Certified Plan Sponsor Professional (CPSP) Practice Exam

Which benefits are reduced when calculating the IRC Sec. 414(s) alternative definition of compensation?

1. Health care costs

2. Welfare benefits and moving expenses

3. Employer matches

4. Bonuses only

The correct answer is: Welfare benefits and moving expenses

The correct choice pertains to welfare benefits and moving expenses, as these are explicitly excluded from the definition of compensation for the purpose of calculating benefits under IRC Sec. 414(s). This section provides an alternative definition of compensation that is often used in retirement plan calculations. By specifically excluding welfare benefits and moving expenses, the alternative definition focuses on more traditional forms of compensation, such as salary or hourly wages. Understanding this distinction is crucial for plan sponsors and administrators as it affects how contributions and benefits may be calculated in retirement plans. By recognizing which benefits are reduced, plan sponsors can ensure compliance with the Internal Revenue Code while also maintaining a clear framework for their compensation structures. This reduced scope helps delineate between employee compensation that is more regular and predictable versus variable or ancillary forms of compensation.