Certified Plan Sponsor Professional (CPSP) Practice Exam

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True or False: Qualified retirement plans can disproportionately favor highly compensated employees.

True
False
Only if certain conditions are met
True, under all circumstances

The correct answer is: False

Qualified retirement plans are designed to provide benefits in a manner that is fair and equitable to all employees, not just highly compensated ones. This is rooted in federal regulations under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code, which impose specific nondiscrimination requirements on these plans. These requirements ensure that qualified plans do not overly benefit those who are highly compensated or key employees at the expense of rank-and-file employees. While some plans may have features that seem to favor high earners (like profit-sharing features), the overall design and administration of qualified plans must pass certain tests, such as the Average Deferral Percentage (ADP) and Average Contribution Percentage (ACP) tests, to demonstrate that contributions or benefits provided do not favor highly compensated employees. Thus, the assertion that qualified retirement plans can disproportionately favor highly compensated employees is fundamentally incorrect, as there are legal protections in place to prevent this from happening.