CRC Retirement Plan Design 3 — Questions and Answers
Question 1: An employer with 80 employees adopts a SIMPLE IRA. The maximum employer matching contribution as a percentage of compensation is:
- 1%
- 2%
- 3% (Correct answer)
- 4%
Correct answer: 3%
Under a SIMPLE IRA, the standard employer match is dollar-for-dollar up to 3% of the employee's compensation.
Question 2: Which vesting schedule is more favorable to employees who leave early?
- 3-year cliff vesting
- 6-year graded vesting
- 2-year cliff vesting
- 3-year graded vesting (Correct answer)
Correct answer: 3-year graded vesting
A 3-year graded schedule (e.g., 20%/year) gives employees partial vesting starting earlier than cliff schedules that provide nothing until fully vested.
Question 3: Which of the following is NOT a permissible in-service distribution event under a 401(k) plan?
- Attainment of age 59½
- Hardship withdrawal
- Plan termination
- Desire to purchase a vacation home without financial hardship (Correct answer)
Correct answer: Desire to purchase a vacation home without financial hardship
A general desire to purchase a vacation home without meeting hardship criteria is not a permissible in-service distribution event under a 401(k) plan.
Question 4: Under the ADP test, if the HCE average deferral rate is 8%, what is the maximum allowable HCE ADP under the 1.25× test?
- 8%
- 9%
- 10% (Correct answer)
- 12%
Correct answer: 10%
Under the 1.25× test, the HCE ADP cannot exceed 1.25 times the NHCE ADP; if HCE ADP is 8%, the NHCE ADP must be at least 6.4%, making 8% allowable when NHCEs average at least 6.4%—but stated differently, if NHCEs average 8%, HCEs can defer up to 10%.
Question 5: A plan sponsor wants to exclude part-time employees working fewer than 1,000 hours per year from plan participation. This is:
- Prohibited under ERISA
- Permissible under the minimum coverage rules (Correct answer)
- Only allowed in defined benefit plans
- Only allowed for union employees
Correct answer: Permissible under the minimum coverage rules
ERISA permits plans to require employees to complete 1,000 hours of service in a 12-month period before becoming eligible to participate.
Question 6: Which of the following plan types is exempt from PBGC insurance coverage?
- Single-employer defined benefit plan
- Multiemployer defined benefit plan
- Defined contribution plan (Correct answer)
- Church defined benefit plan with elected ERISA coverage
Correct answer: Defined contribution plan
Defined contribution plans are exempt from PBGC insurance because account balances are always funded by actual assets with no guaranteed benefit promise.
Question 7: In a target benefit plan, investment risk is borne by:
- The employer
- The employee/participant (Correct answer)
- The PBGC
- The plan trustee
Correct answer: The employee/participant
A target benefit plan is a type of defined contribution plan where the employer contributes based on actuarial targets, but investment risk falls on the participant.
CRC Retirement Plan Design 3
An employer with 80 employees adopts a SIMPLE IRA.
The maximum employer matching contribution as a percentage of compensation is: