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Pension Consultant practice questions

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Question 1Pension and retirement plan consulting (domain content not enumerated in source)

Under ERISA, which party is generally a plan fiduciary because of the authority it holds over plan assets and administration?

  1. The plan sponsor's payroll vendor that remits deferrals under instruction
  2. The actuary who prepares a funding schedule from employer data
  3. The trustee who exercises discretionary authority over plan management Correct answer.
  4. The plan's third-party recordkeeper that only prints statements

Explanation

ERISA defines a fiduciary by function: anyone who exercises discretionary authority or control over plan management or disposition of assets is a fiduciary. A trustee holding discretionary authority fits that definition directly. Vendors performing purely ministerial tasks under instruction generally are not fiduciaries for those acts.

Question 2Pension and retirement plan consulting (domain content not enumerated in source)

A 401(k) plan's ADP test fails for the year. Which correction generally applies to excess contributions made by highly compensated employees?

  1. Carry the excess forward and count it against the following year's ADP limit
  2. Forfeit the excess to the plan and use it to reduce the next year's employer match
  3. Refund the excess plus allocable earnings to the HCEs and report it as taxable income to them Correct answer.
  4. Reallocate the excess to non-highly compensated employees as an additional profit-sharing contribution

Explanation

Excess contributions under a failed ADP test are corrected by distributing them, with allocable earnings, to the affected highly compensated employees. The distribution is taxable to the recipient in the year distributed, and the plan must issue the appropriate reporting. Forfeiture and reallocation are not permitted corrections for ADP failures.

Question 3Pension and retirement plan consulting (domain content not enumerated in source)

Which statement best describes the purpose of the annual funding notice required for defined benefit plans?

  1. It reports the plan's investment returns to the Department of Labor only
  2. It replaces the summary annual report for all welfare plans
  3. It certifies that the plan satisfies the minimum funding standard for the year
  4. It discloses the plan's funded status and related funding information to participants and beneficiaries Correct answer.

Explanation

The annual funding notice gives participants, beneficiaries, and unions information about the plan's funded status, assets and liabilities, and funding policy. It is a disclosure document, not a certification of compliance. It does not substitute for other required disclosures such as the summary annual report.

Question 4Pension and retirement plan consulting (domain content not enumerated in source)

A plan uses the prior-year testing method for its ADP test. For which participants may the plan use current-year compensation in the test?

  1. Only participants who terminated during the year
  2. Only non-highly compensated employees Correct answer.
  3. Only highly compensated employees
  4. All participants, because prior-year testing always uses current-year pay

Explanation

When a plan elects prior-year testing, the ADP test uses prior-year compensation for highly compensated employees but may use current-year compensation for non-highly compensated employees. This asymmetry is expressly permitted and helps the test pass. Using current-year pay for HCEs under prior-year testing is not allowed.

Question 5Pension and retirement plan consulting (domain content not enumerated in source)

Which of the following is a required element of a qualified domestic relations order (QDRO) for it to be recognized by a retirement plan?

  1. Approval by the plan's recordkeeper before the order is submitted to the court
  2. A statement of the participant's vested account balance as of the order date
  3. The alternate payee's consent to the plan's investment lineup
  4. The name and last known mailing address of the participant and each alternate payee Correct answer.

Explanation

A QDRO must identify the participant and each alternate payee by name and mailing address, among other statutory requirements. It must also specify the amount or percentage payable and the plan or plans to which it applies. Recordkeeper approval and account balance statements are not statutory requirements.

Question 6Pension and retirement plan consulting (domain content not enumerated in source)

A participant in a 401(k) plan wants to take a hardship distribution. Which condition must generally be satisfied under the safe harbor rules?

  1. The participant must first repay any prior hardship distribution
  2. The distribution may not exceed the amount needed to satisfy the financial need plus taxes Correct answer.
  3. The distribution must be repaid with interest within five years
  4. The participant must terminate employment before the distribution is made

Explanation

Hardship distributions are limited to the amount required to meet the need, including amounts necessary to pay taxes reasonably anticipated on the distribution. They are not loans, so repayment with interest is not required. Termination of employment is not a condition for a hardship distribution.

Question 7Pension and retirement plan consulting (domain content not enumerated in source)

Which funding rule applies to a single-employer defined benefit plan under the minimum funding standards?

