TREX 401(k) & Defined Benefit Plans 3 — Questions and Answers
Question 1: What is a 'cash balance' plan, and how does it differ from a traditional defined benefit plan?
- A DC plan using hypothetical individual accounts expressed as a lump-sum balance
- A DB plan that expresses the benefit as a hypothetical individual account balance rather than a monthly annuity (Correct answer)
- A 401(k) plan that shows account values in cash equivalents
- A profit-sharing plan linked to company cash flow
Correct answer: A DB plan that expresses the benefit as a hypothetical individual account balance rather than a monthly annuity
A cash balance plan is a defined benefit plan where the employer credits each participant's hypothetical account with pay and interest credits, but the employer still bears investment risk.
Question 2: Which IRS test evaluates whether a 401(k) plan's employer matching contributions disproportionately benefit highly compensated employees?
- ADP test
- ACP test (Correct answer)
- Coverage test
- Top-heavy test
Correct answer: ACP test
The Actual Contribution Percentage (ACP) test compares the average rate of employer matching and after-tax employee contributions for HCEs versus non-HCEs.
Question 3: In a defined benefit plan, 'normal retirement age' is typically defined as the earlier of what?
- Age 55 or 10 years of service
- Age 65 or the later of 62 and 5 years of plan participation (Correct answer)
- Age 59½ or 20 years of service
- Age 62 or 30 years of service
Correct answer: Age 65 or the later of 62 and 5 years of plan participation
ERISA defines normal retirement age as the later of age 62 or 5 years of plan participation, but most plans set it at age 65.
Question 4: A 401(k) plan is considered 'top-heavy' when more than what percentage of plan assets are held by key employees?
- 25%
- 50%
- 60% (Correct answer)
- 75%
Correct answer: 60%
A plan is top-heavy if more than 60% of the aggregate account balances (or present value of accrued benefits) belong to key employees.
Question 5: Which of the following is NOT a permissible in-service distribution event from a 401(k) plan before age 59½ without a 10% early withdrawal penalty?
- Separation from service after age 55
- Substantially equal periodic payments under IRC 72(t)
- Disability
- Taking out a plan loan (Correct answer)
Correct answer: Taking out a plan loan
Plan loans are not distributions and are not subject to the 10% penalty; the other three are recognized penalty exceptions under the tax code.
Question 6: What does 'portability' mean in the context of defined benefit plans?
- The ability to take the plan's investment options to a new employer
- The ability to transfer accrued benefits or their lump-sum equivalent when changing jobs (Correct answer)
- The right to continue contributing after leaving the employer
- The option to convert a DB benefit to a DC account balance
Correct answer: The ability to transfer accrued benefits or their lump-sum equivalent when changing jobs
Portability refers to an employee's ability to move the value of accrued pension benefits—often as a lump-sum rollover—when changing employers.
Question 7: Under the Pension Protection Act of 2006, automatic enrollment in a 401(k) plan with a Qualified Default Investment Alternative (QDIA) protects plan fiduciaries from liability related to what?
- Participant lawsuits over administrative fees
- Investment losses attributable to defaulted participant investments (Correct answer)
- Employer matching contribution adequacy
- Plan document compliance errors
Correct answer: Investment losses attributable to defaulted participant investments
QDIA safe harbor protection shields fiduciaries from investment-loss liability when participants are automatically enrolled and defaulted into approved investment options.
TREX 401(k) & Defined Benefit Plans 3
What is a 'cash balance' plan, and how does it differ from a traditional defined benefit plan?