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 primary purpose of including a hardship withdrawal provision in a 401(k) plan?

To incentivize retirement savings
To provide liquidity in case of financial emergencies
To attract high-income employees
To equalize contributions among all participants

The correct answer is: To provide liquidity in case of financial emergencies

The primary purpose of including a hardship withdrawal provision in a 401(k) plan is to provide liquidity in case of financial emergencies. This provision allows plan participants to access funds in their retirement accounts before they reach retirement age if they encounter certain financial hardships, such as medical expenses, home purchase, or other urgent financial needs. This feature ensures that employees have a safety net during times of financial crisis, allowing them to tap into their savings without incurring early withdrawal penalties that typically apply to distributions made before retirement. It recognizes that while saving for retirement is important, individuals may need to access their savings during unexpected situations that require immediate financial relief. The other options, such as incentivizing retirement savings, attracting high-income employees, or equalizing contributions among all participants, do not capture the primary intention of hardship withdrawals. Hardship provisions specifically focus on providing immediate access to funds for emergencies rather than influencing long-term savings behavior or addressing employee demographics or contribution levels.