  1. The plan must maintain a funded ratio of at least 100 percent at all times
  2. The plan must be funded to the variable-rate premium level each quarter
  3. The employer must contribute the greater of the PBGC guaranteed benefit or the accumulated benefit obligation
  4. The employer must contribute at least the target normal cost plus any shortfall amortization installment Correct answer.

Explanation

The minimum required contribution for a single-employer defined benefit plan is generally the target normal cost plus any shortfall or waiver amortization installments, adjusted for the funding balance. The rule does not require full funding at all times. Premium levels and guaranteed benefits are separate concepts from the funding standard.

Question 8Pension and retirement plan consulting (domain content not enumerated in source)

An employer maintains a plan that covers employees at two unrelated businesses under common control. Why does the controlled group analysis matter for plan qualification?

  1. It determines which employees must be counted for coverage and nondiscrimination testing Correct answer.
  2. It determines whether the plan may hold employer securities
  3. It determines the plan's PBGC premium category
  4. It determines whether the plan can be a cash balance plan

Explanation

Businesses under common control are treated as a single employer for qualified plan purposes. That aggregation affects coverage testing, nondiscrimination testing, and application of the compensation and contribution limits. It does not determine plan design features such as holding employer securities.

Question 9Pension and retirement plan consulting (domain content not enumerated in source)

Which statement accurately describes the top-heavy minimum contribution requirement for a defined contribution plan?

  1. The employer must contribute at least 5 percent of compensation for each key employee
  2. The employer must match employee deferrals at a rate of 100 percent up to 4 percent
  3. The employer must contribute at least 3 percent of compensation for each non-key employee Correct answer.
  4. The employer must provide a fully vested profit-sharing allocation to all employees

Explanation

A top-heavy defined contribution plan must generally provide a minimum contribution of 3 percent of compensation to non-key employees. A safe harbor 401(k) design may satisfy this in some circumstances. The minimum is measured against non-key employees, not key employees.

Question 10Pension and retirement plan consulting (domain content not enumerated in source)

A participant requests a distribution and elects a direct rollover to an eligible retirement plan. What is the tax consequence to the participant?

  1. The distribution is not taxable currently and is not subject to mandatory 20 percent withholding Correct answer.
  2. The distribution is taxable currently but exempt from the early distribution penalty
  3. The distribution is taxable currently and subject to mandatory 20 percent withholding
  4. The distribution is not taxable but is subject to mandatory 20 percent withholding

Explanation

A direct rollover transfers the eligible rollover distribution to another eligible retirement plan or IRA without the participant taking constructive receipt. Because it is not paid to the participant, it is not currently taxable and the 20 percent mandatory withholding does not apply. An indirect rollover, by contrast, is subject to mandatory withholding.

Question 11Pension and retirement plan consulting (domain content not enumerated in source)

Which factor most directly determines whether a retirement plan is covered by ERISA's fiduciary duties?

  1. Whether the plan offers participant-directed investments
  2. Whether the plan is established and maintained by an employer engaged in interstate commerce Correct answer.
  3. Whether the plan is tax-qualified under the Internal Revenue Code
  4. Whether the plan has more than 100 participants

Explanation

ERISA coverage generally turns on whether an employer is engaged in commerce or in an industry affecting commerce and whether a plan is established or maintained by that employer. Tax qualification is a separate Code concept. Participant count and investment design affect specific rules but not basic fiduciary coverage.

Question 12Pension and retirement plan consulting (domain content not enumerated in source)

A plan sponsor wants to correct an operational failure using the IRS Employee Plans Compliance Resolution System. Which correction principle is central to that program?

  1. The correction must place participants in the position they would have occupied had the failure not occurred Correct answer.
  2. The plan must self-identify the failure within 30 days of discovery
  3. The plan must terminate and distribute all assets before correction
  4. The correction must be approved by the plan's recordkeeper before submission

Explanation

EPCRS corrections are designed to restore participants to the position they would have been in absent the failure, including making up missed contributions and earnings. Self-correction is available for many failures without a submission. Recordkeeper approval is not a correction principle.

Question 13Pension and retirement plan consulting (domain content not enumerated in source)

Which of the following best describes a cash balance plan's benefit formula?

  1. A lump sum equal to employee deferrals plus employer matching contributions
  2. A benefit based solely on years of service and final average compensation
  3. An account holding actual employer contributions invested in participant-selected funds
  4. A hypothetical account credited with pay credits and interest credits each year Correct answer.

