EA-2(B) Examination Questions
Spring, 2001
Question 1 (1 point)
Consider
the following statement:
When
the maximum benefit limitation of IRC section 415(b) is adjusted for cost of
living increases, the adjusted figure is effective as of January 1st
of each calendar year and applicable to limitation years beginning during that
calendar year.
Is the above statement
true or false?
[A] True
[B] False
Question 2 (1 point)
A defined benefit plan
provides a qualified pre-retirement survivor benefit.
Consider
the following statement:
When
a participant gets married, under the law, the plan is required to provide that
the spouse immediately becomes the beneficiary for this benefit.
Is the above statement
true or false?
[A] True
[B] False
Question 3 (1 point)
Plan year: Calendar year
An employer offers an
early retirement window to certain plan participants who retire between October
1, 2000 and March 31, 2001. The
employer performs a discrimination test for the plan in both 2000 and 2001.
Consider
the following statement:
Each
participant’s additional accrual of benefits resulting from the acceptance of
this early retirement window will be recognized for the purpose of
discrimination testing in the year in which the participant retires.
Is the above statement
true or false?
[A] True
[B] False
Question 4 (1 point)
Consider
the following statement:
When
determining the value of current liabilities for purposes of the
pre-termination restriction on distributions under regulation 1.401(a)(4)-5(b),
any reasonable and consistent method may be used.
Is the above statement
true or false?
[A] True
[B] False
Question 5 (1 point)
Consider
the following statement:
In
a plan that does not credit vesting service on elapsed time, the plan may give
less than a full year vesting credit to an employee who works over 1,500 hours
during a plan year.
Is the above statement
true or false?
[A] True
[B] False
Question 6 (1 point)
Consider
the following statement:
A
former employee shall be treated as a highly compensated employee if the former
employee was either:
(1) a
highly compensated employee when such employee separated from service; or
(2) a
highly compensated employee at any time after attaining age 55.
Is the above statement
true or false?
[A] True
[B] False
Question 7 (1 point)
Consider
the following statement:
The
$10,000 limitation in IRC section 415(b)(4) is not adjusted for the
commencement of payments prior to the Social Security Retirement Age.
Is the above statement
true or false?
[A] True
[B] False
Question 8 (1 point)
Participant Smith
terminated employment on December 31, 1997, and received a lump sum
distribution on December 31, 1998. This
benefit was less than the benefit otherwise computed under the plan formula due
to the application of IRC section 415(e) then in effect.
Consider
the following statement:
Solely
due to the repeal of IRC section 415(e), additional benefits may be paid to
Smith in 2000.
Is the above statement
true or false?
[A] True
[B] False
Question 9 (1 point)
Consider
the following statement:
For
plan years beginning after December 31, 1999, a plan must determine lump sums
solely on the “applicable interest rate” and “applicable mortality table”
defined in IRC section 417(e).
Is the above statement
true or false?
[A] True
[B] False
Question 10 (1 point)
Consider
the following statement:
An
excise tax of 20% on plan reversions applies if a portion of the excess assets
is transferred to a qualified replacement plan and allocated no more rapidly
than ratably over the 7-year period beginning with the year of transfer.
Is the above statement
true or false?
[A] True
[B] False
Question 11 (1 point)
Consider
the following statement:
The
sponsor of a defined benefit plan subject to Title IV of ERISA must notify the
PBGC when a required quarterly contribution is missed.
Is the above statement
true or false?
[A] True
[B] False
Question 12 (1 point)
Consider
the following statement regarding multiemployer withdrawal liability:
In
determining the withdrawal liability for an employer in a multiemployer plan,
the actuary must use the PBGC actuarial assumptions as set forth in the
regulations.
Is the above statement
true or false?
[A] True
[B] False
Question 13 (1 point)
Consider
the following statement regarding multiemployer withdrawal liability:
The
de minimis rule under ERISA section 4209 does not apply to an employer who
withdraws in a plan year in which substantially all employers withdraw from the
plan.
Is the above statement
true or false?
[A] True
[B] False
Question 14 (1 point)
Consider
the following statement:
A
defined benefit plan may never have more than 10% of plan assets invested in
qualified securities of the plan sponsor.
Is the above statement
true or false?
