Certified Plan Sponsor Professional (CPSP) Practice Exam

What is the IRC Sec. 414(s) alternative definition of compensation used for?

1. Calculating retirement benefits

2. Determining eligibility for life insurance

3. Calculating deferrals in 401(k) plans

4. Calculating contributions for health benefits

The correct answer is: Calculating deferrals in 401(k) plans

The alternative definition of compensation under IRC Sec. 414(s) is specifically designed to provide a more inclusive measure of compensation for certain retirement plan calculations. This definition includes a broader range of compensation types that may not be captured under the standard definition, allowing for a more comprehensive calculation of contributions made to retirement plans. When participants want to calculate their deferrals in 401(k) plans, this alternative definition is crucial, as it ensures that various types of compensation—such as overtime pay, bonuses, or certain forms of deferred compensation—are factored into the eligible income that can be contributed to the 401(k). The application of this alternative definition helps ensure compliance with regulations and can maximize the amount participants are able to save for their retirement, reflecting a more accurate picture of their total earnings. This is particularly important for encouraging higher savings rates among employees and ensuring that all forms of compensation are considered when determining contribution limits. Therefore, the utilization of this alternative definition is instrumental in effectively calculating deferrals in 401(k) plans, facilitating both compliance and maximization of retirement benefits.