Question

All but which of the following tests must be met in order for a retirement plan to receive favorable tax treatment as a qualified plan?

a. Percentage test

b. Ratio test

c. Participation test

d. Average benefit test

14. An accounting firm has 125 employees. All employees are covered by the firm’s defined benefit plan except for 70 junior associates. Has the minimum participation requirement been met for the plan?

a. Yes, both parts of the 50/40 test have been met.

b. Yes, but only one part of the 50/40 test has been met.

c. No, neither part of the 50/40 test has been met.

d. No, only one part of the 50/40 test has been met and the plan must pass both parts.

Answer 1

Q1)

The three tests that are used to determine whether a retirement plan will receive favorable tax treatment are:

a. Percentage Test;

b. Ratio Test; and

c. Average Benefit Test.

Answer : Choice C. Participation Test is not used for determining whether a retirement plan will receive favorable tax treatment.

Q 2)

The 50/40 Test for a Defined Benefit Plan requires that the Plan must benefit at least the lesser of:

a. 50 employees;

or

b. 40% of all employees.

Criterion (a) has been satisfied as 55 employees (Total 125 - 70 Juniors = 55 Employees) are covered by the Firm's Defined Benefit Plan;

Criterion (b) is satisfied as 40% of all employees, i.e., 125 * 40% = 50 are covered by the Firm's Defined Benefit Plan.

Answer:

Choice A IS CORRECT as both the conditions of the 50/40 Test have been satisfied.

Choice B is not correct, as both conditions of the 50/40 Test have been met.

Choice C is not correct as both conditions of the 50/ 40 Test have been met.

Choice D is not correct, as the Defined Benefit Plan must meet either one of the conditions of the 50/40 Test. The plan does not require both conditions of the 50/40 Test to be met.