Certified Plan Sponsor Professional (CPSP) Practice Exam

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What is the maximum allocation to a participant who is under age 50?

120% of compensation
The lesser of 70% of compensation or $20,000
The lesser of 100% of compensation or the applicable dollar limit
Fixed dollar amount of $60,000

The correct answer is: The lesser of 100% of compensation or the applicable dollar limit

The correct allocation for a participant who is under age 50 is indeed the lesser of 100% of compensation or the applicable dollar limit. This guideline is in place to ensure that contributions to retirement plans are kept within reasonable limits while also allowing participants to save a significant amount relative to their income. The term "applicable dollar limit" typically refers to the specific contribution limits set by the Internal Revenue Service (IRS) for various types of retirement plans, such as 401(k) plans. As of 2023, this limit is $22,500 for elective contributions to a 401(k) plan for employees under age 50. Therefore, a participant can contribute either up to 100% of their compensation or the stipulated limit, whichever is lower. This structure provides flexibility for participants to maximize their savings while also adhering to regulatory limits, promoting healthy retirement savings behavior. The other options provided do not accurately define the maximum contribution limits set forth for participants in this age category.