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.
Full Version: 2009 DB Exam - Top Heavy Accrual Calc
BenefitsLink Message Boards > Continuing Professional Education > ASPPA C2 (DB) - Admin Issues of DB Plans
Do your materials include the Internal Revenue Code? See 416(c)(1)(B).
QUOTE (munj34 @ Apr 27 2009, 07:33 PM) 
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.
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.
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.
As Mike suggested, the answer is IRC 416(c)(1)(B):
QUOTE
(c) 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.
(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.
This is a "lo-fi" version of our main content. To view the full version with more information, formatting and images, please click here.