Certified Plan Sponsor Professional (CPSP) Practice Exam

Which statement is true regarding employer contributions to defined contribution plans?

1. They are always voluntary.

2. They are subject to vesting requirements.

3. They do not affect employee tax liabilities.

4. They are mandated by federal laws.

The correct answer is: They are subject to vesting requirements.

Employer contributions to defined contribution plans being subject to vesting requirements is indeed a true statement. Vesting refers to the process by which an employee earns the right to their employer's contributions to a retirement plan over time. This means that although an employer may choose to make contributions to employees’ retirement accounts, those contributions are not immediately owned by the employees. Instead, the employees must work for the company for a certain period, defined in the plan's vesting schedule, to retain the employer's contributions. This principle is important as it encourages employee retention and aligns their interests with the employer’s, fostering a more committed workforce. Additionally, the specific vesting schedule can differ from one plan to another, allowing employers some flexibility in determining how and when employees gain full access to these contributions. In contrast, employer contributions are not always voluntary as some plans may have mandatory contributions based on specific criteria. They can indeed affect employee tax liabilities since contributions can lower the taxable income for employees. Lastly, employer contributions are not mandated by federal laws, as employers are not required to contribute to defined contribution plans, although if they do, compliance with various regulations, including vesting requirements, must be followed.