Certified Plan Sponsor Professional (CPSP) Practice Exam

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What must safe harbor 401(k) contributions be based on according to IRC 414(s)?

A set percentage of income.
A definition of compensation that satisfies IRC 414(s).
The total number of hours worked annually.
The employee's average salary over the last three years.

The correct answer is: A definition of compensation that satisfies IRC 414(s).

Safe harbor 401(k) contributions must adhere to specific definitions of compensation as stipulated by Internal Revenue Code (IRC) Section 414(s). This section defines what constitutes "compensation" for contribution purposes, ensuring that the calculations for safe harbor contributions are based on a consistent and lawful definition. Following IRC 414(s) helps maintain compliance with the regulations governing retirement plans, ensuring that contributions are equitable and appropriately calculated. The requirement for compensation to meet these standards allows employers to properly articulate how contributions are determined relative to an employee's earnings while fulfilling the legal obligations associated with compliance testing. By adhering to this definition, employers can offer safe harbor contributions that satisfy both employee eligibility and retention requirements.