Plan Design, Benefits, and Compensation
What the exam expects
Design questions test whether you can read a plan's eligibility, allocation, and vesting provisions and predict outcomes for a specific participant. Master the building blocks: eligibility service and entry dates, compensation definitions, allocation formulas (integrated, age-weighted, new comparability), vesting schedules, and the limits that constrain design. Know how a design choice creates a testing consequence - for example, a last-day or hours requirement that must satisfy 401(a)(26) or coverage rules.
Concepts to master
- Compensation: total versus base, inclusions and exclusions, and the 401(a)(17) limit.
- 415(c) annual additions, 402(g) elective deferrals, and catch-up treatment.
- Top-heavy minimums and how they interact with integrated and cross-tested formulas.
- Safe harbor 401(k) designs and the price of exemption from ADP/ACP testing.
- Vesting schedules and forfeiture handling; partial termination risk on large layoffs.
Traps
Compensation definition questions are the classic trap: an item like bonuses or commissions may be included for one purpose and excluded for another, and the answer changes if the document is silent. Another trap is applying the current-year limit to a prior-year contribution or forgetting that catch-up is excluded from 415 and top-heavy calculations. Watch for questions that assume a participant is vested based on years of service when the schedule counts vesting years differently from eligibility years.
Worked example
A participant earns $180,000 base plus a $30,000 bonus. The plan defines compensation as base pay only and excludes bonuses. Her plan compensation is capped at the 401(a)(17) limit, so use the lesser of base pay and the limit. If the question asks for the 415(c) limit instead, that is a separate ceiling on total annual additions - do not blend the two limits into one number.