Question

You have just started a new job and are thrilled to learn that your new employer offers a 401(k) retirement plan to its employees. Your annual salary is $40,000. Assume the IRS allows you to contribute up to $24,000 to your 401(k). You’ve decided to contribute 7% of your annual salary to the plan.

Questions:

1. How much more money would you need to contribute to meet the maximum allowable contribution set forth by the IRS?

2. The company offers you a $.50 match for each dollar that you contribute between 2 and 5 percent of your annual salary. How much is the company match based on your 7% contribution?

3. Is this a defined benefit plan or defined contribution plan? Why?

Answer 1

Question 1)

Here the IRS offers to contribute the maximum amount of $24000 per year

And the employee salary is $40000 per year and he was decided to contribute 7% of the annual salary.

So employer contribution = 7% x 40000 = 0.07 x 40000 = $2800

Now the IRS allows us to contribute $24000

So the difference amount = 24000 – 2800 = $21200

So we need to contribute $21200 more to our regular 7% contribution

Question 2)

Here the company offers $0.50 match the each the dollar if the employee contribute between 2 to 5% from the annual salary.

But here employee decided to contribute 7% of their annual salary.

So from the given sources company provides their contribution if the employee contribution between only 2 to 5%.

So here employee may not get any contribution from the employer.

Question 3)

This plan was called as the defined contribution plan where the employee contributes their investments for a specific period to get their retirement benefits after retirement