CLU Qualified Plans and Retirement Practice Questions

Correct answer: C. 7.0%, because the HCE average may exceed the NHCE average by 2 percentage points

The ADP test allows the HCE average to be the greater of 1.25 times the NHCE average, or the lesser of 2 times the NHCE average and the NHCE average plus 2 points. With NHCE at 5%, 1.25 x 5% = 6.25% and the lesser of 10% and 7% is 7%, so 7.0% is the maximum.

• A. The test permits the HCE average to exceed the NHCE average.
• B. 1.25 times applies only when the NHCE average is above 8%; here the plus-2 point test gives a higher limit.
• C. Correct. With NHCE between 2% and 8%, the HCE limit is NHCE plus 2 percentage points.
• D. Twice the NHCE average applies only when NHCE is 2% or less; the plus-2 rule is the lesser limit here.

• Source: IRS: 401(k) plan fix-it guide, ADP and ACP nondiscrimination tests

Correct answer: A. The costs (premiums) and/or the benefits (cash value and death benefit) of the policy, split between the employer and employee according to a written agreement

Split-dollar arrangements involve an employer and employee (or sometimes two parties in an estate planning context) sharing the economics of a life insurance policy — typically the premium cost and the eventual cash value/death benefit — under a written agreement that specifies each party's rights and taxed under either the economic benefit regime or the loan regime, depending on how the arrangement is structured. Choices B, C, and D each mischaracterize what is actually being split.

• A. Correct. In a split-dollar arrangement, the employer and employee share the costs (premiums) and/or the benefits (cash value and death benefit) of the policy according to a written agreement between them.
• B. Split-dollar involves sharing actual costs and/or benefits of the policy itself; an arrangement where the employer contributes nothing and has no rights in the benefits is not a sharing arrangement at all.
• C. Split-dollar concerns a life insurance policy's costs and benefits; it has no connection to the employer's general commercial liability coverage.
• D. This describes straightforward compensation with outright employee ownership, not a split-dollar arrangement, which depends on a written agreement under which the employer and employee share the policy's costs and/or benefits.

Correct answer: C. $50,000, the statutory dollar cap, since 50% of her vested balance exceeds it

Section 72(p) caps plan loans at the lesser of $50,000 or 50% of the participant's vested account balance. Here, 50% of $120,000 is $60,000, but the statutory $50,000 dollar cap is lower and therefore controls, limiting the maximum loan to $50,000.

• A. Incorrect — IRC §72(p) never permits borrowing the full vested balance; both a percentage limit and a dollar cap apply.
• B. Incorrect — while 50% of her balance is $60,000, this ignores the statutory dollar cap, which is lower and controls in this case.
• C. Correct. The lesser of 50% of the vested balance ($60,000) or the $50,000 statutory cap applies, and since $60,000 exceeds $50,000, the maximum loan is $50,000.
• D. Incorrect — §72(p) imposes both a percentage limit and an absolute dollar cap, so a limit based only on half her balance is not the rule.

• Source: IRS: Retirement topics, loans

Correct answer: D. An excise tax penalty imposed on the amount of the shortfall that was not timely withdrawn

Missing an RMD triggers an excise tax penalty on the shortfall — the amount that should have been withdrawn but wasn't — rather than jeopardizing the plan's overall qualified status or the participant's entire account. The penalty can potentially be reduced or waived by the IRS for reasonable cause and timely correction, but it is not simply avoidable by waiting.

• A. Incorrect — an individual RMD failure doesn't disqualify the whole plan for every participant.
• B. Incorrect — the consequence is a tax penalty, not forfeiture of the account.
• C. Incorrect — a penalty generally does apply to the missed amount, though relief may sometimes be available for reasonable cause.
• D. Correct — the excise tax penalty applies specifically to the shortfall amount.

• Source: IRC section 4974 (excise tax on accumulations)