Certified Financial Consultant (CFC) Practice Exam

For employers, what is a tax benefit of contributing to a qualified plan?

1. Higher employee retention rates

2. Increased employee productivity

3. Reduced tax liability

4. Favorable market reputation

The correct answer is: Reduced tax liability

Contributing to a qualified plan allows employers to enjoy a reduced tax liability. Contributions made by employers to these plans are generally tax-deductible as a business expense, which lowers the overall taxable income of the company. This means that the more an employer contributes to employees' retirement plans, the less they owe in taxes, ultimately enhancing cash flow and allowing for more strategic financial planning. While higher employee retention rates, increased employee productivity, and a favorable market reputation can all be positive outcomes of offering a robust retirement plan, they do not directly translate into immediate financial benefits in the same way that reduced tax liability does. These factors may contribute to long-term organizational success, but it’s the tax deduction associated with qualified plan contributions that provides a direct and tangible financial advantage to employers.