CPC Retirement Plan Design & Administration 3 — Questions and Answers
Question 1: A defined benefit plan uses a unit credit formula. An employee has 20 years of service and an average final salary of $80,000. If the benefit rate is 1.5% per year, what is the annual accrued benefit?
- $16,000
- $20,000
- $24,000 (Correct answer)
- $18,000
Correct answer: $24,000
The accrued benefit = 1.5% × 20 years × $80,000 = $24,000 per year.
Question 2: Which plan feature triggers the PBGC's variable-rate premium in addition to the flat-rate per-participant premium?
- Plan having more than 100 participants
- Unfunded vested benefits in a single-employer DB plan (Correct answer)
- Failure to pass the coverage test
- Electing to use the alternative funding standard
Correct answer: Unfunded vested benefits in a single-employer DB plan
PBGC charges a variable-rate premium based on the amount of unfunded vested benefits in single-employer defined benefit plans.
Question 3: A plan sponsor wants to add a cash balance formula alongside an existing final average pay formula in the same plan. What is this arrangement called?
- Floor-offset plan
- Hybrid plan (Correct answer)
- Pension equity plan
- Tiered benefit plan
Correct answer: Hybrid plan
A plan combining a traditional defined benefit formula with a cash balance formula is a hybrid plan design.
Question 4: Under IRC §415(b), what is the maximum annual benefit payable from a defined benefit plan to a participant who retires at age 62 in 2024?
- $275,000 unreduced
- $275,000 actuarially reduced for early retirement (Correct answer)
- $230,000 reduced for early commencement
- $220,000 reduced for early commencement
Correct answer: $275,000 actuarially reduced for early retirement
The §415(b) limit of $275,000 (2024) is reduced actuarially when benefits commence before age 62; at exactly 62, the full limit applies before any actuarial reduction.
Question 5: Which nondiscrimination test specifically evaluates whether a plan provides benefits, rights, and features that do not discriminate in favor of highly compensated employees?
- Coverage test under IRC §410(b)
- ADP test
- General test under IRC §401(a)(4) (Correct answer)
- Top-heavy test under IRC §416
Correct answer: General test under IRC §401(a)(4)
IRC §401(a)(4) requires that contributions or benefits, rights, and features be nondiscriminatory, which is tested using the general test or safe harbor methods.
Question 6: A money purchase pension plan has a mandatory contribution rate of 10% of compensation. Can the employer skip contributions in a bad year?
- Yes, with IRS approval
- Yes, if the plan document is amended first
- No, contributions are mandatory each year (Correct answer)
- Yes, but only for NHCE participants
Correct answer: No, contributions are mandatory each year
Money purchase pension plans require mandatory annual contributions at the stated rate regardless of profitability—this is what distinguishes them from profit-sharing plans.
Question 7: In a safe harbor 401(k) plan using the basic match formula, what is the required employer matching contribution?
- 100% of deferrals up to 3% of compensation, plus 50% of deferrals from 3% to 5% (Correct answer)
- 100% of deferrals up to 4% of compensation
- 3% non-elective contribution for all eligible employees
- 50% of deferrals up to 6% of compensation
Correct answer: 100% of deferrals up to 3% of compensation, plus 50% of deferrals from 3% to 5%
The basic safe harbor match is 100% on the first 3% of compensation deferred plus 50% on the next 2% (3%–5%), totaling a maximum match of 4%.
CPC Retirement Plan Design & Administration 3
A defined benefit plan uses a unit credit formula.
An employee has 20 years of service and an average final salary of $80,000.
If the benefit rate is 1.5% per year, what is the annual accrued benefit?