Certified Plan Sponsor Professional (CPSP) Practice Exam

Which of the following plans would require automatic contribution features?

1. 401(k) plans with voluntary contributions only

2. Simple IRAs

3. 401(k) plans with Eligible Automatic Contribution Arrangements

4. Defined benefit plans

The correct answer is: 401(k) plans with Eligible Automatic Contribution Arrangements

The requirement for automatic contribution features specifically pertains to 401(k) plans that have Qualified Automatic Contribution Arrangements (QACAs), which allows for automatic enrollment of employees into the plan unless they choose to opt out. This feature is designed to increase employee participation in retirement plans, addressing the tendency for workers to not enroll voluntarily. Eligible Automatic Contribution Arrangements play a significant role in promoting retirement savings and ensuring that employees contribute a portion of their salary toward their retirement without needing to take the initiative to enroll themselves. Such arrangements also typically include safe harbor provisions, which shield the employer from certain non-discrimination tests in the IRS regulations, thereby making them particularly attractive to plan sponsors. In contrast, plans such as those with voluntary contributions only or Simple IRAs do not inherently require automatic contribution features. Defined benefit plans, while crucial for retirement income, operate differently and are generally based on pre-established formulas regarding benefits rather than requiring employee contribution mechanisms like those found in 401(k) plans.