Certified Plan Sponsor Professional (CPSP) Practice Exam

Which definition of compensation is considered nondiscriminatory for employer non-elective contribution allocation?

1. Net wages after deductions

2. Gross wages for federal income taxes

3. Hourly wage multiplied by hours worked

4. Commission-based pay

The correct answer is: Gross wages for federal income taxes

The definition of compensation that is considered nondiscriminatory for employer non-elective contribution allocation is gross wages for federal income taxes. This measure includes all types of compensation a participant receives before any deductions, providing a comprehensive basis for determining contributions. Using gross wages ensures that all employees, regardless of their pay structure, are treated equitably when it comes to the allocation of non-elective contributions. This is essential in maintaining compliance with regulations intended to prevent discrimination in retirement plan contributions, which could favor higher-paid employees over lower-paid employees. When discussing other options, net wages after deductions may not be nondiscriminatory because it varies based on individual circumstances, including personal deductions and tax situations, leading to potential inequities. Hourly wages multiplied by hours worked could disregard important elements of total compensation, such as commissions or bonuses, thus failing to reflect a comprehensive compensation approach. Commission-based pay alone can skew contributions because it may not be consistent across all employees, leading to disparities in how contributions are calculated. Overall, gross wages for federal income taxes create a standardized approach that aligns with nondiscriminatory practices, ensuring fair treatment of all employees in employer non-elective contribution allocations.