Certified Plan Sponsor Professional (CPSP) Practice Exam

The IRS may assess which of the following sanctions to a fiduciary who engaged in a prohibited transaction?

1. A 15% penalty tax per year until the transaction is corrected up to 100% if the transaction is not corrected.

2. A fixed fine of $5,000 for each prohibited transaction.

3. Mandatory training on fiduciary duties for a period of five years.

4. A suspension of the fiduciary's duties for a year.

The correct answer is: A 15% penalty tax per year until the transaction is corrected up to 100% if the transaction is not corrected.

The correct answer highlights the serious consequences the IRS has in place for fiduciaries who engage in prohibited transactions. Under the Internal Revenue Code, specifically Section 4975, fiduciaries are subject to a penalty tax of 15% of the amount involved in the prohibited transaction for each year it remains uncorrected. If the transaction is not corrected within a specified time frame, this penalty can escalate to a total of 100% of the amount involved. This structure serves as a deterrent for fiduciaries to adhere to their responsibilities and to avoid engaging in transactions that could compromise the interests of the plan and its participants. The cumulative effect of these penalties emphasizes the importance of compliance with fiduciary duties and the need for immediate correction of any prohibited transactions to mitigate financial repercussions. Other choices, while they may suggest forms of sanctions, do not accurately reflect the penalties imposed by the IRS. The fixed fine option and mandatory training do not align with actual IRS enforcement mechanisms, as there is no standard fine imposed per transaction nor a requirement for training as a penalty. Lastly, a suspension of duties is not an established consequence by the IRS but could potentially be dealt with by other governing bodies or within the framework of a plan sponsor's internal policies.