Massachusetts Life Producer Practice Exam

In a qualified retirement plan, contributions to an employee's account are based on what?

1. Employee tenure

2. Maximum limits set by the IRS

3. Employer discretion

4. Employee performance reviews

The correct answer is: Maximum limits set by the IRS

In a qualified retirement plan, contributions to an employee's account are primarily influenced by the maximum limits set by the IRS. These limits ensure that contributions remain within established guidelines to maintain the plan's qualified status, which allows for tax-deferred growth and potential tax incentives for both employers and employees. The IRS sets annual contribution limits that dictate how much employers and employees can contribute to plans such as 401(k)s, 403(b)s, and other types of retirement accounts. This regulatory framework is in place to prevent excessive tax benefits and ensure that retirement plans serve their purpose of supporting employees in saving for retirement. While factors such as employee tenure, employer discretion, and employee performance reviews might play roles in individual employer practices or specific plan designs, the overarching authority governing the contributions to qualified plans is the IRS's established limits, making them the correct basis for contributions in this context.