Practice Exam for FP515 || Faultless Answers 100%.
The Department of Labor (DOL) issues
A) rulings, including prohibited transaction exemptions (PTEs).
B) guaranty insurance.
C)approval of plan documents in the summary plan description.
D)private-letter rulings. correct answers A. The answer is rulings including prohibited transaction
exemptions (PTEs). The Department of Labor issues advisory opinions and rulings (including
prohibited transaction exemptions) similar to private-letter rulings, which are issued by the IRS.
The DOL does not issue guaranty insurance. The summary plan description is required by the
DOL, but the DOL does not approve plan documents. The IRS approves plan documents
Pension Benefit Guaranty Corporation (PBGC) insurance coverage is required for which of the
following plans?
I. Traditional defined benefit pension plan
II. Target benefit pension plan
III. Money purchase pension plan
IV. Profit-sharing plan correct answers I only. Money purchase pension plans, profit-sharing
plans, and target benefit pension plans do not require PBGC insurance because they are forms of
defined contribution plans. Only defined benefit pension plans (traditional defined benefit plans
and cash balance plans) require the payment of PBGC insurance premiums.
A qualified plan is
I. a company-sponsored retirement plan with benefits guaranteed by the Employee Retirement
Income Security Act (ERISA).
II. a tax-efficient way to save for retirement.
III. only applicable for firms with 50 or more employees.
IV. considered a plan that benefits highly compensated employees only. correct answers II only.
ERISA does not guarantee plan benefits; the Pension Benefit Guaranty Corporation (PBGC)
guarantees benefits in defined benefit pension plans. A qualified plan is a tax-efficient way to
,save for retirement. Qualified plans may be established for firms with as few as one employee.
Qualified plans also benefit non-highly compensated employees.
Which of the following are examples of qualified retirement plans?
Cash balance plan
Section 401(k) plan
Section 403(b) plan
Employee stock ownership plan (ESOP) correct answers The answer is I, II, and IV. A Section
403(b) plan is a tax-advantaged plan but not an ERISA-qualified retirement plan. While tax-
advantaged plans are very similar to qualified plans, there are some minor differences. For
example, a tax-advantaged plan is not allowed to have net unrealized appreciation (NUA)
treatment. They are also not allowed to offer 10-year forward averaging or special pre-1974
capital gains treatment. Tax-advantaged plans also have less restrictive nondiscrimination rules.
Otherwise they are very similar to qualified plans.
Which of the following are minimum coverage tests for qualified retirement plans?
Nondiscrimination test
Average benefits percentage test
Ratio test
Maximum compensation test correct answers The answer is II and III. The two minimum
coverage tests for qualified retirement plans are the average benefits percentage test and the ratio
test. In order to be qualified, a retirement plan must meet at least one of these tests if the plan
does not meet the percentage (safe harbor) test.
Roderick Manufacturing maintains a qualified defined benefit plan. There are 100 eligible
employees working for the company. What is the minimum number of employees the retirement
plan must cover to satisfy the 50/40 test? correct answers The answer is 40. Under the 50/40 test,
a defined benefit plan must cover the lesser of 50 employees or 40% of all eligible employees. In
this case, the lesser of 50 employees or 40% of all eligible employees (100) is 40 employees.
One way to remember the 50/40 test is the phrase "people before percentages" (50 people or
40%). Also, note that there are no qualifiers to the types of people. It is not 50 non-highly
compensated people. It is just 50 employees who work for Roderick Manufacturing.
,Which of the following statements regarding the coverage rules for qualified plans is (are)
CORRECT?
The coverage tests for qualified plans include the percentage test, the ratio test, and the average
contribution percentage test.
A retirement plan can cover any portion of the workforce, provided it satisfies one of the three
coverage tests under Section 410(b). correct answers The answer is II only. Statement I should
list the third coverage test as the average benefit percentage test, not the average contribution
percentage test.
Several years ago, Greener Grass Company implemented a traditional defined benefit plan.
According to the plan document, the employer must contribute an annual amount that will
provide the employees with a specified benefit at retirement. Which of the following events
would be expected to decrease the employer's annual contribution to a traditional defined benefit
pension plan using a percentage for each year of service benefit formula?
Inflation is higher than expected.
Benefits are cost of living adjusted.
Forfeitures are higher than anticipated.
The investment returns of the plan are greater than expected. correct answers The answer is III
and IV. Defined benefit pension plan contributions decrease because of the events described in
statements III and IV. Statements I and II are incorrect. Inflation would likely cause salaries and
plan expenses to increase, thereby causing contributions to increase. Likewise, benefits that are
adjusted for the cost of living would result in greater employer contributions, not less.
