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Question 8

 

This question involves the repeal of the IRC section 415(e) rules, which is covered in Revenue Notice 99-44.  In Q&A number 3, it states that benefit increases may be provided to current and former employees who have commenced receiving benefits, but only to the extent that they are participants on or after the effective date of the repeal of IRC section 415(e).  Since the participant in this question received a lump sum distribution in 1998, and 415(e) was repealed for limitation years beginning in 2000, the participant was no longer a plan participant at the time of the repeal and would not be entitled to any additional benefit.

                     

Answer is B.

 

 

Question 11

 

Missed quarterly contributions are not specifically listed as a reportable event under ERISA 4043.  However, IRC section 412(n)(4)(A) requires that the PBGC must be notified if a quarterly contribution required under IRC section 412(m) is missed, and that the unpaid balance exceeds $1,000,000.  This statement is false since it is not clear that the plan sponsor’s quarterly contribution requirement exceeded this amount.  In addition, PBGC Technical Update 97-6 grants an exemption of the reporting requirement for plans with no more than 100 participants.

                   

Answer is B.

 

 

Question 16

 

Formula I:         Clearly, the benefit formula before 2001 satisfies the 133 1/3% rule.  The fact that the formula increased in 2001 is disregarded for years prior to 2001 (see IRS regulation 1.411(b)-1(b)(2)(ii)(B)).  For 2001, IRS regulation 1.411(b)-1(b)(2)(ii)(A) indicates that any amendment is treated as always being in effect.  So, this formula satisfies the 133 1/3% rule.

                

Formula II:        This formula satisfies the 133 1/3% rule since $400 does not exceed 133 1/3% of $300.

 

Formula III:       This formula satisfies the 133 1/3% rule since $100 does not exceed 133 1/3% of $300.  Note that this formula is actually frontloaded, and that is allowable.

                                                     

Answer is D.

 

Question 19

 

The average annual accrual must be determined since the measurement period is the current and past years.

 

Average annual accrual = $18,640 ¸ 8 years = $2,330

 

The normal form of benefit is a 5 C&C.  The average annual accrual must be converted to a life annuity for purposes of the normal accrual rate.  The average annual accrual is a benefit payable at age 65.  So, the conversion factor from a 5 C&C to a life annuity can be determined using the given annuity factors for normalization at age 65.  The normalized average annual accrual is:

 

$2,330 ´ (8.8125/8.6468) = $2,374.65

 

The normal accrual rate is the ratio of the normalized annual accrual to the annual testing compensation.

 

Normal accrual rate = 2,374.65 ¸ 130,000 = .018267, or 1.8267%

 

For the most valuable accrual rate, consider the most valuable benefit that Smith could elect. Clearly, that would be the early retirement benefit that would first be available at age 63 (when Smith first has 10 years of service), payable as a joint and 50% survivor.  There would be no early retirement reduction since the reduction only applies for early retirement before age 62.  The early retirement benefit payable as a joint and 50% survivor annuity is:

 

$2,330 ´ .95 = $2,213.50

 

This must be normalized to age 65 (converting it to a life annuity benefit) using the given annuity factors for normalization and the 8% interest assumption used for testing purposes to accumulate from age 63 to age 65. The normalized most valuable accrual is:

 

$2,213.50 ´ 10.0239 ´ 1.082 ¸ 8.6468 = $2,993.01

 

Most valuable accrual rate = 2,993.01 ¸ 130,000 = .023023, or 2.3023%

 

The difference between the most valuable accrual rate and the normal accrual rate is:

 

2.3023% - 1.8267% = .4756%

 

Answer is B.

Question 26

 

A partial withdrawal can be shown to have occurred on 12/31/1997 due to a 70% decline. Looking at the years 1990 – 1994 (the five year period before the three year period ending on 12/31/1997), the years with the two largest contribution base units are 1990 and 1992.  The average of the base units from 1990 and 1992 is:

 

(280,000 + 275,000)/2 = 277,500

 

30% of this amount is:

 

277,500 ´ .3 = 83,250

 

Clearly, a 70% decline has occurred since the base units in each of 1995, 1996 and 1997 are less than 83,250.  The fraction used to prorate the complete liability for Employer A upon the partial withdrawal due to the 70% decline is:

 

 = .620853, or 62.0853%

 

Note that the numerator in the above fraction is equal to the base units in 1998 (the year following the year of the partial withdrawal).

 

Answer is D.

 

Note that the question itself is confusing since it does not specifically state that the fraction being asked about is the one used to prorate the complete liability in the case of a partial withdrawal.  However, in the context of the information given, this is the only interpretation that makes sense.