Question

In 2019, Maggy (34 years old) is an employee of YBU Corp. YBU provides a 401(k) plan for all its employees. According to the terms of the plan, YBU contributes 50 cents for every dollar the employee contributes. The maximum employer contribution under the plan is 15 percent of the employee’s salary (if allowed, YBU contributes until the employee has contributed 30 percent of her salary). (Use Exhibit 13-2)

a. Maggy worked for YBU Corporation for 3½ years before deciding to leave effective July 1, 2019. Maggy’s annual salary during this time was $45,000, $52,000, $55,000, and $60,000 (she only received half of her $60,000 2019 salary). Assuming Maggy contributed 8 percent of her salary (including her 2019 salary) to her 401(k) account, what is Maggy’s vested account balance when she leaves YBU (exclusive of account earnings)? Assume YBU uses three-year cliff vesting.

b. Using the same facts in part (a), assume YBU uses six-year graded vesting. What is Maggy’s vested account balance when she leaves YBU (exclusive of account earnings)?

c. Maggy wants to maximize YBU’s contribution to her 401(k) account in 2019. How much should Maggy contribute to her 401(k) account assuming her annual salary is $100,000 (and assuming she works for YBU for the entire year)?

d. Using the same facts in part (c), assume Maggy is 55 years old rather than 34 years old at the end of the year. How much should Maggy contribute to her 401(k) account?

Answer 1

a. Three year vesting

Year	Annual Salary	Maggy's Contribution	Employer Contribution
		@8%	50% of Maggy's Contribution
2016	$45,000	3,600	1,800
2017	$52,000	4,160	2,080
2018	$55,000	4,400	2,200
2019	$30,000	2,400	1,200
	Total	$14,560	$7,280

Maggy’s vested account balance when she leaves YBU = $14,560+$7,280 = $21,840

As per three-year cliff vesting, employee is entitled to receive 100% of employer's contribution if he or she worked for 3 years of service.

b. Six-year graded vesting

Year	Annual Salary	Maggy's Contribution	Employer Contribution
		@8%	40% of (50% of Maggy's Contribution)
2016	$45,000	3,600	720
2017	$52,000	4,160	832
2018	$55,000	4,400	880
2019	$30,000	2,400	480
	Total	$14,560	$2,912

Maggy’s vested account balance when she leaves YBU = $14,560+$2,912 = $17,472

As per six year graded vesting, employee is entitled to receive 40% of employer's contribution if he or she worked for 3 years of service.

c. "The maximum employer contribution under the plan is 15 percent of the employee’s salary. According to the terms of the plan, YBU contributes 50 cents for every dollar the employee contributes." So, to maximize YBU’s contribution to her 401(k) account in 2019, Maggy should contribute 30% of her salary. For 2019, the maximum contribution allowed under 401(k) is $19,000 in the year 2019 for employee aged under 50 and $25,000 for employee aged 50 or more.

Maggy's annual salary in 2019 = $100,000

Maggy's contribution in 2019 = $19,000

Employer's(YBU) maximum contribution in 2019 = 50% of $19,000 = $9,500.

d. For 2019, the maximum contribution allowed under 401(k) is $25,000 in 2019 for employee aged 50 or more. Assuming Maggy is 55 years old here.

Maggy's annual salary in 2019 = $100,000

Maggy's contribution in 2019 = $25,000

Employer's(YBU) maximum contribution in 2019 = 50% of $25,000 = $12,500.

Answer 2

Maggy's contribution for problem c is $19,500 For 2020, the maximum contribution allowed under 401(k) is $19,500