TAX 9873 Lecture Notes - Lecture 39: Defined Contribution Plan, Pension, Accrual

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20 Dec 2019

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A points allocation method assigns points to each participant under criteria specified in the allocation formula. The formula must define points or the allocation formula is not definite. Points may be awarded for compensation, years of service or years of participation, age, profitability or any other objective criteria. The formula may award points for one or any combination of these criteria. Once points are determined, each participant"s share of the contribution is equal to his share of the total points assigned to all participants. A defined benefit plan does not maintain account balances to reflect the accrued benefits of the plan participants. Instead, the accrued benefit is determined by a formula stated in the plan. As a pension plan, the defined benefit plan must provide for definitely determinable benefits. To meet this requirement, the plan must define the benefit formula and how benefits are accrued under that formula.

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Hi, Please help me to solve these questions with detailexplanation . Thanks

Question 4
Dustin, who is 48 years old, works for Pinnacle Inc., with a salaryof $300,000, a car allowance, and a very nice expense account.Pinnacle is a Fortune 1,000 company that sponsors a defined benefitplan that pays 2 percent times years of participation times theaverage of the three final years of compensation. In addition,Pinnacle sponsors a 401(k) / profit sharing plan and contributes18% of employees salary to the profit sharing plan. There is noadditional match. If the ADP of the NHCEs is 3%, what is themaximum that Dustin can defer this year (2018)?
A.

$5,500.
B.

$13,750.
C.

$15,000.
D.

$18,500.

Question 5
Larry, age 55, is employed by BB Trucking Company as a tire repairspecialist. He earns $62,000 per year and received an allocation of$40,000 to his employer-provided profit sharing plan for the year.If BB Trucking does not match employee deferrals, what is themaximum amount Larry can defer to his 401(k) plan for the 2018 planyear?
A.

$15,000
B.

$18,500
C.

$21,000
D.

$24,500

Question 6
Jacques, who is age 45, has just resigned from his current job. Heworked for Ace, which sponsors a cash balance plan and a standard401(k) plan. Each of the plans uses the longest permitted vestingschedule and both plans are top heavy. He has a balance of $40,000in the cash balance plan, has deferred $20,000 into the 401(k) planand has employer matching contributions of $10,000. If he has beenemployed for three years, but only participating in the plans forthe last two years, how much does he keep if he leaves today?
A.

$ 20,000.
B.

$30,000.
C.

$60,000.
D.

$64,000.

Question 7
Mikael opened a fabulous restaurant ten years ago. The food is soexceptional that the restaurant has become one of the top spots inthe city. Mikael, age 55, is the sole owner with compensation of275,000. Mikaelâs son Jamel, age 28, is the master chef withcompensation of $100,000. Jamel has been with the restaurant fulltime since he turned 18. Mikael also employs 15 other individualswhose ages range between 25 and 35 and have compensation on averageof $40,000 per year. Mikael wants to establish a profit sharingplan. Which of the following statements is true?
A.

If Mikael selected the standard allocation method and the plancontributes 10 percent per individual, the plan will contribute$55,000 to Mikaelâs account.
B.

If Mikael selected the permitted disparity method and the plancontributes 10 percent per individual, the contribution the companymakes for Mikael will be increased.
C.

Considering the needs and wants of Mikael and Jamel, anage-based profit sharing plan is the best plan for both ofthem.
D.

A new comparability plan is the least expensive, simplest way tomeet both Mikael and Jamelâs retirement needs.
Question 8

Which of the following statements regarding an age-based profitsharing plan is correct?
A.

An age-based profit sharing plan provides a greater benefit tothose plan participants whose earnings exceed the Social Securitywage base and who are over fifty years old.
B.

An age-based profit sharing plan only provides a benefit tothose plan participants whose age is within 10 years of the age ofthe owner of the plan sponsor.
C.

An age-based profit sharing plan provides greater benefits tothe older plan participants.
D.

Younger plan participants in an age-based profit sharing planusually receive the majority of the profit sharing planallocation.

Question 9 :
Acme Inc., is establishing a retirement plan and they want a planthat includes a Roth account. Which of the following statements iscorrect about Roth accounts?
A.

Matching contributions can be contributed to Roth account.

Amounts in a traditional 401(k) plan cannot be rolled over to aRoth account.
C.

Roth accounts do not require minimum distributions until afterthe death of the participant.

Roth accounts permit access for taxpayers who may otherwise notbe able to contribute to a Roth IRA.

Question 10
Which of the following qualified plans would allocate a higherpercentage of the planâs current contributions to a certain classor group of eligible employees?

A profit sharing plan that uses permitteddisparity.
An age-based profit sharing plan.
A defined benefit pension plan.
A target benefit pension plan.

1 only
B.

1 and 3
C.