Which statements regarding integrating a plan with Social Security are true?
Only the excess method can be used by a defined benefit pension plan.
The maximum increase in benefits for earnings above the covered compensation level is 26.25%
for a defined benefit pension plan.
Because there is a disparity in the Social Security system, all retirement plans are allowed
integration with Social Security.
Under the offset method, a fixed or formula amount approximates the existence of Social
Security benefits and reduces the plan formula. correct answers The answer is II and IV.
Statement I is incorrect because the excess method may only be used by a defined contribution
plan. A defined benefit plan may use either the excess method or the offset method for Social
, Security integration. Statement III is incorrect because not all retirement plans may be integrated
with Social Security.
Which of the following retirement plans can be integrated with Social Security?
Profit-sharing plan
Simplified employee pension (SEP) plan
Money purchase pension plan
Defined benefit pension plan correct answers The answer is I, II, III, and IV. All these plans may
be integrated with Social Security. Employee stock ownership plans (ESOPs), savings incentive
match plan for employees (SIMPLEs), and salary reduction SEPs (SARSEPs) are not permitted
to use integration. Also, employee elective deferrals and employer matching contributions cannot
be integrated.
Which of the following statements regarding prohibited transactions is CORRECT?
The lending of money or other extension of credit between the plan and a party in interest
(outside of nondiscriminatory retirement plan loans based on the participant's account balance) is
not a prohibited transaction.
One category of prohibited transactions involves self-dealing.
One category of prohibited transactions bars a fiduciary from causing the plan to engage in a
transaction if the fiduciary knows or should know that such a transaction constitutes a direct or
indirect involvement between the plan and the parties in interest.
One category of prohibited transactions involves the investment in the sponsoring employer's
stock or real property above certain limits. correct answers The answer is II, III, and IV.
Statement I is incorrect. The sale, exchange, lending, or leasing of any property between the
plan's assets and a party in interest is a prohibited transaction. A plan participant can take a
retirement plan loan based on the participant's balance, but the plan cannot make a loan of the
general plan assets to a party in interest.
Which of the following is one of the differences between defined benefit pension plans and
defined contribution plans?
A) A defined contribution plan has a benefit limit, whereas a defined benefit pension plan has a
contribution limit.
The Department of Labor (DOL) issues
A) rulings, including prohibited transaction exemptions (PTEs).
B) guaranty insurance.
C)approval of plan documents in the summary plan description.
D)private-letter rulings. correct answers A. The answer is rulings including prohibited transaction
exemptions (PTEs). The Department of Labor issues advisory opinions and rulings (including
prohibited transaction exemptions) similar to private-letter rulings, which are issued by the IRS.
The DOL does not issue guaranty insurance. The summary plan description is required by the
DOL, but the DOL does not approve plan documents. The IRS approves plan documents
Pension Benefit Guaranty Corporation (PBGC) insurance coverage is required for which of the
following plans?
I. Traditional defined benefit pension plan
II. Target benefit pension plan
III. Money purchase pension plan
IV. Profit-sharing plan correct answers I only. Money purchase pension plans, profit-sharing
plans, and target benefit pension plans do not require PBGC insurance because they are forms of
defined contribution plans. Only defined benefit pension plans (traditional defined benefit plans
and cash balance plans) require the payment of PBGC insurance premiums.
A qualified plan is
I. a company-sponsored retirement plan with benefits guaranteed by the Employee Retirement
Income Security Act (ERISA).
II. a tax-efficient way to save for retirement.
III. only applicable for firms with 50 or more employees.
IV. considered a plan that benefits highly compensated employees only. correct answers II only.
ERISA does not guarantee plan benefits; the Pension Benefit Guaranty Corporation (PBGC)
guarantees benefits in defined benefit pension plans. A qualified plan is a tax-efficient way to
,save for retirement. Qualified plans may be established for firms with as few as one employee.
Qualified plans also benefit non-highly compensated employees.
Which of the following are examples of qualified retirement plans?
Cash balance plan
Section 401(k) plan
Section 403(b) plan
Employee stock ownership plan (ESOP) correct answers The answer is I, II, and IV. A Section
403(b) plan is a tax-advantaged plan but not an ERISA-qualified retirement plan. While tax-
advantaged plans are very similar to qualified plans, there are some minor differences. For
example, a tax-advantaged plan is not allowed to have net unrealized appreciation (NUA)
treatment. They are also not allowed to offer 10-year forward averaging or special pre-1974
capital gains treatment. Tax-advantaged plans also have less restrictive nondiscrimination rules.
