Certified Plan Sponsor Professional (CPSP) Practice Exam

Disable ads (and more) with a membership for a one time $2.99 payment

Prepare for the Certified Plan Sponsor Professional Exam. Use flashcards and multiple choice questions with full explanations. Achieve exam success!

Each practice test/flash card set has 50 randomly selected questions from a bank of over 500. You'll get a new set of questions each time!

Practice this question and more.

What is the annual deduction limit for all contributions to a 401(k) plan?

20% of total compensation of all eligible participants
25% of total compensation of all eligible participants
No limit set by law
30% of the corporation's taxable income

The correct answer is: 25% of total compensation of all eligible participants

The correct answer reflects that the annual deduction limit for all contributions to a 401(k) plan is set at 25% of the total compensation of all eligible participants. This limit is determined by the rules governing qualified retirement plans, specifically the Internal Revenue Code. In a 401(k) plan, the employer is allowed to contribute up to a maximum percentage of the total compensation for all eligible employees. This structure aims to ensure that employers can provide sufficient retirement benefits while maintaining compliance with tax regulations. The 25% deduction limit indicates that contributions made by the employer to their employees' 401(k) accounts are subject to this cap, which helps prevent excessive tax advantages, ensuring that the employer's contributions remain within a reasonable range according to federal guidelines. The choices provided pertain to different aspects of contribution limits and tax deductions in retirement plans. Understanding these limits is crucial for maintaining the tax-favored status of retirement plan contributions and ensuring compliance with regulatory requirements.