Question

Calculating​ 401(k) Matching Contributions

Companies decide whether to institute matching contributions. Ones that offer matching contributions do so for numerous​ reasons, including recruitment and retention of the most qualified individuals.​ Also, companies choose the formulas for making contributions and setting maximum limits. Here are three common approaches for determining matching​ contributions:

Full​ match: The employer fully matches an​ employee's contribution to the​ 401(k) plan account up to an amount set by law. For illustrative​ purposes, an employee earning​ $50,000 annually contributes​ $2,000 to her​ 401(k). Then, the​ company's matching contribution equals​ $2,000.

Fixed dollar match​:

The employer deposits​ $1 for every​ $1 the employee contributes up to a specified​ limit, for​ instance, 5 percent of pay. One employee contributes 3 percent of her​ $100,000 pay equaling​ $3,000: (3 percent

times× $100,000). The employer contributes the same amount. Another employee contributes 10 percent of his​ $100,000 pay equaling​ $10,000: (10 percent times× $100,000). In this​ case, the company deposits​ $5,000: (5 percent times× $100,000) because the plan specifies a 5 percent matching contribution maximum.

Variable dollar​ match: The​ employer's contribution decreases as an​ employee's contribution increases. For example an employer might deposit​ $1 for every​ $1 on the first 3 percent of pay contributed by the​ employee, and 50 cents per dollar on the next 3 percent of pay. An employee who earns​ $100,000 annually contributes 6 percent to the​ 401(k) plan, equaling​ $6000: (6 percent

times× $100,000). The employer contributes a total of​ $4,500: [($1 times× (3 percent times× $100,000)) +($0.50 times× (3 percent times× $100,000))].

​Now, let's calculate the​ employer's matching contributions for three​ employees, Amanda, Shiyu and Onkar using each method. Amanda earns $36,050 annually and does not contribute anything to the 401(k) plan. Shiyu earns $118,750 annually and contributes 5 percent of pay to the​ 401(k) plan. Onkar earns $80,800 annually and contributes

2 percent of pay.

Under the full match​ approach, the​ employer's contribution for

​(Round your answers to the nearest hundredths​ place.)

​a) Amanda:

​$nothing

​b) Shiyu:

​$nothing

​c) Onkar:

​$nothing

Answer 1

SOLUTION:

FIRST LET US LOOK AT EACH EMPLOYEE'S EARNINGS AND HOW MUCH MONEY THEY CONTRIBUTE TOWARDS THEIR 401(K)

AMANDA DOES NOT CONTRIBUTE ANYTHING TO THE 401(K) ANG HER CONTRIBUTION IS ZERO 0.

FOR THOSE OTHER 2, THE CONTRIBUTION IS A PERCENTAGE OF THEIR SALARY. SO, SHIYU'S CONTRIBUTION TO HIS 401(K) IS 7 PERCENT OF THE DAY ,

7 PERCENT * 118750 = 118750 * 7 /100

=8312.5

USING SIMILAR CALCULATON FOR ONKAR, WE GET,

2 PERCENT * 80800 = 80800 * 2 / 100

= 1616

	EARNINGS	CONTRIBUTION TO 401(K)
AMANDA		0
SHIYU	118750	8312.5
ONKAR	80800	1616

  

NOW THE QUESTION ASKS FOR THE EMPLOYER'S CONTRIBUTION FOR EACH OF THEM UNDER THE FULL MATCH APPROACH.

UNDER THIS APPROACH, THE EMPLOYER ADDS AN AMOUNT EQUAL TO THE EMPLOYEE'S CONTRIBUTION TO THE 401(K).

(A) THE EMPLOYER'S CONTRIBUTION TO AMANDA'S ACCOUNT IS $0

(B) THE EMPLOYER'S CONTRIBUTION TO SHIYU'S ACCOUNT IS $8662.5 (ROUNDED TO THE NEAREST HUNDRETHS PLACES GIVES THE SAME NUMBER).

(C) THE EMPLOYER'S CONTRIBUTION TO ONKAR'S ACCOUNT IS EQUAL TO THE EMPLOYEE CONTRIBUTION, WHICH IS $1616.

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