[A] True
[B] False
Question 15 (4 points)
Date
of plan termination: 1/1/2001
Optional
forms of payment: Lump
sum for distributions less than $10,000.
Conversion
to Qualified Joint
and
50% Survivor Annuity
(QJ&50%S): 7%
reduction to life annuity.
Data
for missing participant Smith:
Date of birth: 1/1/1936
Monthly benefit payable at age 65
for life: $75.00
Assumed marital status: Single.
Lump
sum factors under PBGC missing participant assumptions and plan assumptions for
monthly benefit of $1.
Age at PBGC Plan
Distribution Date
Factor Factor
65 125.0 120.7
PBGC
present value factors for a monthly single life annuity and a monthly joint and
50% survivor annuity of $1 as of the deemed distribution date:
Age at Life
Annuity QJ&50%S
Distribution Date
Factor Factor
65 116.8 126.3
In
what range is the value of the designated benefit for missing participant Smith
as of the deemed distribution date?
[A] Less than $8,900
[B] $8,900 but less than $9,100
[C] $9,100 but less than $9,300
[D] $9,300 but less than $9,500
[E] $9,500 or more
Question 16 (2 points)
Consider
the following benefit formulas:
I.
$300 for each year of participation, not to
exceed 25 years. Amended effective
1/1/2001 to increase the $300 to $600 for each year of participation after
1/1/2001.
II.
$300 for each year of participation up to 25
years, then $400 for each year thereafter.
III.
$300 for each year of participation up to 20
years, then $100 for each of the next 15 years of participation.
Which,
if any, of the above benefit formulas comply with the 133 1/3% rule for benefit
accruals?
[A] I and II only
[B] I and III only
[C] II and III only
[D] I, II, and III
[E] The correct answer is not given by [A],
[B], [C], or [D] above.
Question 17 (3 points)
Plan
effective date: 1/1/1976.
Normal
retirement benefit: 1% of final
average compensation times years of service.
Early
retirement eligibility: Age 55
and 10 years of service.
Early
retirement reduction: 5% for each
year prior to age 65.
Data
for participant Smith:
Date of birth: 1/1/1954
Date of hire: 1/1/1976
Date of death: 12/31/2000
Spouse’s date of birth: 1/1/1964
Date of marriage: 1/1/1999
Final average compensation: $40,500
The
minimum qualified pre-retirement spouse annuity under IRC section 417 is paid
beginning at the latest date allowed under the law.
The
plan specifies the following factors to convert the normal form of benefit to a
joint and survivor annuity:
Joint and 33 1/3% survivor 0.90
Joint and 50% survivor 0.85
Joint and 100% survivor 0.72
In what range is the
monthly benefit payable to Smith’s spouse at the earliest commencement date
allowed under the plan?
[A] Less than $150
[B] $150 but less than $250
[C] $250 but less than $350
[D] $350 but less than $450
[E] $450
or more
Question 18 (3 points)
Plan
effective date: 1/1/1970
Plan
termination date: 12/31/2000
Normal
retirement benefit: 4% of 3-year
final average compensation times service.
Normal
form of benefit: Joint &
100% survivor annuity
Early
retirement benefit: None
Data
for participant Smith (not a substantial owner):
Date of birth: 1/1/1955
Date of hire: 1/1/1976
Spouse’s date of birth: 1/1/1955
Compensation
1996
$32,000
1997
34,000
1998
36,000
1999
38,000
2000
40,000
Maximum
monthly benefit guaranteed by PBGC at age 65 in life only form of payment:
$3,221.59
In
what range is Smith’s PBGC guaranteed benefit payable monthly?
[A] Less than $2,200
[B] $2,200 but less than $2,500
[C] $2,500 but less than $2,800
[D] $2,800 but less than $3,100
[E] $3,100 or more
Question 19 (4 points)
Normal form: Life annuity with
60 payments guaranteed (5 C&C).
Early retirement
eligibility: Age 60 and 10
years of service.
Early
retirement benefit: Normal
retirement benefit reduced by 6% for each year by which the benefit
commencement date precedes age 62.
Plan
conversion factor to Joint and 50% Survivor: 0.95
Testing
assumptions:
Date: 12/31/2001.
