Guest munj34 Posted April 28, 2009 Posted April 28, 2009 I am studying for the 2009 DB exam and have come across a couple items on the sample practice test that are confusing me. Q. 13: Based on the following information, determine the monthly accrued benefit for a non-key employee at a certain age: The plan has always been top-heavy The employee was hired at age 25. The employee became a participant at age 26. The employee’s current age is 37. The plan’s NRA is 65 The employee’s current average monthly compensation is $3,500. NRB is 2.5 percent of average monthly compensation times years of service maximum of 25; fractional accrual method based on years of service. A. $656 B. $700 C. $840 D. $963 E. $1,050 A: B The formula accrued benefit is (12/40) * (.025*25*3500)=$656 since projected service for accrual is 40 even though only 25 years of service earn a benefit. However, the top-heavy minimum is .02*10*3500=$700. Q. 15: Based on the following information, determine the participant’s annual accrued benefit at age 36: The participant was hired at age 25 The employee became a participant at age 25. High 5 year average pay is $50,000 High 3 year average pay is $60,000 NRA is 65. The plan has always been top-heavy. The participant is a non-key employee. Benefit formula is 50% of high 3 year average pay accrued fractionally on service. Normal form of benefit is a life annuity. A. $8,250 B. $10,000 C. $11,000 D. $12,000 E. $13,200 A: B The top heavy accrual based on 5 year compensation is 10*.02*50,000=10,000. This exceeds the accrued formula benefit of (11/40)*(.5*60,000)=8,250. In both of the above questions, (#13 and #15) why is only 10 years of service being multipled by the 2% top heavy minimum? Why aren't the actual years of service being used? I can't find anything in the DB study guide or the DB Answer Book that instructs to use 10 years of service if the ppt's years of service are over 10 (I'm assuming that because in the sample question #4 at the end of chapter 4 in the study guide, the actual years of service are used but that actuals years are less than 10.
Mike Preston Posted April 28, 2009 Posted April 28, 2009 Do your materials include the Internal Revenue Code? See 416©(1)(B).
Guest Butterfly Posted November 10, 2009 Posted November 10, 2009 I am studying for the 2009 DB exam and have come across a couple items on the sample practice test that are confusing me.Q. 13: Based on the following information, determine the monthly accrued benefit for a non-key employee at a certain age: The plan has always been top-heavy The employee was hired at age 25. The employee became a participant at age 26. The employee’s current age is 37. The plan’s NRA is 65 The employee’s current average monthly compensation is $3,500. NRB is 2.5 percent of average monthly compensation times years of service maximum of 25; fractional accrual method based on years of service. A. $656 B. $700 C. $840 D. $963 E. $1,050 A: B The formula accrued benefit is (12/40) * (.025*25*3500)=$656 since projected service for accrual is 40 even though only 25 years of service earn a benefit. However, the top-heavy minimum is .02*10*3500=$700. Q. 15: Based on the following information, determine the participant’s annual accrued benefit at age 36: The participant was hired at age 25 The employee became a participant at age 25. High 5 year average pay is $50,000 High 3 year average pay is $60,000 NRA is 65. The plan has always been top-heavy. The participant is a non-key employee. Benefit formula is 50% of high 3 year average pay accrued fractionally on service. Normal form of benefit is a life annuity. A. $8,250 B. $10,000 C. $11,000 D. $12,000 E. $13,200 A: B The top heavy accrual based on 5 year compensation is 10*.02*50,000=10,000. This exceeds the accrued formula benefit of (11/40)*(.5*60,000)=8,250. In both of the above questions, (#13 and #15) why is only 10 years of service being multipled by the 2% top heavy minimum? Why aren't the actual years of service being used? I can't find anything in the DB study guide or the DB Answer Book that instructs to use 10 years of service if the ppt's years of service are over 10 (I'm assuming that because in the sample question #4 at the end of chapter 4 in the study guide, the actual years of service are used but that actuals years are less than 10.
Guest Butterfly Posted November 10, 2009 Posted November 10, 2009 Help! I also have the same questions on this and was wondering if you ever got a response or resloution? I am taking this test in two weeks and don't know where the 10 yrs of svc is coming from.
david rigby Posted November 10, 2009 Posted November 10, 2009 As Mike suggested, the answer is IRC 416©(1)(B): © Plan must provide minimum benefits (1) Defined benefit plans (A) In general. A defined benefit plan meets the requirements of this subsection if the accrued benefit derived from employer contributions of each participant who is a non-key employee, when expressed as an annual retirement benefit, is not less than the applicable percentage of the participant’s average compensation for years in the testing period. (B) Applicable percentage. For purposes of subparagraph (A), the term “applicable percentage” means the lesser of— (i) 2 percent multiplied by the number of years of service with the employer, or (ii) 20 percent. I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.
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