Certified Plan Sponsor Professional (CPSP) Practice Exam

Which type of post-separation compensation cannot be contributed as an elective deferral to a 401(k) plan?

1. Bonus payments

2. Salary continuation

3. Severance pay

4. Stock options

The correct answer is: Severance pay

Severance pay is considered a form of post-separation compensation that is typically issued as a lump sum upon termination of employment, rather than as ongoing salary or payment. Elective deferrals to a 401(k) plan must come from regular wages or similar income types that are part of the employee's earnings while actively employed, and severance pay does not fit this criterion. Bonus payments, salary continuation, and stock options can be structured in ways that allow them to qualify as elective deferrals; for instance, bonuses may be provided as part of regular payroll and could be contributed to the 401(k) if the plan permits. Salary continuation generally pertains to payments made for a set period after employment, suggesting continuity in compensation that may allow for deferral. Stock options can be exercised and turned into deferred amounts as well, depending on the specific plan provisions regarding these financial instruments. Therefore, severance pay stands out as the type of compensation that cannot be contributed to a 401(k) in the form of an elective deferral.