Certified Plan Sponsor Professional (CPSP) Practice Exam

Safe harbor 401(k) contributions must adhere to which definition of compensation?

1. IRS Publication 590

2. Federal tax regulations

3. RC414(s) compensation

4. ERISA guidelines

The correct answer is: RC414(s) compensation

Safe harbor 401(k) contributions must adhere to the definition of compensation outlined in RC414(s) compensation. This designation provides specifics on what constitutes eligible compensation for retirement plan contributions, distinguishing it from other forms of income and ensuring a standardized approach across plans. RC414(s) compensation includes elements such as wages, bonuses, and certain fringe benefits while excluding others, which helps simplify how employers calculate contributions for their employees. This definition is particularly important because safe harbor plans must satisfy specific contribution requirements to avoid certain nondiscrimination testing, which protects both employer and employee benefits within the plan. The other options pertain to compensation regulations or guidelines that may provide useful information or serve different purposes but do not directly define the compensation that safe harbor contributions must be based on in the context of 401(k) plans. For instance, IRS Publication 590 addresses IRA contributions and distributions, federal tax regulations provide broader guidelines for tax treatment, and ERISA outlines general employee benefit plan requirements but does not specifically focus on the detailed definition of compensation for safe harbor contributions.