Description
1st set of Questions:
Complete the following questions " Questions are attached"
- Page 198 – Questions 1-8
- Page 505 – Questions 25-30
2nd set of Questions:
Answer each of the following questions and provide your rational for your choice for each one. You will not receive full credit unless you provide your explanation.
- Jacob is a participant in JJ’s defined benefit plan. Jacob is 37 years old and earns $160,000. He has 4 years of service for purposes of the plan and has worked at the firm for 5 years. The plan provides a benefit of 1.5% for each year of participation. The plan has the least generous vesting schedule possible. Almost 70 percent of the accrued benefits are attributable to the fifteen equal owners, who have all been working at the company for decades. If Jacob were to leave today, what percent of his salary (as defined by the plan) could he expect to receive at normal retirement?
- 3.6%
- 4.8%
- 6.0%
- 6.4%
- Parker is a highly skilled sales person at Byberry, which is a 30-year-old company that has grown significantly in terms of revenue and product offerings. It sponsors a pension plan that provides a benefit of 2% times the years of participation times the average of the final three years of salary. Parker has worked for Byberry for the last 30 years and earned $200,000 two years ago, $150,000 last year, and $250,000 this year. If he is retiring this year, how much should he expect to receive as a pension benefit?
- $200,000
- $185,000
- $160,000
- $120,000
- Drake has worked for GT for the last 20 years and been a participant in its defined benefit plan. It the last ten years, his salary has increased significantly. Over the last ten years, his compensation was $300,000, $145,000, $200,000, $400,000, $224,000, $240,000, $233,000, $210,000, $150,000, and $290,000, respectively. In 2019, what is the most that he could receive as a pension payment?
- Jake has worked for GT for the last 20 years and been a participant in its defined benefit plan. In the last ten years, his salary has increased significantly. Over the last ten years, his compensation was $290,000, $100,000, $120,000, $100,000, $240,000, $200,000, $160,000, $180,000, $150,000, and $210,000. In 2019, what is the most that he could receive as a pension payment?
- $200,000
- $225,000
- $246,667
- $280,000
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Explanation & Answer
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1. Explain the mandatory funding requirement and its impact on defined contribution plans and
defined benefit plans.
In the case of defined benefit plan, the mandatory funding requirement set out an amount
that an employer had to contribute to the pension plan for each year. With mandatory funding
requirements, quantitative standards are implemented in order to ensure that an employer only
deducts the amount necessary to fund the future benefits. The future benefits promised by the
defined benefit formula limits an employer’s ability to overfund the benefits plan; therefore,
avoiding it as a means to shelter their current taxable income. Although the calculation of
mandatory funding requirements differs between defined contribution plans and defined benefit
plans, the employer is still both required to fund these plans with the determined amount.
2. Define “in-service withdrawal.”
In-service withdrawal refers to any occurring withdrawal while the employee is a
participant in a qualified, employer-sponsored retirement plan.
3. Explain the investment limitations for pension plans.
Although pension plans can be used as tax reduction, there is a maximum allowable
deduction. Pension plans are only best suited for early investors, an investor must start contributing
as early as possible in order to reap the full benefits.
4. Compare the investment risk of defined contribution plans to the investment risk of defined
benefit plans.
In a defined contribution plan, the employee carries the risks because the employer only
promises contribution while the retired employees only received the pension benefits depending
on...
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