2 and 4
D.

1, 2, 3, and 4

redwolf542

1. Briefly summarize the key point of the article, but DO NOT include any direct text from the article (i.e., don't quote or copy from the article), tell me in YOUR OWN words. This should be brief.

2. Explain how your article is connected to business

3. Explain what other businesses, or your employer, could learn from the key point(s) in this article.

Americans Keep Crushing It With Their 401(k)s

The stock market is fueling all-time highs in retirement account balances, with the average IRA breaking into the six figures.

Itâs happened again: Retirement savings account balances have hit all-time highs. A string of record 401(k) and IRA account totals now stretches across three consecutive quarters, according to second-quarter data from Fidelity Investments. The data covers 22,155 companies and 15.1 million 401(k) plan participants, as well as 8.8 million IRA accounts. The performance reflects the impressive display of endurance training by a stock market that just keeps on running, as well as increased employee and employer contributions to retirement accounts. The average 401(k) account balance stands at $97,700 as of June 30. Thatâs a 9.6 percent gain from the $89,100 average of a year ago, and a big leap from the $73,300 average of five years ago. Average IRA totals, meanwhile, rose to $100,200 from $89,600 a year ago and $73,100 in 2012. For the 12 months ending June 30, market gains accounted for 72 percent of the rise in retirement account balances at Fidelity. Over that same period, the Standard & Poorâs 500 had a total return of 17.9 percent. Employees put a record average of $5,850 into their 401(k)s over the past 12 months, a 4 percent increase from a year ago. Ninety-five percent of active employees contribute to their 401(k)s, and many defer enough of their pre-tax salary to get the average company match, which is 4.5 percent. But about 21 percent of employees canât, or arenât, contributing enough to get the full match. Many are likely to have been auto-enrolled into their 401(k) at a salary deferral rate of 3 percent, and left it there. The bit of good news is that many savers donât have that far to go before getting the full matchâ53 percent are 1 or 2 percentage points away. Competing financial priorities may mean saving another 1 or 2 percent of salary isnât feasible until a raise or bonus comes into play. But if extra cash flow exists, a relatively small increase in savings rates can make a big difference over a long career. One way companies are trying to get employees to save more is by rejiggering the company match, said Jeanne Thompson, a senior vice president at Fidelity. For example, instead of giving a 100 percent match on the first three percent of salary put into the plan, a company may match 50 percent of contributions up to 6 percent, so employees need to contribute 6 percent to get the full match. In addition to tracking accounts quarterly, Fidelity looks at workers with long histories in 401(k) accounts. Workers with 10 straight years in the same 401(k) also enjoyed a record quarter, with the average balance rising to $266,100. Ten years ago, the average was about a third of that amount, $78,800. Market action is responsible for 53 percent of the tripling in these 10-year plan participant balances since 2007, and the rest came from employee and employer contributions. The long run-up in stocks has Fidelity urging retirement savers to make sure they donât have too much of their nest egg in equities. Thatâs not an issue for all generations of saversâtwo-thirds of millennials in Fidelityâs database are 100 percent invested in target-date funds (TDFs). (The funds automatically adjust asset allocations over time, based on your years to retirement; Fidelity assumes youâll retire at age 67.) Millennial accounts hold 87.4 percent in stocks on average. Thatâs where they should be, according to the equity allocation in a Fidelity TDF for someone who wants to retire in about 30 years. The generation with the largest chunk of savers holding equity stakes at least 10 percentage points above Fidelityâs recommended allocation for their age is baby boomers, coming in at 26 percent. The average equity stake for boomers is 68.8 percent. For someone who wants to retire in 10 yearsâsay a 55-year-old planning to retire in 2027âthe recommendation is 64 percent in stocks. So the average equity stake isnât far off, but there are some extremely equity-heavy portfolios out there. Boomers may also be very tech-heavy in their retirement portfolios, since they are less likely to be in widely diversified target-date funds than younger workers. Some of the most widely held mutual funds in 401(k) plans, including the $116.1 billion Fidelity Contrafund and the $39.3 billion Fidelity Growth Company, have large tech stakes and big chunks of assets concentrated in their top five holdings. Contrafundâs tech stake was just over 37 percent as of June 30, and the Growth Company held almost 40 percent in tech. The top five holdings in Contrafund make up 23.5 percent of the fund; it was 24 percent for Growth Company. Itâs been a great strategy so far. The dilemma now, at least for boomers nearing retirement, is when and if to take some money off the equity table. âAn element of caution needs to be built into a portfolio,â said Brian Singer, head of dynamic asset allocation strategies at William Blair and Co., âbut the market is making it so expensive to put that caution into place.â

TAX 9873 Lecture Notes - Lecture 39: Defined Contribution Plan, Pension, Accrual

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