Certified Plan Sponsor Professional (CPSP) Practice Exam

Why is it essential to distinguish between plan and settlor functions?

1. To reduce time spent on administration

2. To determine tax responsibilities

3. To know which expenses can be paid from plan assets

4. To avoid legal liabilities

The correct answer is: To know which expenses can be paid from plan assets

The distinction between plan and settlor functions is crucial because it directly impacts which expenses can be legitimately charged to plan assets. Plan functions pertain to activities associated with the administration of the plan, including the management of plan assets and the execution of fiduciary duties. In contrast, settlor functions relate to the establishment and design of the plan itself, which involve making decisions about the type and structure of the benefits offered without necessarily being subject to the same fiduciary standards. When these functions are recognized and delineated correctly, plan sponsors can ensure that only those costs directly tied to plan administration and management are funded through plan assets. This aspect is vital for both compliance and financial integrity, ensuring that the plan operates within the legal framework and protects the interests of plan participants. For instance, if expenses associated with the creation or modification of the plan are incorrectly charged to plan assets, it could lead to legal consequences, as such expenses may not be deemed appropriate for plan funding. Therefore, clarity in how expenses are categorized based on their associated functions allows for better compliance with legal and regulatory requirements.