Explanation

A cash balance plan is a defined benefit plan that expresses benefits as a hypothetical account balance. The account is credited annually with pay credits and interest credits, and the benefit is paid as an annuity or lump sum. The assets are pooled trust assets, not participant-directed accounts.

Question 14Pension and retirement plan consulting (domain content not enumerated in source)

A 401(k) plan uses the safe harbor nonelective contribution design. What contribution level generally satisfies the safe harbor?

  1. 3 percent of compensation for all eligible employees Correct answer.
  2. 1 percent of compensation for all eligible employees
  3. 6 percent of compensation for highly compensated employees only
  4. 5 percent of compensation for non-highly compensated employees only

Explanation

The safe harbor nonelective design requires a contribution of at least 3 percent of compensation to all eligible non-highly compensated employees who are eligible to defer. Satisfying the safe harbor relieves the plan of ADP and ACP testing. Contributions are not limited to the HCE group.

Question 15Pension and retirement plan consulting (domain content not enumerated in source)

Which statement about required minimum distributions from a traditional IRA is accurate for an owner who reaches the applicable age?

  1. Distributions must begin by April 1 of the year following the year the owner reaches the applicable age Correct answer.
  2. Distributions may be delayed until the owner retires from all employment
  3. Distributions must begin by December 31 of the year the owner reaches the applicable age
  4. Distributions are not required if the owner continues working part time

Explanation

An IRA owner must begin required minimum distributions by April 1 of the year following the year in which the applicable age is reached. The first distribution year's amount may be delayed to that deadline, but subsequent distributions must be made annually. The working-retirement exception applies to employer plans, not IRAs.

Question 16Pension and retirement plan consulting (domain content not enumerated in source)

A plan fiduciarily selects an investment fund that later underperforms its benchmark for three consecutive years. What is the most appropriate fiduciary response?

  1. Automatically remove the fund to avoid liability for underperformance
  2. Replace the fund only after obtaining participant approval
  3. Do nothing, because investment losses never create fiduciary exposure
  4. Document a prudent review of the fund and take action consistent with the plan's investment policy Correct answer.

Explanation

Fiduciary prudence is judged by the process used, not by investment outcomes alone. A fiduciary should monitor the fund against the plan's investment policy and document a reasoned decision. Automatic removal based solely on performance and participant votes are not required by ERISA.

Question 17Pension and retirement plan consulting (domain content not enumerated in source)

Which item is generally excluded from compensation for purposes of the section 415(c) annual additions limit unless the plan provides otherwise?

  1. Overtime pay
  2. Bonuses
  3. Severance pay Correct answer.
  4. Commissions

Explanation

Section 415 compensation generally includes wages, salaries, and other amounts received for personal services, but excludes severance pay and certain other items. Plans may elect to include or exclude specific items within the permitted rules. Overtime, bonuses, and commissions are generally includible.

Question 18Pension and retirement plan consulting (domain content not enumerated in source)

What is the primary purpose of the summary plan description provided to participants?

  1. To describe the plan's terms, benefits, and participant rights in plain language Correct answer.
  2. To report the plan's investment performance for the year
  3. To certify that the plan satisfies the coverage rules
  4. To disclose the plan's annual funded status and funding policy

Explanation

The summary plan description explains the plan's terms and benefits and informs participants of their rights under ERISA in language understandable to the average participant. It must be furnished within specified deadlines and updated for material changes. It is not a funding or performance report.

Question 19Pension and retirement plan consulting (domain content not enumerated in source)

A participant-directed 401(k) plan wants relief from fiduciary liability for participants' investment decisions under ERISA section 404(c). Which condition is essential?

  1. The plan must obtain participant consent to the default investment
  2. The plan must offer at least 15 investment alternatives
  3. The plan must guarantee participants against investment losses
  4. The plan must provide participants a broad range of investments and adequate information to make informed choices Correct answer.

Explanation

Section 404(c) relief requires that participants exercise control over their accounts and that the plan provide a broad range of investment alternatives and sufficient information. It does not guarantee against losses. The number of alternatives is a facts-and-circumstances matter, not a fixed statutory count.

Question 20Pension and retirement plan consulting (domain content not enumerated in source)

Which statement about catch-up contributions for a participant age 50 or older in a 401(k) plan is accurate?

