Certified Plan Sponsor Professional (CPSP) Practice Exam

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What is a primary benefit of participating in a nonqualified plan?

Nonqualified plans are not subject to statutory contribution limits.
Nonqualified plans guarantee retirement income.
Nonqualified plans offer higher interest rates.
Nonqualified plans provide tax-free withdrawals.

The correct answer is: Nonqualified plans are not subject to statutory contribution limits.

Participating in a nonqualified plan offers the primary benefit of not being subject to statutory contribution limits. This means that employers can provide higher contributions for selected employees beyond the limits imposed by qualified plans, such as 401(k) plans. Nonqualified plans allow organizations the flexibility to design more tailored benefits for key employees or executives without the usual constraints of contribution caps. This can be particularly advantageous for employers looking to attract and retain top talent by offering them enhanced retirement savings opportunities that are not available through standard qualified plans. While the other options may seem attractive, they do not represent realistic features of nonqualified plans. For instance, nonqualified plans do not guarantee retirement income nor do they inherently offer higher interest rates or tax-free withdrawals. Instead, they operate on the basis of the employer's discretion and plan design, making the lack of contribution limits a significant advantage for both the employer and the highly compensated employees they choose to incentivize.