Chapter 8 - Question 6 :
Please, help me to explain this question. Thank you
ABC Corporation, is considering implementing some form of
retirement plan. The client’s objectives for the plan, in order of
importance, are:
1. Rewarding long-term employees
2. Retention of employees
3. Providing a level of income at retirement equal to 50% of an
employee’s earnings
4. Tax-deductible funding
5. No risk to employees of benefits available
The company indicates it is willing to contribute an amount equal
to 30% of payroll to such a plan. The company has been in business
for 22 years and during the past decade has consistently been
profitable. Based upon the stated objectives, the most suitable
retirement plan for ABC Corporation would be a:
A. Money-purchase pension plan
B. Non-qualified deferred-compensation plan for
long-term employees
C. Combination defined-benefit/401(k) plan
D. Defined-benefit plan
E. Profit-sharing plan
Considering the nature of ABC Corporation, I would recommend money purchase pension plan for the employees of the company because:
A money purchase pension plan is something similar to profit sharing plan which requires the employer to contribute a fixed amount every year. This doesn’t look difficult for the company because it has been in existence for the past twenty years with consistent profits. Hence the employer can contribute without any difficulty.
The plan requires only 25% contribution from the employer & the company is ready to contribute up to 30%. As mentioned in the question, the employer’s contributions are tax deferred as long as they are within their annual limits.
It is common for employers to set up vesting schedules that dictate when an employee can claim the funds from his or her plan. When employees are fully vested, they are able to begin taking withdrawals upon reaching age 59½ without incurring a tax penalty. Employees may also borrow from their plans before they reach age 59½ if a circumstance occurs that can be identified as a “qualifying event,” as defined in the plan document.
Withdrawals are taxed as ordinary income and must begin after the account holder reaches the age of 70½; withdrawals can be taken as a lump sum or in minimum annual installments based on life expectancy.
If you are a business owner and desire to attract employees from larger corporations that offer a wide range of retirement plans, then a money purchase pension plan may be an option for you. It allows you to contribute high amounts on your employees’ behalf while providing you with the added benefit of tax deductions.
Chapter 8 - Question 6 : Please, help me to explain this question. Thank you ABC...
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