Certified Plan Sponsor Professional (CPSP) Practice Exam

Which statement regarding matching contributions is correct?

1. They can only be fixed according to federal guidelines

2. They may vary based on employee longevity

3. They can be fixed or discretionary as per plan documents

4. They are mandatory for all plans

The correct answer is: They can be fixed or discretionary as per plan documents

Matching contributions can indeed be structured in various ways, as long as they align with the plan documents established by the plan sponsor. This flexibility allows for two primary types of matching contributions: fixed and discretionary. A fixed matching contribution means that the employer commits to contributing a predetermined percentage of the employee's contributions, while discretionary matching allows the employer to adjust the matching amount based on various factors, including financial performance or company policy. This adaptability is essential since it permits employers to create a matching contribution structure that aligns with their overall compensation strategy and the financial health of the organization. In contrast, the other options present limitations or inaccuracies. Federal guidelines do not dictate that matching contributions must only be fixed; thus, the assertion that they can only be fixed does not hold true. Employee longevity can indeed influence match amounts in certain cases, but it is not a requirement across all plans, making the statement about varying contributions based on longevity not universally applicable. Lastly, while matching contributions are common, they are not mandatory for all retirement plans, as plan sponsors have discretion over whether to include them in their plan offerings. This highlights the importance of the plan documents in defining how contributions are structured.