  1. Catch-up contributions must be matched by the employer at the same rate as regular deferrals
  2. Catch-up contributions are limited to participants who have 15 years of service
  3. Catch-up contributions are not counted toward the ADP test or the section 415(c) limit Correct answer.
  4. Catch-up contributions are permitted only if the plan passes the ADP test

Explanation

Eligible catch-up contributions are excluded from the ADP test and are not counted against the section 415(c) annual additions limit. This makes them a useful planning tool for older participants. Employer matching of catch-up contributions is optional, not required.

Question 21Pension and retirement plan consulting (domain content not enumerated in source)

A plan sponsor is evaluating whether to freeze a defined benefit plan. Which consequence is most directly associated with a hard freeze?

  1. The employer's minimum funding obligation ends immediately
  2. Future benefit accruals stop, but participants retain benefits already accrued Correct answer.
  3. The plan must terminate within 12 months of the freeze
  4. All participants become fully vested immediately by operation of law

Explanation

A hard freeze stops future benefit accruals while preserving benefits already earned. It does not automatically trigger full vesting or require termination. The employer generally remains subject to funding obligations for the accrued benefits.

Question 22Pension and retirement plan consulting (domain content not enumerated in source)

Which of the following is a key difference between a defined benefit plan and a defined contribution plan from the employer's perspective?

  1. The employer bears the investment risk in a defined benefit plan Correct answer.
  2. The employer's contribution is fixed in a defined benefit plan
  3. Only defined contribution plans are subject to ERISA fiduciary rules
  4. Only defined benefit plans require an annual Form 5500 filing

Explanation

In a defined benefit plan the employer promises a specified benefit and bears the investment and longevity risk of funding it. In a defined contribution plan the contribution is defined and the participant bears investment risk. Both plan types are subject to ERISA fiduciary rules and annual reporting.

Question 23Pension and retirement plan consulting (domain content not enumerated in source)

A plan administrator receives a domestic relations order that assigns benefits to an alternate payee but does not specify the number of payments or the period to which the order applies. What is the appropriate determination?

  1. The order is a QDRO if the participant consents in writing
  2. The order is a QDRO because it identifies an alternate payee
  3. The order is not a QDRO because it fails to specify the amount, percentage, or period Correct answer.
  4. The order is a QDRO only if the plan's recordkeeper approves it

Explanation

A QDRO must specify the amount or percentage of benefits to be paid and the number of payments or period to which the order applies. An order missing these elements does not meet the statutory requirements. Participant consent and recordkeeper approval are not substitutes for the required terms.

Question 24Pension and retirement plan consulting (domain content not enumerated in source)

What is the purpose of the PBGC's single-employer insurance program?

  1. To reimburse employers for contributions made to overfunded plans
  2. To guarantee participants' benefits within statutory limits if a covered plan terminates underfunded Correct answer.
  3. To insure plan fiduciaries against breach of fiduciary duty claims
  4. To provide investment returns guarantees for stable value funds

Explanation

The PBGC insures benefits of participants in covered single-employer defined benefit plans, subject to statutory limits, when a plan terminates with insufficient assets. It is not a fiduciary liability insurer and does not reimburse employers. It does not guarantee investment returns.

Question 25Pension and retirement plan consulting (domain content not enumerated in source)

A plan sponsor is considering adding an automatic enrollment feature with a default escalation schedule. Which statement best reflects the design considerations under the applicable rules?

  1. Automatic enrollment is permitted only in plans with fewer than 100 participants
  2. Automatic enrollment eliminates the need for any nondiscrimination testing
  3. Automatic enrollment requires participant affirmative consent before any deferral occurs
  4. Automatic enrollment requires default investments and permissible withdrawal rights to fit within the statutory safe harbor Correct answer.

Explanation

Automatic enrollment arrangements that rely on the statutory safe harbor require an eligible default investment and a permissible withdrawal feature, among other conditions. Participants are enrolled unless they opt out, so affirmative consent is not required. Automatic enrollment does not eliminate all testing.

Question 26Pension and retirement plan consulting (domain content not enumerated in source)

A plan sponsor is adopting a new defined contribution plan and asks how the section 415(c) annual additions limit is determined for a participant with no other plans. Which limit applies for the 2024 limitation year?

  1. 100% of compensation with no dollar ceiling for defined contribution plans
  2. A flat $69,000 regardless of the participant's compensation
  3. The lesser of 100% of compensation or a dollar amount indexed annually, which was $69,000 for 2024 Correct answer.
  4. The greater of 25% of compensation or $69,000

Explanation

Section 415(c) caps annual additions at the lesser of a statutorily indexed dollar limit ($69,000 for 2024) or 100% of the participant's compensation. The compensation test matters most for lower-paid participants, so a flat dollar amount is never the whole rule.

