Certified Plan Sponsor Professional (CPSP) Practice Exam

What does the maximum dollar limit allocated to participants get adjusted for annually?

1. Cost of living increases

2. Income tax rates

3. Market fluctuations

4. Inflation indexing

The correct answer is: Inflation indexing

The maximum dollar limit allocated to participants is adjusted annually based on inflation indexing. This means that the adjustment takes into account the changes in the cost of goods and services over time, which is typically measured by a Consumer Price Index (CPI). This is important because without such adjustments, the purchasing power of the allocated amounts might diminish in real terms as inflation increases. By aligning limits with inflation, plan sponsors ensure that participants' benefits retain their intended value over the years. The other options, while related to financial matters, do not directly pertain to the annual adjustments of maximum dollar limits for participants. Cost of living increases, while somewhat similar, do not specifically refer to the mechanism used for adjusting the dollar limits in retirement plans. Income tax rates fluctuate based on various factors but are separate from how benefit limits are adjusted. Market fluctuations can affect investment values but do not influence the predetermined limits set by regulatory bodies for retirement accounts. Thus, inflation indexing is the correct concept that reflects how these limits are intended to keep pace with changes in the economy.