Certified Plan Sponsor Professional (CPSP) Practice Exam

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What type of plan allows for greater flexibility in compensation for key employees?

401(k) plans
Nonqualified Deferred Compensation Plans (NQDCs)
Defined contribution plans
Safe harbor plans

The correct answer is: Nonqualified Deferred Compensation Plans (NQDCs)

Nonqualified Deferred Compensation Plans (NQDCs) provide a unique opportunity for employers to offer greater flexibility in designing compensation packages for key employees. These plans allow employers to defer compensation beyond the limits imposed by qualified retirement plans, such as 401(k) plans, enabling more customized retirement savings options for highly compensated individuals. NQDCs do not have to adhere to the same regulatory requirements as qualified plans, which allows for various types of arrangements that can better meet the specific financial and retirement needs of leadership and key staff. Employers can set the terms of the deferred compensation, including when and how it will be distributed, taking into account their financial strategies and the preferences of the participants. This flexibility is especially advantageous for companies looking to attract, retain, and incentivize key talent without the constraints of more regulated plans that apply to all employees.