Otherwise they are very similar to qualified plans.
Which of the following are minimum coverage tests for qualified retirement plans?
Nondiscrimination test
Average benefits percentage test
Ratio test
Maximum compensation test correct answers The answer is II and III. The two minimum
coverage tests for qualified retirement plans are the average benefits percentage test and the ratio
test. In order to be qualified, a retirement plan must meet at least one of these tests if the plan
does not meet the percentage (safe harbor) test.
Roderick Manufacturing maintains a qualified defined benefit plan. There are 100 eligible
employees working for the company. What is the minimum number of employees the retirement
plan must cover to satisfy the 50/40 test? correct answers The answer is 40. Under the 50/40 test,
a defined benefit plan must cover the lesser of 50 employees or 40% of all eligible employees. In
this case, the lesser of 50 employees or 40% of all eligible employees (100) is 40 employees.
One way to remember the 50/40 test is the phrase "people before percentages" (50 people or
40%). Also, note that there are no qualifiers to the types of people. It is not 50 non-highly
compensated people. It is just 50 employees who work for Roderick Manufacturing.
,Which of the following statements regarding the coverage rules for qualified plans is (are)
CORRECT?
The coverage tests for qualified plans include the percentage test, the ratio test, and the average
contribution percentage test.
A retirement plan can cover any portion of the workforce, provided it satisfies one of the three
coverage tests under Section 410(b). correct answers The answer is II only. Statement I should
list the third coverage test as the average benefit percentage test, not the average contribution
percentage test.
Several years ago, Greener Grass Company implemented a traditional defined benefit plan.
According to the plan document, the employer must contribute an annual amount that will
provide the employees with a specified benefit at retirement. Which of the following events
would be expected to decrease the employer's annual contribution to a traditional defined benefit
pension plan using a percentage for each year of service benefit formula?
Inflation is higher than expected.
Benefits are cost of living adjusted.
Forfeitures are higher than anticipated.
The investment returns of the plan are greater than expected. correct answers The answer is III
and IV. Defined benefit pension plan contributions decrease because of the events described in
statements III and IV. Statements I and II are incorrect. Inflation would likely cause salaries and
plan expenses to increase, thereby causing contributions to increase. Likewise, benefits that are
adjusted for the cost of living would result in greater employer contributions, not less.
Which statements regarding integrating a plan with Social Security are true?
Only the excess method can be used by a defined benefit pension plan.
The maximum increase in benefits for earnings above the covered compensation level is 26.25%
for a defined benefit pension plan.
Because there is a disparity in the Social Security system, all retirement plans are allowed
integration with Social Security.
Under the offset method, a fixed or formula amount approximates the existence of Social
Security benefits and reduces the plan formula. correct answers The answer is II and IV.
Statement I is incorrect because the excess method may only be used by a defined contribution
plan. A defined benefit plan may use either the excess method or the offset method for Social
, Security integration. Statement III is incorrect because not all retirement plans may be integrated
with Social Security.
Which of the following retirement plans can be integrated with Social Security?
Profit-sharing plan
Simplified employee pension (SEP) plan
Money purchase pension plan
Defined benefit pension plan correct answers The answer is I, II, III, and IV. All these plans may
be integrated with Social Security. Employee stock ownership plans (ESOPs), savings incentive
match plan for employees (SIMPLEs), and salary reduction SEPs (SARSEPs) are not permitted
to use integration. Also, employee elective deferrals and employer matching contributions cannot
be integrated.
Which of the following statements regarding prohibited transactions is CORRECT?
The lending of money or other extension of credit between the plan and a party in interest
(outside of nondiscriminatory retirement plan loans based on the participant's account balance) is
not a prohibited transaction.
One category of prohibited transactions involves self-dealing.
One category of prohibited transactions bars a fiduciary from causing the plan to engage in a
transaction if the fiduciary knows or should know that such a transaction constitutes a direct or
indirect involvement between the plan and the parties in interest.
One category of prohibited transactions involves the investment in the sponsoring employer's
stock or real property above certain limits. correct answers The answer is II, III, and IV.
Statement I is incorrect. The sale, exchange, lending, or leasing of any property between the
plan's assets and a party in interest is a prohibited transaction. A plan participant can take a
retirement plan loan based on the participant's balance, but the plan cannot make a loan of the
general plan assets to a party in interest.
Which of the following is one of the differences between defined benefit pension plans and
defined contribution plans?
A) A defined contribution plan has a benefit limit, whereas a defined benefit pension plan has a
contribution limit.
