Question

1. If an employer does not pay the taxes withheld from employees to the government, is the employee responsible?

2. Is a defined benefit or a defined contribution plan better for an employee? for an employer?

3. Why would a company consider issuing preferred stock? If it needs to raise capital, wouldn’t it be better just to borrow the money from a bank?

Answer 1

1. If an employer does not pay the taxes withheld from employees to the government, is the employee responsible?

The employee is not responsible for payment of the taxes, however the employee has some other responsibilities in this case:

• Contact the employer and request for the W-2.
• If the employer fails to provide W-2, the employee should complete Form 4852, and file the tax return
• The employee should bring it to the notice of IRS

But in no way, the employee can be made to pay those taxes again.

2. Is a defined benefit or a defined contribution plan better for an employee? for an employer?

This is a fairly subjective question and has no right or wrong answer. Both the retirement plans have their own pros and cons. However, from the perspective of the employee, I believe defined contribution plan is better, because:

• The employee retains the full control on the savings
• The retirement funds are in the name of the employee
• The employee can withdraw funds as per his discretion though withdrawals may be subjected to tax or penalties if made premature.
• However, in this case the entire financial risk is on the employee. The risk of not having enough income to survive through retirement lies with the employee

From the employers' perspective, a defined benefit is better:

• It gets vested only if an employee completes certain number of years in the company
• It helps in preventing attrition and retaining employees
• However the financial risk lies with the Employers. The benefits are yet to be covered even if the funds are exhausted.

3. Why would a company consider issuing preferred stock? If it needs to raise capital, wouldn’t it be better just to borrow the money from a bank?

It can. That option is always there, however there are certain reasons why debt may not always be preferred to equity:

• Borrowing leads to mandatory obligation of servicing (interest and repayment). Failure to do so leads to events of default and far reaching consequences. Dividends on preferred stock is discretionary and there may not mandatory obligation to redeem the preference shares.
• Borrowing requires compliances with lots of positive and negative covenants. It places many restrictions on the borrower. Preferred stock may not have that degree of compliances as debt has.
• Borrowing requires security. The lender will always like to be secured and hence need collateral, mortgages. Preferred capital doesn't require any security.