Certified Plan Sponsor Professional (CPSP) Practice Exam

Which issue is associated with providing top-heavy minimum contributions in 401(k) plans?

1. Inconsistent participant contributions

2. Failure to comply with minimum distribution rules

3. The need for regular audits

4. Inadequate employer matching

The correct answer is: Failure to comply with minimum distribution rules

The issue associated with providing top-heavy minimum contributions in 401(k) plans primarily revolves around the failure to comply with minimum distribution rules. When a 401(k) plan is classified as top-heavy, it has certain requirements that need to be met to ensure equitable contributions for participants, especially for key employees. The rules stipulate that if a plan is determined to be top-heavy, the employer is required to make minimum contributions to the accounts of non-key employees to ensure that their retirement benefits are not disproportionately skewed. Minimum distribution requirements must be adhered to, as failing to make the mandated contributions can lead to compliance issues with the IRS regulations. This can result in penalties for the plan sponsor and potentially harm the participants who depend on these contributions for their retirement savings. The other issues mentioned, such as inconsistent participant contributions or inadequate employer matching, may affect the plan’s overall health and effectiveness but do not speak to the specific compliance obligations associated with top-heavy plans as closely as the failure to comply with minimum distribution rules does. Regular audits, while important for plan management, are not specifically tied to top-heavy status issues, making compliance with distribution mandates the more pertinent concern.