Measurement period: Current and prior years.
Interest: 8% per year.
Pre-retirement mortality: None.
Testing age: 65.
Data
for participant Smith:
Date of birth 12/31/1940 Accrued
annual benefit $ 18,640
Date of hire 12/31/1993 Testing
compensation $130,000
Annuity
factors for normalization:
Life Joint
and 50%
Age Annuity 5C&C Survivor
60 10.4982
61 10.3475
62 10.1894
63 10.0239
64 9.8514
65 8.6468 8.8125 9.6723
In what range is the
difference between Smith’s most valuable accrual rate and normal accrual rate?
[A] Less
than 0.40%
[B] 0.40%
but less than 0.50%
[C] 0.50%
but less than 0.60%
[D] 0.60%
but less than 0.70%
[E] 0.70%
or more
Question 20 (2 points)
Consider the following
statements regarding PBGC reportable events:
I.
A reportable event occurs for a plan when any
member of the controlled group commences a bankruptcy case (under the
Bankruptcy Code).
II.
A reportable event occurs when the number of
active participants in a plan during a plan year is reduced to less than 80
percent of the number of active participants at the beginning of the plan year.
III.
A reportable event occurs when an amendment to a
plan is adopted that reduces the rate of future benefit accruals.
Which,
if any, of these statements are true?
[A] I and II only
[B] I and III only
[C] II and III only
[D] I, II, and III
[E] The correct answer is not given by [A],
[B], [C], or [D] above.
Question
21 (4 points)
Data for all plan
participants and beneficiaries as of 1/1/2001:
417(e)
Value of Value of
Accrued Current
Participant Benefits Liabilities
HCE 1 $1,100,000 $ 900,000
HCE 2 275,000 240,000
HCE
3 80,000 60,000
HCE
4 60,000 15,000
All
NHCEs 5,000,000 4,225,000
Total $6,515,000 $5,440,000
Market (actuarial)
value of plan assets as of 1/1/2001: $6,000,000.
All four highly
compensated employees terminate employment on 12/31/2000.
Which HCE or HCEs can
be paid a lump sum on 1/1/2001 equal to the value of the accrued benefits
without violating the restrictions on distributions?
[A] HCE 1 only
[B] Either HCE 2 or HCE 3
[C] HCE 4 only
[D] Both HCE 3 and HCE 4
[E] The correct answer is not given by [A],
[B], [C], or [D] above.
Question 22 (3 points)
Plan effective date: 1/1/1990.
Plan termination date: 12/31/2001
Benefit formula:
Effective 1/1/1990: $15 per month times all years of
service.
Effective 1/1/1999: $20 per month times all years of
service.
Effective 4/1/2001: $25 per month times all years of
service.
Vesting: 100% after 3 years of
service
Data for selected
participants as of 12/31/2001:
Smith Brown
Date of birth 1/1/1950 1/1/1950
Date of hire 1/1/1993 1/1/1998
Ownership
50% 5%
In what range is the
sum of the monthly benefits guaranteed by the PBGC for Smith and Brown as of
12/31/2001?
[A] Less than $70
[B] $70 but less than $95
[C] $95 but less than $120
[D] $120 but less than $145
[E] $145 or more
Question 23 (5 points)
Plan effective date: 1/1/1995.
Normal
retirement benefit: 2%
of highest 3-year average compensation for each year of service.
Mandatory employee
contributions: 3.5% of
compensation, paid on 12/31 each year.
Vesting eligibility: Statutory 3
to 7 year graded vesting.
Lump
sum actuarial equivalence: Applicable
interest rate for the second full month preceding the plan year and applicable
mortality table.
Data
for participant Smith:
Date
of birth: 1/1/1950
Date
of hire: 1/1/1996
Selected
values:
November
120%
of Jan. Average
Federal
Mid- 30-year
Year
Compensation Term Rate Treasury Rate
1996 $32,000 6.89% 6.48%
1997 34,000 7.34 6.11
1998 36,000 7.13 5.25
1999 38,000 5.59 6.15
2000 40,000 7.47 6.50 assumed
Lump Sum
Actuarial
Interest Equivalence at
Rate Age 65
5.25
11.30
6.11
10.56
6.15
10.52
6.48
10.26
6.50 10.25
Life annuity values
are based on lump sum actuarial equivalence.
