Tennessee Insurance Practice Exam

What is a requirement for a 401(k) plan with respect to employees' salaries?

1. Only full-time employees qualify

2. Employees must earn at least $10,000

3. Employees must be over the age of 21

4. All employees earning at least $5,000 are eligible

The correct answer is: All employees earning at least $5,000 are eligible

A 401(k) plan must comply with specific regulations set forth by the Internal Revenue Service (IRS), one of which involves eligibility criteria related to employee compensation. The correct answer indicates that all employees who earn at least $5,000 in compensation during a calendar year are eligible to participate in the plan. This minimum salary requirement ensures that a broad base of employees can benefit from the tax advantages and retirement savings opportunities provided by a 401(k). This requirement serves several purposes: it helps maintain simplicity in plan administration, encourages employee participation in saving for retirement, and aligns the plan with the IRS guidelines regarding which employees can join a 401(k). This inclusivity is crucial for fostering a culture of saving among lower- and mid-wage earners. Other choices present different scenarios. Limiting eligibility to only full-time employees or imposing higher minimum salary thresholds could inadvertently exclude many part-time employees or those earning slightly less than the stated amounts, which is not aligned with the goals of encouraging widespread participation in retirement savings plans. Similarly, while age restrictions can be part of plan design, the minimum salary requirement is a more fundamental and widely recognized standard for eligibility in a 401(k) plan.