Certified Plan Sponsor Professional (CPSP) Practice Exam

What is considered a civil penalty under ERISA regarding early distributions?

1. Late contributions

2. Mandatory penalties of $100

3. Taxable income

4. Unreported rollovers

The correct answer is: Mandatory penalties of $100

Under the Employee Retirement Income Security Act (ERISA), penalties for early distributions from retirement plans are designed to discourage participants from accessing their retirement savings before reaching the required age or meeting certain conditions. The correct choice regarding civil penalties specifically references mandatory penalties, which are characterized under the Internal Revenue Code as imposed fines or fees for noncompliance with conditions set for tax advantages on retirement plans. In this context, mandatory penalties of $100 directly align with the civil penalties outlined in ERISA. These penalties often apply to certain violations related to retirement plans and maintain the integrity of the regulations intended to protect retirement savings. Specifically, early distributions that do not satisfy the legal requirements may incur these civil penalties, which serve as a financial deterrent. The other choices relate to different aspects of retirement plans but do not specifically define civil penalties under ERISA for early distributions. Late contributions pertain to the timely deposit of participant contributions rather than penalties for early access. Taxable income refers to the tax implications of distributions rather than penalties. Unreported rollovers involve failure to report a rollover transaction and do not constitute a civil penalty defined in the same way as mandatory monetary penalties for early distributions. Thus, the association of mandatory penalties of $100 with ERISA’s framework for handling early