In what range is
Smith’s annual vested accrued benefit as of 1/1/2001?
[A] Less than $2,350
[B] $2,350 but less than $2,650
[C] $2,650 but less than $2,950
[D] $2,950 but less than $3,250
[E] $3,250 or more
Question 24 (5 points)
Plans A and B are
merged effective 1/1/2001. Each plan
covers only 2 employees.
Plan A employee data
as of 1/1/2001:
Priority
category of Annual Accrued Benefits Present Value of Accrued Benefits
sec. 4044 of
ERISA Smith Brown Smith Brown
3 $20,000 $200,000
4 $8,000 50,000 $64,000
5 6,000 48,000
Plan A actuarial
(market) value of plan assets as of 1/1/2001: $320,000
Plan B employee data
as of 1/1/2001:
Priority
category of Annual Accrued Benefits Present Value of Accrued Benefits
sec. 4044 of
ERISA Green Jones Green Jones
3 $30,000 $270,000
4 $10,000 $70,000
5 12,000 84,000
Plan B actuarial (market) value of plan assets
as of 1/1/2001: $400,000
In what range is the additional annual benefit
included in the special schedule of benefits for Jones as required by
regulation 1.414(l)?
[A] Less
than $8,000
[B] $8,000
but less than $11,000
[C] $11,000
but less than $14,000
[D] $14,000
but less than $17,000
[E] $17,000 or more
Question 25 (5 points)
Plan
A 2001 plan year data:
Plan
A Controlled Group
Benefiting
Employees Non-excludable
Employees
HCEs 20 200
NHCEs 40 1,800
Data
for the four employees with normal accrual rates of 1.80% or greater:
Normal
Accrual Rate Most
Valuable Accrual Rate
HCE 2.00% 4.00%
NHCE1 1.95% 4.00%
NHCE2 2.00% 3.50%
NHCE3 1.80% 3.50%
The
rate groups for all other HCEs comply with a general nondiscrimination test on
the basis of the ratio percentage test.
The
employees benefiting under Plan A can be shown to fall within a qualified
separate line of business (QSLOB) separate from all other employees in the
controlled group.
The average benefit
percentage test yields a result of 80%.
Consider the following
methodologies that could be used in the application of the general
nondiscrimination test:
I.
Grouping of accrual rates around a central rate.
II.
Demonstration that Plan A employees are in a
QSLOB.
III.
Use of an average benefit percentage test.
Which of the above
methodologies will demonstrate that Plan A satisfies the general
nondiscrimination test?
[A] None
[B] I and II combined
[C] I and III combined
[D] II and III combined
[E] The correct answer is not given by [A],
[B], [C], or [D] above.
Question 26 (5 points)
Type of plan:
Multiemployer
History of
contribution base units for Employer A:
1988
350,000
1989
265,000
1990
280,000
1991
180,000
1992
275,000
1993
170,000
1994
150,000
1995
80,000
1996
70,000
1997
60,000
1998
80,000
1999
90,000
2000
70,000
2001
45,000
In what range is the fraction used to prorate
the liability Employer A would have incurred upon a complete withdrawal in
2001?
[A] Less
than 40%
[B] 40%
but less than 50%
[C] 50%
but less than 60%
[D] 60%
but less than 70%
[E] 70%
or more
Question 27 (5 points)
Plan effective date: 1/1/1991
Plan termination date: 1/1/2001
Date of provisions
(adopted and effective) 1/1/1991 1/1/1996
1/1/1999
Early retirement eligibility age 55 55 55
Early retirement eligibility service 15 10 10
Early retirement reduction per year
prior to normal retirement age 65 5% 5% 3%
Accrued benefit per year of service
$24 $28 $38
Data for active
non-owner participant Smith:
Date of
birth 1/1/1941
Date of hire 1/1/1987
Smith’s expected
retirement age pursuant to PBGC regulations: 62.
Selected annuity values:
= 8.52
= 6.07
In what range is the PBGC category 4 liability
for participant Smith as of 1/1/2001?
