Massachusetts Life Producer Practice Exam

In a qualified retirement plan, what type of discrimination is not permitted?

1. Discrimination against part-time employees

2. Discrimination in favor of highly compensated employees

3. Discrimination based on age

4. Discrimination based on tenure

The correct answer is: Discrimination in favor of highly compensated employees

In a qualified retirement plan, the type of discrimination that is not permitted is favoritism shown towards highly compensated employees. This is in place to ensure that retirement plans provide equitable benefits across all employee levels. Qualified retirement plans, such as 401(k) plans, must pass certain tests to ensure they do not disproportionately benefit higher-paid employees to the detriment of lower-paid employees. The underlying principle is to promote fairness and equal opportunity for all employees to participate in and benefit from retirement savings. This is crucial because retirement plans are designed to help secure financial stability for all employees during retirement, not just those with higher salaries. Therefore, any plan that discriminates in favor of highly compensated employees can jeopardize its qualified status and may result in penalties and loss of tax advantages for both the plan and the employer. In contrast, other forms of discrimination such as against part-time employees, based on age, or based on tenure, although discouraged in practice, do not necessarily violate the non-discrimination requirements specifically mandated for qualified retirement plans in the same way favoritism towards highly compensated employees does. This distinction highlights the emphasis placed on ensuring that all employees, regardless of their compensation level, receive fair access to retirement benefits.