Certified Plan Sponsor Professional (CPSP) Practice Exam

What tax benefit does the IRS provide to employers sponsoring a qualified retirement plan?

1. Employer contributions are tax-deductible

2. Employer contributions are exempt from FICA

3. Employees do not pay taxes on contributions

4. Employers can defer taxes on contributions

The correct answer is: Employer contributions are exempt from FICA

The correct answer highlights that employer contributions made to a qualified retirement plan, although subject to certain conditions, are indeed considered tax-deductible. This means that the contributions reduce the employer's taxable income, leading to a potential decrease in overall tax liability. Employers benefit by being able to invest in their employees' future without incurring taxes right away on the contributions made. This incentivizes businesses to sponsor retirement plans, ultimately promoting retirement savings among employees. Regarding employee contributions, these are typically made on a pre-tax basis, allowing employees to defer taxation until they withdraw those funds in retirement. However, the contributions made by employers are generally tax-deductible in the year they are made, promoting an effective way to save for both employers and employees while minimizing immediate tax obligations. In summary, the significant benefit for employers sponsoring a qualified plan is the tax deduction for contributions, which can foster a more robust retirement savings culture within the organization.