Certified Plan Sponsor Professional (CPSP) Practice Exam

Which statement is true regarding employee after-tax contributions?

1. They are automatically exempt from all tests

2. They are tested for non-discrimination using the ACP test

3. They do not require documentation

4. They are subject to a different contribution limit

The correct answer is: They are tested for non-discrimination using the ACP test

Employee after-tax contributions are indeed tested for non-discrimination using the ACP (Actual Contribution Percentage) test. The purpose of this test is to ensure that the contributions made by highly compensated employees do not disproportionately benefit them compared to non-highly compensated employees. By requiring compliance with the ACP test, the IRS aims to maintain fairness within retirement plans, allowing plans to remain qualified and retain their tax advantages. In contrast, the other options present misconceptions about after-tax contributions. For instance, these contributions are not automatically exempt from tests, as all contributions must comply with certain regulatory requirements to ensure equitable treatment of all employees. Additionally, although it is important to maintain thorough documentation for contributions to comply with regulations, there is no blanket exemption for documentation in this context. Finally, while there are distinct contribution limits depending on the type of contributions, after-tax contributions do not have a separate limit when compared to pre-tax contributions; they are generally subject to overall plan limits in conjunction with other types of contributions.