Question

To prevent a qualified plan from being used primarily as a tax shelter for highly compensated employees and executives, the tax code imposes a limitation on which of the following?

a) Maximum contribution limits

b) Minimum distribution requirements

c) Tax-free withdrawals

d) Tax credits for contributions

Answer 1

The tax code imposes maximum contribution limits to prevent qualified plans, like 401(k)s and 403(b)s, from being primarily used as tax shelters by highly compensated employees.

Step-by-step explanation:

To prevent a qualified plan like a 401(k) or 403(b) from being used primarily as a tax shelter for highly compensated employees and executives, maximum contribution limits are imposed by the tax code.

These limits are in place to ensure that retirement plans are used for their intended purpose of providing retirement security for all employees and not just as a tax advantage for higher earners.

These defined contribution plans allow both employers and employees to contribute a fixed amount into the retirement account regularly, and the employee has the flexibility of taking their plan with them if they change jobs.