Certified Plan Sponsor Professional (CPSP) Practice Exam

If a plan sponsor uses the top-paid group election to determine Highly Compensated Employees (HCEs), what is the percentage limit for those identified as HCEs through this method?

1. 10%

2. 15%

3. 20%

4. 25%

The correct answer is: 20%

When a plan sponsor uses the top-paid group election to determine Highly Compensated Employees (HCEs), the IRS allows them to select the top 20% of employees based on compensation from the total number of employees. This method involves designating a portion of the workforce that earns the highest levels of compensation, and by choosing the top 20%, plan sponsors can more easily manage their retirement plan compliance and contribution limits. This top-paid group election is advantageous for employers as it simplifies the identification process of HCEs while still aligning with regulatory standards. By limiting this group to the top 20% of earners, the plan sponsor can focus their efforts on a defined subgroup that is more likely to influence the overall plan contributions and compliance issues, thus ensuring that the plan remains compliant with nondiscrimination requirements.