View Full Version : 2004 EA-2B HORRIBLE QUESTION 17
The question is about Avg Annual Comp being a 5 year average. Does anybody understand how they justify answer C? They obviously use EGTRRA limits retroactively but the question does not say the plan amended to do that. AND General Provision 15 of the exam says "The plan has not been amended since its effective date".
How can they expect us to assume a plan has an amendment when they don't say it did? What else should we just assume?
My point is, if that's their thinking why not include all $210,000 in the most recent year. How do we even know the plan is qualified (hint, due to General Provision 2 that states such - are we supposed to use some of their provisions not others).
Victor The Eagle
09-03-2004, 12:54 PM
I did not ask to get my answer sheet, but I remember this question. I too assumed (which is the logical assumption) that the $200,000 retro did not apply. I don't remember the specifics or what answer C was, but I agree that if they used $200,000 as the cap for the older years, this should be investigated.
Yes, answer C can only be achieved by using the 200,000 limits retroactively. If you limit each year to the applicable 401(a)17 limits you get answer B. (if you ignore all limits which would mean ignoring all General Exam Provisions, you'd get D).
C is the one answer that cannot be justified.
I believe the default condition with EGTRRA is that the 200,000 limit was applied retroactively. Therefore the plan would be amended only if the limit was *not* applied retroactively.
As you said, we're to assume that there have been no amendements and thus it seems that the only answer that could be justified is answer C.
I think the question basically tested whether or not you knew the defaults of EGTRRA.
09-08-2004, 08:50 AM
I disagree - there really is NO default specified. I think this is a matter of interpretation, which varies depending on where you work.
When the 401(a)(17) limit was reduced (by OBRA 1993) to 150,000 the IRS made it clear that it applied retroactively. The reason was that it reduced benefits for everyone.
In EGTRRA, the 401(a)(17) limit was increased to 200,000. This could increase benefits for everyone. So the IRS did NOT force it to be applied retroactively.
In Notice 2001-56 Section B (Effective Date), it says:
"Thus, for purposes of determining benefit accruals or the amount of allocations for plan years beginning on or after January 1, 2002, compensation taken into account may not exceed the compensation limit under § 401(a)(17), as amended by § 611(c) of EGTRRA.
In the case of a plan that uses annual compensation for periods prior to the first plan year beginning on or after January 1, 2002, to determine accruals or allocations for a plan year beginning on or after January 1, 2002, the plan is permitted to provide that the $200,000 compensation limit applies to annual compensation for such prior periods in determining such accruals or allocations."
The examples which follow (in Notice 2001-56) refer to a plan that was amended in two different ways. One amendment reflects the 200,000 limit for pre-EGTRRA years, and the other amendment does NOT.
09-08-2004, 11:55 AM
You know the front of the exam, where it lists all the conditions (like Normal Retirement is at 65, ...)
In that section, does it specify the default condition for applying EGTRRA to 401(a)17? Also, was the plan effective date before or after EGTRRA?
You need to amend your plan to use EGTRRA retroactively - I know that from client work over the years.
I have talked with Dave Farber who has discussed this with Rick G. and they are going to help me talk to the joint board (or at least find the right person) about accepting answer B since they agree with my logic.
Here's my deal though - I just got my exam back and I scored a 52. Even though I am only 4 points from a passing grade, these 2 points will not help me even if the joint board buckles as accepts answer B. If anybody else would get a 56 or better by having answer B accepted, I'd love for you to take the torch from here and deal with the joint board. Because for me to pursue this, it would be a whole lot of work for a whole lot of nothing in the end.
And if you don't know how close you were (but you got a 5) you might as well request your exam - it took about a week for me to get it.
09-08-2004, 02:31 PM
Before anyone agrees with you, we should see the exact wording of the question. Have they released the exam?
09-08-2004, 02:57 PM
The exact wording of the question:
Average Annual Compensation for accrued benefits is defined as the highest five consecutive compensation years prior to retirement.
Data for participant Smith:
Compensation Year Annual Compensation
In what range is the highest Average Annual Compensation that could be used in the calculation of Smith's accrued benefit as of 12/31/2003?
(A) Less than $176,000
(B) $176,000 but less than $180,000
(C) $180,000 but less than $184,000
(D) $184,000 but less than $188,000
(E) $188,000 or more
09-08-2004, 03:36 PM
"The highest that could be used."
The question was testing whether or not you knew that a plan could be retroactively amended for EGTRRA.
If it was asking what you thought it was asking, it wouldn't have used the words highest or could.
Also, even non-retroactive EGTRRA isn't automatically applied to all plans. Most plans had to be amended for it.
09-08-2004, 03:58 PM
Actually, if it didn't use the words "highest" or "could" ... THAT would have a horribly written question. Without those words, you wouldn't know whether or not to retroactively apply EGTRRA.
Your answer of B necessarily means that it is not possible to retroactively amend for EGTRRA, which is wrong.
Then the highest that could be used would also include the 210,000 from 2003. That is the HIGHEST that COULD be used, right?
09-08-2004, 04:07 PM
No, because the rules in front of the exam state the plan has to be qualified.