Question 27Pension and retirement plan consulting (domain content not enumerated in source)

An employer wants to give rank-and-file employees a meaningful retirement benefit while concentrating most of the contributions for the owner. Which testing concept most directly constrains how far such a design can go in a profit sharing plan?

  1. The section 411 vesting schedule minimums
  2. The PBGC premium schedule for single-employer plans
  3. The section 401(a)(4) nondiscrimination rules, often applied through general testing of allocation rates Correct answer.
  4. The section 410(b) coverage test alone

Explanation

Section 401(a)(4) prohibits discrimination in contributions or benefits in favor of highly compensated employees, and general testing evaluates allocation rates across the workforce. Coverage under 410(b) is a threshold requirement but does not by itself police the size of the benefit disparity.

Question 28Pension and retirement plan consulting (domain content not enumerated in source)

A 401(k) plan allows participant loans. Which set of terms is generally required for a loan to be treated as exempt from the prohibited transaction rules and the distribution rules?

  1. No written loan policy, provided each loan is documented in the participant's file
  2. A below-market rate to avoid imputed income, with repayment over any period the participant chooses
  3. A commercially reasonable interest rate, adequate security, and a repayment schedule that amortizes the loan within five years unless it funds a principal residence Correct answer.
  4. Any interest rate the plan administrator negotiates, with repayment due in full at termination of employment

Explanation

A participant loan escapes treatment as a prohibited transaction and taxable distribution only if it is made available on reasonably equivalent terms, bears a reasonable rate of interest, is adequately secured, and amortizes generally within five years, with an exception for principal-residence loans. A written loan policy is also expected as part of plan administration.

Question 29Pension and retirement plan consulting (domain content not enumerated in source)

A plan sponsor with a calendar-year plan is deciding when to adopt a discretionary profit sharing contribution for the prior plan year. Which statement about the deduction timing is accurate?

  1. The contribution must be both adopted and paid by the last day of the plan year to be deductible for that year
  2. The contribution can never be deducted for a year before the plan year in which it is paid
  3. The contribution may be deducted for the prior tax year if it is paid by the due date of the employer's return, including extensions, even when adopted after year-end Correct answer.
  4. The contribution is deductible only in the year the plan document is amended, regardless of payment date

Explanation

An employer generally may deduct a contribution for the tax year if it is made by the due date of the return, including extensions, and the plan terms permit it. This allows a contribution to be adopted and funded after the close of the plan year while still being deducted for that year.

Question 30Pension and retirement plan consulting (domain content not enumerated in source)

A participant in a governmental 457(b) plan also participates in her employer's 403(b) plan. How are the deferral limits coordinated between the two plans?

  1. The 457(b) limit is reduced dollar for dollar by employer contributions to the 403(b) plan
  2. Only the 403(b) limit applies because governmental plans are exempt from 457(b) limits
  3. A single combined limit applies across both plans, so deferrals under one reduce the amount available under the other Correct answer.
  4. Each plan has its own separate limit, and contributions to one do not affect the other

Explanation

Deferrals to a 457(b) plan and a 403(b) plan maintained by the same employer are aggregated for purposes of the elective deferral limit, so contributions to one plan reduce the room available under the other. This coordination prevents a participant from doubling the annual deferral ceiling through multiple plans.

Question 31Pension and retirement plan consulting (domain content not enumerated in source)

A plan administrator must furnish a summary of material modifications to participants. Which event most clearly triggers this requirement?

  1. A change in the plan's third-party administrator's office address
  2. An annual increase in the plan's administrative expense budget
  3. An amendment that materially reduces a participant's future benefit accrual rate Correct answer.
  4. A routine change in the plan's investment fund lineup selected by participants

Explanation

A summary of material modifications must be furnished when a plan amendment or other change materially affects participants' rights, such as a reduction in future accruals. Routine administrative or investment-menu changes generally do not require the notice.

Question 32Pension and retirement plan consulting (domain content not enumerated in source)

A defined benefit plan is terminating and is fully funded. Which step is most directly required before plan assets can be distributed to participants?

