Certified Plan Sponsor Professional (CPSP) Practice Exam

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Why are rollover contributions accountable separately in a retirement plan?

To avoid taxation issues
To comply with different distribution restrictions
To provide clearer statements to participants
None of the above

The correct answer is: To comply with different distribution restrictions

Rollover contributions are accounted for separately in a retirement plan to comply with different distribution restrictions that apply specifically to these types of contributions. When an individual rolls over assets from another retirement plan, such as a 401(k) or an IRA, those assets are subject to different rules compared to contributions made directly to the plan. For instance, rollover contributions may have different withdrawal options and may not be subject to certain penalties that apply to regular contributions. By keeping these contributions separate, plan administrators can ensure that they are adhering to regulatory requirements and providing the necessary protections and options that comply with federal laws, such as the Internal Revenue Code and ERISA regulations. This segmentation also allows for better tracking of funds and can enhance participants' understanding of their account balances and the conditions governing those funds. While taxation issues and clearer statements to participants are important considerations in plan administration, they are not the primary reason for the separate accounting of rollover contributions. The primary focus is on compliance with the distinct distribution restrictions that apply to rollover amounts.