Certified Plan Sponsor Professional (CPSP) Practice Exam

What document must be given to a participant who requests a distribution of benefits after terminating employment?

1. A notice explaining the taxation of retirement distributions

2. A summary of available benefits

3. A list of investment options

4. A statement of account balance

The correct answer is: A notice explaining the taxation of retirement distributions

The requirement to provide a notice explaining the taxation of retirement distributions to a participant who requests a distribution of benefits after terminating employment is based on regulatory guidelines intended to ensure that participants are fully informed of the tax implications of their distribution choices. This notice typically highlights key tax consequences, such as potential penalties for early withdrawal, the withholding tax rate, and the impact of rolling over the distribution into another retirement account. Having this information is crucial for participants, as it helps them make informed decisions regarding their retirement funds. Understanding the tax implications allows participants to plan appropriately for their financial needs after employment and avoid unexpected tax liabilities. Proper adherence to these requirements helps protect both the participants and the plan sponsors from future disputes or legal complications related to taxation. While the other options provide valuable information—such as a summary of available benefits, a list of investment options, or a statement of account balance—they do not specifically address the need for awareness around tax implications, which is a critical factor when making distribution decisions after termination of employment.