  1. Transferring all assets to the PBGC and closing the plan immediately
  2. Obtaining the consent of every participant before any benefit can be paid
  3. Filing for bankruptcy protection to discharge benefit liabilities
  4. Obtaining a determination letter on plan termination from the IRS, while following the standard termination procedures including participant notices Correct answer.

Explanation

A standard termination requires that the plan be sufficient for benefit liabilities and that the sponsor follow the prescribed notices and filings, including requesting an IRS determination letter on termination. Participant consent is not a general prerequisite to paying benefits in a terminating plan.

Question 33Pension and retirement plan consulting (domain content not enumerated in source)

An employer maintains a defined benefit plan and a defined contribution plan covering the same employees. For which purpose does the combined plan deduction limit under section 404(a)(7) become relevant?

  1. It limits the aggregate deductible contributions when the defined benefit plan is not a multiemployer plan and the combined contributions exceed 25% of compensation, subject to exceptions Correct answer.
  2. It caps employee elective deferrals in the defined contribution plan
  3. It applies only to plans covering collectively bargained employees
  4. It applies only when the defined benefit plan is covered by PBGC insurance

Explanation

Section 404(a)(7) limits aggregate deductions for contributions to a combination of a defined benefit plan and a defined contribution plan to 25% of compensation, with important exceptions such as when the defined contribution contributions do not exceed 6% of compensation. The rule addresses employer deductions, not employee deferrals.

Question 34Pension and retirement plan consulting (domain content not enumerated in source)

A plan sponsor is considering a safe harbor 401(k) design to avoid annual nondiscrimination testing on elective deferrals. Which requirement is essential to the safe harbor nonelective design?

  1. A matching contribution that applies only to highly compensated employees
  2. An annual participant vote approving the contribution level
  3. A contribution that vests over a six-year graded schedule
  4. A contribution of at least 3% of compensation to all eligible nonhighly compensated employees, fully vested Correct answer.

Explanation

The safe harbor nonelective design requires a contribution of at least 3% of compensation for each eligible nonhighly compensated employee, and that contribution must be fully vested. Meeting these conditions lets the plan avoid the actual deferral percentage test.

Question 35Pension and retirement plan consulting (domain content not enumerated in source)

A participant in a defined contribution plan wants to know how her account will be invested if she never makes an investment election. Which plan feature governs this outcome?

  1. The PBGC's investment guidelines
  2. The employer's own corporate treasury investment policy
  3. The plan's money purchase pension formula
  4. The default investment alternative designated in the plan, which may be a qualified default investment alternative Correct answer.

Explanation

When participants fail to direct investments, the plan applies its designated default investment, which is often a qualified default investment alternative such as a target-date fund. This default is a plan design feature and can provide fiduciary relief when the QDIA rules are followed.

Question 36Pension and retirement plan consulting (domain content not enumerated in source)

An employer is weighing a defined benefit plan against a defined contribution plan for a workforce with many long-service employees. Which characteristic of the defined benefit design is most relevant to that comparison?

  1. Benefits are always limited to the employee's own contributions plus earnings
  2. Benefits are based on a formula tied to compensation and service, with investment risk borne by the employer Correct answer.
  3. The employer's contribution obligation ends once the annual contribution is deposited
  4. Participants bear the investment risk for the trust's assets

Explanation

A defined benefit plan promises a benefit determined by a formula, commonly using compensation and years of service, and the employer bears the investment and longevity risk. This contrasts with defined contribution plans, where the account balance depends on contributions and investment results.

Question 37Pension and retirement plan consulting (domain content not enumerated in source)

A plan uses the elapsed time method for vesting. How is a participant's period of service generally measured under this method?

  1. By counting only months in which the participant made elective deferrals
  2. By measuring the total period of time from the employment commencement date to the severance date, including certain gaps Correct answer.
  3. By counting only service after the participant reaches age 21
  4. By counting only hours of service in excess of 1,000 in each plan year

Explanation

The elapsed time method measures service as the total period from the employment commencement date to the severance date, with specified rules for breaks in service. It does not rely on counting hours above a threshold as the hourly method does.

Question 38Pension and retirement plan consulting (domain content not enumerated in source)

A plan administrator is reviewing a qualified domestic relations order. Which feature distinguishes a QDRO from an ordinary domestic relations order?

