APA common mistakes
APA · Understand the traps and how to avoid them.
Applying the 10% early distribution additional tax to every distribution taken before age 59½ without first checking whether an exception applies.
Candidates memorize the headline rule and stop there, forgetting the statutory exceptions (disability, separation from service at 55 or later for qualified plans, QDRO payments, IRS levy, substantially equal periodic payments, qualified birth or adoption, and similar carve-outs).
What to do instead
Before answering, list the distribution's facts (age, plan type, reason, payee) and run each exception against them; state explicitly in your reasoning whether the 10% tax applies or an exception removes it.
Treating the required beginning date as the end of the year the participant turns the applicable age rather than April 1 of the following year.
The two dates are close together and candidates conflate the calendar-year trigger with the actual deadline, or forget the April 1 extension and its double-distribution consequence in the first year.
What to do instead
Anchor on the rule: RMDs begin for the year the participant attains the applicable age, but the deadline for that first RMD is April 1 of the next year; note that deferring means two RMDs are taxable in the second year.
Calculating the ADP or ACP test using the wrong compensation definition or testing period, such as using full-year compensation when the plan defines testing compensation differently.
Candidates default to the plan's general compensation figure without checking whether the plan elected a 414(s) safe harbor or alternative definition and whether the testing period is the plan year.
What to do instead
Identify the plan's compensation definition and testing period first, then compute the HCE and NHCE averages from that base; document the definition used in your answer.
Misidentifying highly compensated employees by using only the ownership test and ignoring the compensation threshold or look-back year.
The 5% owner rule is memorable, so candidates skip the compensation prong or apply the current-year threshold instead of the prior-year look-back.
What to do instead
Run both prongs: 5% owner in the current or prior year, or compensation above the indexed threshold in the look-back year (with the top-paid group election if applicable).
Applying vesting schedules or contribution limits to the wrong plan type, such as imposing 401(k) deferral limits on a defined benefit accrual or applying top-heavy vesting to a non-top-heavy plan.
Rules from different plan categories blur together under exam pressure, and candidates apply the most familiar limit regardless of plan type.
What to do instead
Classify the plan (DB, DC, 401(k), ESOP, governmental, church) before recalling any limit, and state the classification in your reasoning so the correct rule set follows.
Computing top-heavy minimum contributions without first determining the top-heavy ratio and the applicable determination date.
Candidates jump to the 3% minimum or the DB accrual minimum without confirming the plan is top-heavy or checking whether the plan uses the transition rule.
What to do instead
Step through it: compute account balances or accrued benefits as of the determination date, calculate the ratio, apply the transition rule if newly top-heavy, then apply the minimum benefit requirement.
Assuming a participant is fully vested in employer contributions after a partial termination or plan termination without checking the plan's vesting schedule and the automatic vesting rule.
The concept of partial termination is studied in the abstract, so candidates forget that affected participants become fully vested on partial or full termination.
What to do instead
When a fact pattern shows a significant workforce reduction or plan shutdown, flag it and apply 100% vesting to affected participants before computing any distribution.
Failing to apply the spousal consent requirement to a distribution or beneficiary designation when the participant is married and the plan is subject to the QJSA rules.
Candidates focus on the participant's election and overlook that a waiver of the QJSA or designation of a non-spouse beneficiary requires the spouse's notarized or witnessed consent.
What to do instead
Check marital status and plan type first; if the plan is subject to QJSA/QPSA rules and the participant is married, require spousal consent for any waiver or non-spouse beneficiary.
Confusing ERISA fiduciary duties with prohibited transaction rules and applying the wrong standard to a fact pattern involving plan investments or party-in-interest dealings.
Both concepts appear in the same scenarios, and candidates cite the prudence/loyalty duty when the real issue is a prohibited transaction, or vice versa.
What to do instead
Separate the analysis: first ask whether the act is a fiduciary act subject to the duties of loyalty and prudence, then ask whether it is a prohibited transaction and whether a statutory or class exemption applies.
Reporting contributions and distributions on the wrong Form 5500 schedule or missing the small-plan audit exemption threshold.
The schedule letters and thresholds are easy to mix up, and candidates forget that the audit requirement depends on participant count and plan type.
What to do instead
Map each item to its schedule (financial information, service provider fees, actuarial information for DB plans) and check the participant count against the audit threshold before concluding an audit is or is not required.