Certified Plan Sponsor Professional (CPSP) Practice Exam

What are Nonqualified Deferred Compensation Plans (NQDCs) designed to do?

1. Provide benefits to all employees equally

2. Offer tax advantages to all employees

3. Limit coverage to a select group of highly compensated employees

4. Require employer contributions for all participants

The correct answer is: Limit coverage to a select group of highly compensated employees

Nonqualified Deferred Compensation Plans (NQDCs) are specifically designed to provide deferred compensation benefits primarily to a select group of highly compensated employees, often referred to as "highly paid executives" or "key employees." The primary intent of these plans is to help retain and reward these key individuals within an organization, allowing the company to tailor compensation packages that exceed the limits set forth by qualified plans, such as 401(k)s. NQDCs offer flexibility in terms of contribution amounts and distribution options, making them particularly attractive to employers seeking to incentivize their top talent without the constraints typically associated with qualified retirement plans. Because these plans are not subject to the same regulatory requirements as qualified plans, they can provide unique benefits directly aligned with an organization’s strategic goals. Understanding this context clarifies why choices focused on equal treatment of all employees, universal tax advantages, or mandated employer contributions for all participants do not apply to NQDCs, as the plans are inherently structured to serve a specific subset of employees rather than providing blanket benefits across the workforce.