Certified Plan Sponsor Professional (CPSP) Practice Exam

In a nonqualified plan, what tax form needs to be filed for reported income to participants?

1. Form 1040

2. Form W-2

3. Form 1099

4. Form 7500

The correct answer is: Form W-2

In a nonqualified plan, Form W-2 is the appropriate tax form to report income to participants. This form is used by employers to report wages paid to employees and the taxes withheld from them. Since nonqualified plans often provide benefits that are considered taxable as ordinary income when they are paid out, these payments need to be documented as income for the participants, just as regular wages would be. Using Form W-2 ensures that participants receive an accurate report of their income for tax purposes, which is necessary for them to properly file their individual tax returns. This form includes information about the employee's total earnings and the amounts withheld for federal, state, and other taxes. The other forms mentioned serve different purposes: Form 1040 is the individual income tax return, Form 1099 is generally used to report various types of income other than wages (such as self-employment income or interest), and Form 7500 doesn't relate to reporting income for participants in nonqualified plans. Thus, using Form W-2 aligns with the reporting requirements of wages and benefits provided through a nonqualified plan.