Certified Plan Sponsor Professional (CPSP) Practice Exam

Which statement best describes the Internal Revenue Code's structure of a 401(k) plan?

1. 401(k) plans are 403(b) plans

2. 401(k) plans are 401(a) defined contribution profit sharing with a Cash or Deferred Arrangement (CODA)

3. 401(k) plans provide guaranteed retirement income

4. 401(k) plans only include employer contributions

The correct answer is: 401(k) plans are 401(a) defined contribution profit sharing with a Cash or Deferred Arrangement (CODA)

The statement that describes the Internal Revenue Code's structure of a 401(k) plan accurately identifies the plan's classification under the tax code. Specifically, a 401(k) plan is categorized as a 401(a) defined contribution plan that incorporates a Cash or Deferred Arrangement (CODA). This means that participants can choose to have a portion of their income contributed to their retirement plan on a pre-tax basis, or they can opt for after-tax contributions. This flexibility is a fundamental feature of 401(k) plans, allowing employees to tailor their savings to fit their financial situation and retirement goals. By framing 401(k) plans within the context of the Internal Revenue Code, this statement emphasizes the regulatory foundation and provides insight into how these plans are designed to promote savings for retirement while also offering potential tax advantages for both employees and employers. In contrast, the other statements presented do not accurately depict the structure of a 401(k) plan according to the tax code. For example, 401(k) plans are distinct from 403(b) plans, which are designed for certain tax-exempt organizations. Additionally, 401(k) plans do not provide guaranteed retirement income; instead, they are reliant on the market performance of the chosen investments. Lastly