Don't forget, there is one HIGHEST amount that COULD be used for plans that amend EGTRRA retroactively and a DIFFERENT HIGHEST amount that COULD be used for plans that don't amend.
09-08-2004, 04:14 PM
Yes. And since
1. The question didn't specify whether or not it uses retroactive, thus leaving it as an open variable
2. The question clearly asked for the highest that could be used.
You should have assumed retroactive EGTRRA.
Let me give you an analogy.
1. I ask you what the most expensive house costs.
2. You say $500,000.
3. I say, but my aunt's house costs $750,000.
4. You say, "I was assuming you meant most expensive house in my neighborhood, you should have told me if you wanted me to consider all possible locations."
In fact, you shouldn't have assumed that I implied a fixed location, since nothing I said dictated a fixed location.
The rules of the question only dictate a qualified plan. They do not dictate whether or not retroactive EGTRRA has been applied. There is nothing, anywhere in the exam booklet, which says you CAN'T assume retroactive EGTRRA when answering questions.
09-08-2004, 04:22 PM
"The plan has not been amended since its effective date"
This doesn't rule out the possibility of retroactive EGTRRA being written into the plan ON the effective date.
09-08-2004, 04:51 PM
Wow, all of the sudden nil is quiet.
Take it easy 24fan, I was in a seminar. You are obviously getting way too worked up about this. And try to keep your arrogance in check. The case is hardly closed.
Feel free to disagree, that's what's great about this country. I think they just left the question too open-ended and it can be interpreted in two different ways. I've run it by the head actuary of our Chicago office, Dave Farber and Rick G. I'll take their analysis over "24FAN" anyday.
It's a bad result for an exam question. I'll pursue this if I feel like it.
You have done absolutely nothing to make me rethink my position.
09-08-2004, 06:14 PM
I thought you were doing this for a passing score. Never mind then.
Man, it is so funny to read your replies. I might have to print some of these out.
I have no idea why you are so fired up. And if you read my earlier post, I am 4 points away so these 2 points would not get me to a passing grade - but thanks for coming across like a total hard a@#. I have my point of view and you have yours.
I'd hate to encounter you in person, lest you destroy me because you are so superior and mighty. Go have a beer and chill out.
09-08-2004, 06:26 PM
Maybe you should have laid off the beers the night before the exam, eh?
Seriously though, I felt bad for you when you wrote that you were horribly wronged. So I took time to investigate the question.
You have to admit that your "but you have to amend for EGTRRA" argument has been shot down, since retroactive EGTRRA could have been written into the plan at its inception. You have no objections left, thus you also have to admit the answer is C.
I don't agree with you but that is beside the point. You obviosly need to have the last word and make some "edgy" and, in your view, witty cutdown. So feel free to get it out of your system and reply - yet again.
I have spent too much time with this back-and-forth with you. Arguing with you is futile since no resolution will come about on this message board and I'm kind of upset with myself for even doing it.
I'll pursue my issue with the appropriate parties. My discussions with Farber will continue and I will let you know what the Joint Board says.
Thanks for giving me the other side of the argument.
Unfortunately, I think message boards can become a bad thing. There is no way you would talk to me this way in person but the anonymity of the board allows people to be as brash or rude as they want with no consequences. I see it on stock message boards all of the time. It's sad, but I guess that's life.
09-09-2004, 12:06 AM
You have some nerve.
You come on here, claiming to have been "horribly" wronged. I take the time to review the question, and show you that in fact, the question was properly worded to lead to only one answer. You protest with an objection. I show your objection is invalid. You protest with another objection. Again I show this too is invalid.
Finally it gets through your thick head, and you have no further relevant objections.
But rather than thank me, you respond that nothing I say will ever convince you and then proceed with a personal attack, on me and the internet!
You have some nerve to waste the time of others, and blame the exam writer for getting the question wrong, when in fact the only problem is your poor reading comprehension.
nil: Let's forget about all the nastiness going back and forth. I'm on the committee that writes this exam though I wasn't involved with this question so I thought I would give my opinion. Though I respect Dave Farber and Rick G., I disagree with them about this question. I think that the "could be used" means that you should figure out the highest average pay possible as long as the plan stays "qualified". The whole point of the question is for you to know that you "could" apply EGTRRA retroactively to obtain the highest average pay. The condition that the plan has not been amended since inception does not preclude you from amending the plan now to obtain a higher average pay.
09-10-2004, 12:59 PM
I agree. This is something that makes MC exams more tricky. On an essay exam you could write your own assumptions to what realm of possibilities the word "could" defines. You might lose minimal points. On MC, you have to step back and think about what is the question really asking. Would the exam writer really want you to just apply the basic pay limits? Any retarded monkey could do that. Most of the time there will be some thought involved. The fact it's a 2 point question further makes you think it's not just a quick average using the basic pay limits.
I agree that it's phrased somewhat vaguely, which is why you have to try to put yourself in the question asker's shoes. Otherwise you can convince yourself of anything, like, does "could" mean that there could be a data error and they really received $20,000 more in each year. I mean, that COULD happen right? Or the plan could be retroactively amended to include bonuses, thereby increasing each year's pay. So many "could" possibilities.
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