Please answer questions 1-5 1) Pickens\' Cookie Shop sponsors a qualified profit
ID: 2816075 • Letter: P
Question
Please answer questions 1-5
1) Pickens' Cookie Shop sponsors a qualified profit sharing plan. Of their 205 employees, 200 are nonexcludable. Of the 200 nonexcludable employees, 160 are NHC and 40 are HC. The plan covers 110 of the NHC and 15 of the HC. The plan does not meet the coverage requirements because only 69% of the NHC are covered by the plan.
Question 1 options:
2) Since turnover is usually highest for employees in their first few years of employment and for younger employees, it makes sense from an administrative standpoint for a plan sponsor to delay these employees’ participation in a qualified plan.
Question 2 options:
3) Which of the following statements are reasons to delay eligibility of employees to participate in a retirement plan?
1. Employees don’t start earning benefits until they become plan participants (except in defined benefit plans, which may count prior service).
2. ERISA laws do not take place until the employee enrolls in the retirement plan. Delaying entrance into the plan allows company's to lower adminstrative costs related to ERISA compliance.
Question 3 options:
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
4) Gruden Coaching School sponsors a 401(k) profit sharing plan. In the current year, the company places 25% of each employees’ earned income into the profit sharing plan. The ADP of the 401(k) plan for the NHC was 3.5%. If Sam, age 57, earns $100,000 and is a 6% owner, what is the maximum amount that he may defer into the 401(k) plan for 2018?
Question 4 options:
a) $5,500.
b) $6,000
c) $11,500.
d) $24,500
5)Which of the following people is considered highly compensated for 2018?
Question 5 options:
a) Doug, a 3.5% owner who earns $110,500 per year.
b) Sarah, who earned $88,000 last year and is the 18th highest paid employee of 100 employees.
c) Jordan who owns 20% owner and earns $24,000 per year.
d) Both Sarah and Jordan (from above answers) are considered highly compensated.
a) True b) FalseExplanation / Answer
1 b False
In measuring coverage, the level or ratio of NHCEs benefiting under the plan are compared with the level or ratio of HCEs benefiting. Thus, the relative number of NHCEs and HCEs benefiting are compared under the plan, and the plan is not required to benefit an absolute percentage of NHCEs of the employer.
The NHCE benefiting percentage is a ratio:
# of NHCE’s benefiting under the plan /Total # of nonexcludable NHCE’s
This in our question is = (110/160)*100 = 68.75%
The HCE benefiting percentage is a ratio
# of HCE’s benefiting under the plan / Total nonexcludable HCE’s
This in our question is = (15/40)*100 = 37.5%
The ratio percentage is determined by dividing the NHCEs’ benefiting percentage by the HCEs’ benefiting percentage
This in our question is = 68.75/ 37.5 = 182%
The ratio percentage test is satisfied if the plan’s “ratio percentage” is greater than or equal to 70%.
In our case, the plan satisfies the ratio percentage test since the ratio percentage is 182% (69%/38%). Thus, a plan can satisfy coverage even though it covers only fraction of the non-excludable employees.
2 b True
Who 401k fiduciaries let into their plan can have a dramatic effect on the plan’s cost, ease of administration, and perceived value to existing or prospective employees.
Small businesses may allow new employees to enter their 401k plan immediately or require them to meet minimum age and service conditions first. They may also want to keep certain employees out of their plan altogether. Some 401k plan eligibility basics for 401k fiduciaries to understand include:
3 d
The reasons to delay eligibility of employees to participate in a retirement plan are
4 b $6,000
As per the rule for 2018, the $6,000 catch-up contribution limit for participants age 50 or older applies from the start of the year to those turning 50 at any time during the year.
5 d Both Sarah and Jordan are considered highly compensated.
The general rule is that workers can put away $18,000 a year in pre-tax income in a 401(k) plan. But if you earn more than $120,000 a year, or own more than a 5% stake in your employer's company, or are in the top 20% of earners at your firm, you are considered a “highly compensated employee” (HCE) by the IRS.