Certified Plan Sponsor Professional (CPSP) Practice Exam

When may a nonqualified 401(k) mirror plan be appropriate?

1. When all employees are highly compensated.

2. When the employer wants flexibility in contributions.

3. When a plan sponsor struggles with nondiscrimination tests.

4. When there is a high turnover of employees.

The correct answer is: When a plan sponsor struggles with nondiscrimination tests.

A nonqualified 401(k) mirror plan may be appropriate when a plan sponsor struggles with nondiscrimination tests. Nondiscrimination tests are designed to ensure that retirement plans do not disproportionately benefit highly compensated employees over rank-and-file employees. If a sponsor finds that their qualified plan fails these tests, implementing a nonqualified 401(k) mirror plan can offer a solution. This type of plan allows the employer to provide benefits to highly compensated individuals without the constraints of compliance that are required for qualified plans. Therefore, employers can offer benefits to executives or key employees while still adhering to regulations surrounding the base qualified plan. This maintains a balance in the overall employee compensation and benefits structure, allowing sponsors to meet the needs of their organization while still working to pass nondiscrimination tests in their qualified plans. The other scenarios, while they might be relevant in different contexts, do not specifically necessitate the use of a nonqualified 401(k) mirror plan as a solution to a direct challenge posed by nondiscrimination testing. For example, having a workforce made up entirely of highly compensated employees may reduce the need for complex testing, while high employee turnover and a desire for contribution flexibility do not inherently connect with the need for a nonqualified plan to remediate