  1. It must clearly specify the alternate payee, the amount or method of determining benefits, and the plan or plans to which it applies Correct answer.
  2. It must waive the alternate payee's right to a separate account
  3. It must be approved by the PBGC before benefits can be assigned
  4. It must be signed by the plan administrator before it takes effect

Explanation

A QDRO must identify the participant and alternate payee, specify the amount or manner of determining benefits, and identify the plan covered, while not requiring a benefit the plan does not provide. Meeting these requirements allows the order to assign benefits without violating the anti-alienation rule.

Question 39Pension and retirement plan consulting (domain content not enumerated in source)

A small employer wants to adopt a retirement plan that allows the owner to make large deductible contributions while requiring minimal contributions for staff. Which design element is most likely to be examined under the nondiscrimination and coverage rules?

  1. The integration of contributions with Social Security, sometimes called permitted disparity Correct answer.
  2. The plan's recordkeeping vendor
  3. The frequency of participant statements
  4. The plan's choice of trustee

Explanation

Permitted disparity allows contributions or benefits to be integrated with Social Security, but the permitted disparity must stay within statutory limits and still satisfy nondiscrimination testing. This design element is a common focus when an owner seeks larger relative benefits.

Question 40Pension and retirement plan consulting (domain content not enumerated in source)

A participant in a money purchase pension plan asks how the required employer contribution is determined. Which statement is accurate?

  1. The employer may skip contributions in any year without consequence
  2. The contribution is limited to the participant's elective deferrals
  3. The contribution is determined each year by the plan's investment performance
  4. The employer must contribute a fixed percentage of compensation each year as stated in the plan formula Correct answer.

Explanation

A money purchase pension plan requires the employer to contribute a fixed percentage of compensation specified in the plan formula, and the contribution is generally required regardless of profits. This mandatory funding distinguishes it from a profit sharing plan.

Question 41Pension and retirement plan consulting (domain content not enumerated in source)

A plan sponsor is reviewing the fiduciary responsibilities for selecting and monitoring service providers. Which duty is most directly implicated when the sponsor chooses a recordkeeper without evaluating fees and services?

  1. The duty to diversify investments
  2. The duty to withhold participant taxes
  3. The duty of prudence in managing plan expenses Correct answer.
  4. The duty to furnish summary annual reports

Explanation

Fiduciaries must act prudently, and that duty extends to evaluating the reasonableness of plan expenses and the quality of services when selecting providers. Choosing a recordkeeper without reviewing fees and services can breach that duty even if no investment decision is involved.

Question 42Pension and retirement plan consulting (domain content not enumerated in source)

A participant separates from service in the year she turns 55 and wants to take a distribution from her employer's 401(k) plan. Which rule most directly affects whether the 10% additional tax applies?

  1. The 60-day rollover rule for IRA-to-IRA transfers
  2. The required beginning date for minimum distributions
  3. The age-55 separation-from-service exception, which can apply to distributions from the plan of the employer she separated from Correct answer.
  4. The plan's loan amortization schedule

Explanation

Distributions made after separation from service in or after the year the participant turns 55 may avoid the 10% additional tax, but the exception generally applies only to the plan of the employer from which she separated. Other plans and IRAs are not covered by that exception.

Question 43Pension and retirement plan consulting (domain content not enumerated in source)

An employer maintains a plan that covers both union and nonunion employees. Why might the plan be structured with separate benefit structures for the two groups?

  1. Because union employees are exempt from all qualified plan rules
  2. Because collectively bargained employees may be tested separately for coverage and nondiscrimination purposes Correct answer.
  3. Because the plan must exclude union employees to remain qualified
  4. Because separate structures eliminate the need for a plan document

Explanation

The rules permit certain collectively bargained employees to be tested separately from non-collectively bargained employees for coverage and nondiscrimination purposes. This can justify separate benefit structures while still maintaining a single qualified plan.

Question 44Pension and retirement plan consulting (domain content not enumerated in source)

A participant wants to roll over a distribution from a governmental 457(b) plan to a traditional IRA. Which statement about eligibility for rollover is accurate?

  1. 457(b) distributions can never be rolled over because the plan is governmental
  2. Rollover is permitted only if the participant is at least age 70½
  3. Governmental 457(b) distributions are generally eligible for rollover to an eligible retirement plan, subject to the applicable distribution rules Correct answer.
  4. Rollover is permitted only to another 457(b) plan

Explanation

Eligible rollover distributions from a governmental 457(b) plan generally may be rolled over to an eligible retirement plan such as a traditional IRA, provided the distribution is otherwise an eligible rollover distribution. Rollover is not limited to other 457(b) plans.

