Question

Kryptonite is a telecommunications provider located in Iowa with hundreds of thousands of employees. Their CEO, Clark Kline is considering the replacement of their expensive defined benefit (DB) pension plan which requires large contributions every year with a 401(k) where the employees will bear the investment risk. The majority of the workforce is young and the top executives are ll in their 50's and 60's. 2. An intern that works for you recommends utilizing a DB.K plan. What is your opinion of using such a plan in this case? 3.Who would benefit the most from the change away form the DB plan to a 401(k)? 4. What is the maximum contribution to a 401(k) of a worker age 56, who earns $200,000 per year as a factory worker with Kryptonite? 5. Louis Kent has been with Kryptonite for 10 years but is nervous now that Clark has taken over operations. She wants to know her options regarding taking money out of the 401(k) at a later date. You correctly tell her that she can access her 401(k) funds without penalty under what eight circumstances? 6. Clark gas heard that ADP testing is an issue for 401(k) plans. What are three ways to minimize that issue?

Answer 1

2) DB/K plan is a hybrid of the Defined Benefit Plan and the 401K Plan. It combines some characteristics of both the retirement plans. In this, just like the 401K plan, the employees are required to contribute to the retirement investments and like Defined Benefit plan, employer pay the employee a small percentage of his or her salary. It would be a better option for the intern as he/she would be having very minimal salary. So if he/she opts for 401K plan, it would be very difficult for him/her to contribute to the retirement investments from that salary.

3) The company moving to 401 (K) plan will benefit the employees who are young. This is mainly because the employees do not have to pay taxes on their contribution towards the retirement investments till the time they uses that fund i.e. after retirement. So a young employee could save more tax as compare to the one with around 50 to 60 age.

4) The maximum contribution a worker can contribute to a 401(k) with age 56 is $26,000. Employees in general can contribute a maximum of $19,500 to their 401(k) plan while the employees with age 50 or above can contribute an additional of $6,500 as an additional catch-up contribution. So, a worker age 56, who earns $200,000 per year as a factory worker with Kryptonite can contribute a maximum of $26,000.

5) An employee can withdraw money from 401k funds without penalty in case of following circumstances

(a) In case of total and permanent disability

(b) In case of loss of employment when you're at least age 55

(c) In case of a Divorce. If the account needs to be distributed in pursuant to a qualified domestic relations order

(d) In case you want to pay unreimbursed medical expenses above 7.5% of your MAGI (modified adjusted gross income)

(e) In case of Corrective Distributions of Excess Contributions

(f) In case of the IRS levies an account for unpaid taxes and/or penalties

(g) In case of Birth or Adoption. You can withdraw money from 401k funds without penalty to offset expenses for the birth of a child or an adoption

(h) In case of Disability. If you are totally and permanently disabled you can withdraw money from 401k funds without penalty