[A] Less
than $10,000
[B] $10,000
but less than $20,000
[C] $20,000
but less than $30,000
[D] $30,000
but less than $40,000
[E] $40,000 or more
Question 28 (2 points)
Asset value on
12/31/2000 for the purposes of providing health benefits: $0.
Health benefits paid
for retirees of the plan and their spouses in the year 2001:
Retirees $575,000
Spouses
475,000
Selected pension
valuation results as of 1/1/2001:
Accrued liability plus normal cost $27,200,000
Actuarial (market) value of assets
28,150,000
Current liability 22,000,000
In what range is the
maximum amount the plan sponsor could transfer to the IRC section 401(h)
account for 2001?
[A] Less than $400,000
[B] $400,000 but less than $600,000
[C] $600,000 but less than $800,000
[D] $800,000 but less than $1,000,000
[E] $1,000,000 or more
Question 29 (4 points)
Normal
retirement benefit: 1.5% of
final 3-year average compensation for each year of service.
Normal
form of benefit: Life annuity
with 120 months guaranteed (10 C&C).
Early
retirement eligibility: Age 55.
Early
retirement benefit: Normal
retirement benefit reduced by 3% for each year by which the benefit
commencement date precedes age 65.
Plan
conversion factor to a Qualified Joint and 50% Survivor Annuity (QJ&50%S):
0.97
Selected
annuity factors using normalization assumptions of 7.5% and a standard
mortality table:
Age
55 Age 65
Life annuity 11.30 9.50
10 C&C 11.40 9.95
QJ&50%S 11.95 10.40
Testing assumptions:
Date: 12/31/2001.
Measurement period: Current and prior years.
Interest: 7.5% per year.
Pre-retirement mortality: None.
Testing age: 65.
Data for participant
Smith:
Date of birth: 12/31/1946
What are Smith’s
normal accrual rate and most valuable accrual rate respectively, each rounded
to the nearest 0.05%?
[A] 1.50% and 2.60%
[B] 1.50% and 2.65%
[C] 1.55% and 2.60%
[D] 1.55% and 2.65%
[E] The correct answer is not given by [A],
[B], [C], or [D] above.
Question 30 (3 points)
Benefit
formula: [1.30% times average annual
compensation, less 0.65% times average annual compensation up to covered
compensation], multiplied by the lesser of years of service or 35.
There
are no social security supplemental benefits.
Data
for plan participant Smith:
Date of birth 12/31/1939
Date of hire 12/31/1981
Date of retirement 12/31/2001
Average annual compensation $74,000
Covered compensation $45,000
The
plan complies with the safe harbor rules under IRC section 401(l).
In what range is the
largest early retirement benefit that can be paid to Smith at age 62?
[A] Less than $12,250
[B] $12,250 but less than $12,650
[C] $12,650 but less than $13,050
[D] $13,050 but less than $13,450
[E] $13,450 or more
Question 31 (3 points)
Testing assumptions:
Date 12/31/2000.
Measurement period Current and prior years.
Testing age 65.
Permitted disparity Imputed.
Data for participant
Smith:
Date of birth 12/31/1939
Date of hire 12/31/1960
Average annual compensation
$100,000
Covered compensation 45,000
Annual accrued benefit 57,600
In what range is the
greatest permissible value for the normal accrual rate, after imputing
disparity?
[A] Less than 1.70%
[B] 1.70% but less than 1.73%
[C] 1.73% but less than 1.76%
[D] 1.76% but less than 1.79%
[E] 1.79% or more
Question 32 (3 points)
Data for sponsor of
two defined benefit plans:
Highly Non-Highly Employee
Compensated Compensated Benefit
Employees Employees Accrual Rate
Total employees 600 6,000
Excludable employees 100 1,500
Non-excludable
employees benefiting
under
Plan A 150 1,500 2.00%
Non-excludable employees
benefiting
under
Plan B 250 1.75%
Each plan satisfies
the reasonable classification test.
The two plans have no
employers in common.
In what range is the
minimum number of non-highly compensated employees who must benefit under Plan
B in order to meet minimum coverage requirements under IRC section 410(b) and
the regulations thereunder?
[A] Less than 800
[B] 800 but less than 1,000
[C] 1,000 but less than 1,200
[D] 1,200 but less than 1,400
[E] 1,400 or more
