Certified Plan Sponsor Professional (CPSP) Practice Exam

What is identified by the IRS as a top compliance concern for plan administrators?

1. Failure to apply the correct definition of compensation

2. Improper communication with participants

3. Low employee participation rates

4. Incorrect investment choices

The correct answer is: Failure to apply the correct definition of compensation

The identification of the failure to apply the correct definition of compensation as a top compliance concern by the IRS highlights the critical responsibility plan administrators have in ensuring that compensation is interpreted correctly when calculating contributions, benefits, and other related factors. This is essential because the definition of compensation can vary depending on the type of retirement plan and potentially lead to discrepancies in contributions or distributions if misapplied. Using the correct definition of compensation is vital not only for compliance with IRS regulations but also for maintaining fairness and equity among plan participants. An incorrect definition can result in compliance failures that may lead to penalties, increased scrutiny from regulators, and a loss of tax-qualified status for the plan. Ensuring accurate application helps protect the interests of both the participants and the plan itself, making it a paramount concern for plan administrators. Other areas like communication with participants, employee participation rates, and investment choices are also important, but they do not carry the same level of direct compliance risk from an IRS perspective as the proper definition of compensation does. Miscommunication might affect participant understanding or engagement but does not typically reflect on compliance standards in the same way. Therefore, the focus on compensation aligns with IRS’s regulatory priorities for maintaining plan integrity.