Advanced Diploma of Financial Planning (ADFP) Practice Test

Is a Section 401(k) plan governed by the same rules as qualified retirement plans?

1. Yes, they are governed by the same rules

2. No, they are governed by different rules

3. It depends on the specific plan

4. Only if the employer offers additional benefits

The correct answer is: No, they are governed by different rules

A Section 401(k) plan is indeed a type of qualified retirement plan, and so it operates under many of the same regulations established by the Internal Revenue Service (IRS). However, it also has its own specific rules and provisions that can set it apart from other types of qualified plans. These specific rules may involve contribution limits, participation requirements, special tax treatment, and withdrawal restrictions that vary from those governing other plans such as pension plans or profit-sharing plans. Additionally, 401(k) plans have unique features such as employee salary deferrals and employer matching contributions, which can influence how they are managed and the benefits they provide. The correct understanding reflects the distinction between general regulations for qualified retirement plans and the tailored rules that apply uniquely to Section 401(k) plans. This creates a framework where while they share some overarching principles, 401(k) plans also have distinctive elements that necessitate separate consideration under the law.