 × 4.28 → P = 40.60
See IRC sections 411(c)(2)(B) and (C).
Answer is D.
Question 24
IRC section 417(a)(1) requires a defined benefit plan to offer a qualified joint and survivor annuity(QJSA) option to married participants, and if the participant elects to waive the QJSA option the plan must also offer a qualified optional survivor annuity (QOSA). IRC section 417(g)(2) specifies that the survivor percentage of the QOSA must either be 50% (if the QJSA survivor percentage is at least 75%) or 75% (if the QJSA survivor percentage is less than 75%).
The plan in this question has only two joint and survivor annuity options: 50% and 100%. Only the 50% option could be a QOSA, so the QJSA percentage must be 100% (at least 75%). IRC section 417(c)(1)(A) states that the qualified preretirement survivor annuity (QPSA) percentage cannot be less than the qualified joint and survivor annuity percentage. Therefore, the smallest QPSA percentage that must be provided in this plan is equal to the QJSA percentage of 100%.
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 53 and had only 9 years of service, so the earliest retirement age at which Smith could have retired had he not died is the normal retirement age of 65 (the exam general condition for normal retirement age). Future years of service with the employer had Smith not died cannot be assumed for this purpose.
The vested accrued benefit of $1,000 must be converted to a 100% joint and survivor annuity using the plan’s equivalence factor of 0.80.
QJSA benefit = $1,000 × 80% = $800
This is the QPSA benefit payable to Smith’s spouse.
Answer is E.
Question 25
The PBGC flat-rate premium is equal to $35 per participant (using the participant count as of 12/31/2010) in 2011.
2011 flat-rate premium = $35 × (12 + 12 + 4 + 10) = $1,330
The variable-rate premium is equal to 0.9% of the unfunded vested benefits. The vested benefit value using the standard premium method is based upon the standard premium funding target. The assets taken into account are the market value of assets.
2011 variable-rate premium = ($2,180,000 – $1,300,000) × 0.009 = $7,920
For small employers (no more than 25 employees), there is a cap on the variable premium equal to the number of participants squared, multiplied by $5. As of 1/1/2011 there are only 24 active employees, so the cap must be considered. Note that the number of participants is the same as was used for the flat-rate premium.
Variable-rate premium cap = $5 × (12 + 12 + 4 + 10)2 = $7,220
The variable-rate premium must be capped at $7,220.
Total 2011 PBGC premium = $1,330 + $7,220 = $8,550
Answer is D.
Question 26
I. ERISA section 101(f)(1) states that the funding notice must be provided annually to plan participants and beneficiaries. It is the statement of benefits that need only be provided once every three years. The statement is false.
II. ERISA section 101(f)(2)(B)(i)(I) states that the funding notice must include a statement regarding whether the FTAP for the current and previous two years is at least 100% (and the smaller percentage if it was not at least 100%). The statement is true.
III. ERISA section 101(f)(2)(B)(iv) states that the funding notice must include a statement of the plan’s funding policy and the asset allocation. The statement is true.
Answer is D.
Question 27
Accrued vested benefits as of the plan termination date are guaranteed, subject to phase-in and maximum guaranteeable benefit rules under ERISA section 4022. The benefit formula for this plan was amended effective on 1/1/2008, so the increase in the vested accrued benefit for each participant due to the amendment must be phased in over a period of 3 years (from 1/1/2008 to the plan termination date of 1/1/2011). Each participant has at least 5 years of service, and is fully vested under the plan’s vesting schedule. Note that no service for purposes of the benefit formula is granted after 2008, but all service counts towards the satisfaction of the early retirement service requirement.