West Virginia State Life Insurance Practice Exam

In a qualified retirement plan, the yearly contributions to an employee's account are:

1. Unlimited

2. Only based on employer's discretion

3. Restricted to maximum levels set by the IRS

4. Automatically adjusted annually

The correct answer is: Restricted to maximum levels set by the IRS

In a qualified retirement plan, the yearly contributions to an employee's account are restricted to maximum levels set by the IRS. This is to ensure that the contributions remain within limits that are deemed reasonable and to prevent overly generous benefits from being provided on a tax-deferred basis. By regulating contribution limits, the IRS encourages equitable savings and helps maintain fairness among participants while also controlling the tax benefits that can result from these plans. Contribution limits can vary depending on the type of retirement plan in question, such as 401(k) plans, IRAs, and others, and these limits are often reviewed and adjusted by the IRS on an annual basis to account for inflation and other economic factors. However, the fundamental principle is that contributions are indeed capped, promoting sustainability in the retirement system and tax code compliance.