Question 45Pension and retirement plan consulting (domain content not enumerated in source)

A plan sponsor is considering adding a Roth feature to its 401(k) plan. Which statement about Roth deferrals is accurate?

  1. Roth deferrals are not subject to the elective deferral limit
  2. Roth deferrals must be distributed at separation from service
  3. Roth deferrals reduce the participant's taxable wages in the year of deferral
  4. Roth deferrals are made on an after-tax basis, and qualified distributions are generally tax-free Correct answer.

Explanation

Roth elective deferrals are included in the participant's taxable income when deferred and are not deductible, but qualified distributions can be tax-free. They still count toward the same elective deferral limit as pre-tax deferrals.

Question 46Pension and retirement plan consulting (domain content not enumerated in source)

A plan administrator is determining whether a rehired employee must be credited with prior service for vesting. Which principle generally applies?

  1. Rehired employees automatically become fully vested
  2. Only service after the rehire date can ever count for vesting
  3. Service before a break in service may need to be restored depending on the break-in-service rules and the length of the break Correct answer.
  4. Prior service is always forfeited upon rehire

Explanation

The break-in-service rules determine whether pre-break service must be restored for vesting and eligibility purposes, often based on comparing the break to the participant's years of service. A rehire does not automatically forfeit or fully vest prior service.

Question 47Pension and retirement plan consulting (domain content not enumerated in source)

A participant in a defined benefit plan is considering a lump sum distribution instead of an annuity. Which factor is most relevant to the participant's decision under the plan's terms and applicable rules?

  1. The plan's funding target percentage for the prior year
  2. The employer's credit rating
  3. The relative value of the lump sum compared with the annuity and the participant's longevity and investment assumptions Correct answer.
  4. The PBGC's maximum guarantee limit for the plan year

Explanation

Choosing between a lump sum and an annuity involves comparing the relative value of the forms of benefit and considering longevity, investment returns, and inflation assumptions. The plan must provide the required relative value disclosure, but the substantive decision turns on those personal and financial factors.

Question 48Pension and retirement plan consulting (domain content not enumerated in source)

An employer sponsors a defined benefit plan and wants to reduce future benefit accruals. Which action most directly accomplishes that goal while preserving benefits already accrued?

  1. Reducing the plan's investment return assumption without changing benefits
  2. Amending the plan to freeze future accruals, subject to the anti-cutback rules protecting accrued benefits Correct answer.
  3. Terminating the plan and forfeiting all accrued benefits
  4. Transferring plan assets to the employer's general account

Explanation

A plan amendment can freeze or reduce future accruals, but the anti-cutback rules prohibit reducing benefits already accrued, including certain early retirement subsidies and optional forms. Changing actuarial assumptions or terminating the plan does not permit forfeiture of accrued benefits.

Question 49Pension and retirement plan consulting (domain content not enumerated in source)

A plan administrator is evaluating whether a distribution is an eligible rollover distribution subject to the 20% mandatory withholding rule. Which distribution generally is not an eligible rollover distribution?

  1. A distribution paid to a surviving spouse that the spouse elects to roll over
  2. A distribution paid directly to an eligible retirement plan in a direct rollover
  3. A lump sum distribution paid to a participant who has separated from service
  4. A distribution that is one of a series of substantially equal periodic payments made over the participant's life expectancy Correct answer.

Explanation

Substantially equal periodic payments made over life expectancy or a period of at least ten years are not eligible rollover distributions and are therefore not subject to the 20% mandatory withholding. A direct rollover, by contrast, is not subject to withholding because it is paid to the plan.

Question 50Pension and retirement plan consulting (domain content not enumerated in source)

A plan sponsor is reviewing the plan's fidelity bond requirement. Which statement about the ERISA fidelity bond is accurate?

  1. The bond must protect the plan against fraud or dishonesty by persons handling plan funds, generally at 10% of plan assets with a minimum and maximum Correct answer.
  2. The bond covers investment losses caused by market declines
  3. The bond replaces the need for fiduciary liability insurance
  4. The bond is required only for plans with more than 1,000 participants

Explanation

ERISA requires a fidelity bond covering every fiduciary and person handling plan funds against fraud or dishonesty, generally in an amount equal to 10% of plan assets subject to a minimum and maximum. The bond does not protect against market losses and does not substitute for fiduciary liability insurance.