Question

In: Finance

"Sponsoring Employee Compensation Plans" Imagine that you are an employer trying to decide whether to sponsor...

"Sponsoring Employee Compensation Plans" Imagine that you are an employer trying to decide whether to sponsor a “qualified” retirement plan or “nonqualified” deferred compensation plan for your employees. What are the tax and nontax consequences of each plan? Based on what you know about the different plans, what would be your justification for selecting the one you choose?

Solutions

Expert Solution

Qualified and nonqualified deferred compensation plans are for employee benefits in small business. But there are different set of rules for a qualified plan and nonqualified plan.

Differences

Qualified deferred compensation plans are also governed by the Employee Retirement Income Security Act (ERISA). ERISA issues specific rules for participating in qualified plans. Nonqualified deferred compensation plans are not governed by ERISA, and they have more flexible rules.

Qualified deferred compensation plans have a limit. There is no limit for non-qualified deferred compensation plans. Employees can defer compensation as much they like.

Qualified plans are subject to FICA tax at the time of deferral. Nonqualified plans are also subject to FICA tax, and if the employee is required to perform substantial future services to receive their future payment, FICA tax is not owed until the employee has performed all the services

Business can deduct qualified deferred compensation contributions (from you and your employee) at the time of deferral for availing tax deductions. But the contributions for nonqualified plans until the employee actually receives the funds are not deductible.

From both of these plans, Qualified deferred compensation plans are recommended because, the compensation contributions are tax deductible and it has specific rules.


Related Solutions

Imagine that you are trying to decide whether to cross a street without using the designated...
Imagine that you are trying to decide whether to cross a street without using the designated crosswalk at the traffic signal. a. What are the expected marginal benefits of crossing? (2) b. What are the expected marginal costs? (2) c. How would the following conditions change your benefit–cost equation? What would be the rational decision in each case and why? (6) i. The street was busy. ii. The street was empty, and it was 3:00 A.M. iii. You were in...
Imagine that you are trying to decide whether to cross a street without using the designated...
Imagine that you are trying to decide whether to cross a street without using the designated crosswalk at the traffic signal. a. What are the expected marginal benefits of crossing? b. What are the expected marginal costs? c. How would the following conditions change your benefit–cost equation? What would be the rational decision in each case and why?   i. The street was busy. ii. The street was empty, and it was 3:00 A.M. iii. You were in a huge hurry....
You are trying to decide whether to take a vacation. Most of the costs of the...
You are trying to decide whether to take a vacation. Most of the costs of the vacation (airfare, hotel, and forgone wages) are measured in dollars, but the benefits of the vacation are psychological. How can you compare the benefits to the costs? Compare the airfare and hotel costs of the vacation to the foregone wages. Determine the benefits of what you give up by going on the vacation, and compare them to the benefits of going on the vacation....
You are trying to decide whether to make an investment of $498.7million in a new technology...
You are trying to decide whether to make an investment of $498.7million in a new technology to produce Everlasting Gobstoppers. There is a 61% chance that the market for these candies will produce profits of $98.9 million​ annually, a(n) 22% chance the market will produce profits of$50.1 ​million, and​ a(n) 17% chance that there will be no profits. The size of the market will become clear one year from now.​ Currently, the cost of capital of the project is 11.47%per...
You are trying to decide whether to accept or reject a project. The project will generate...
You are trying to decide whether to accept or reject a project. The project will generate a cash flow of $15,000 in year one; $25,000 in year two; $20,000 in year three; and $4,000 in year four. The project costs $40,000 initially. The firm has a weighted average cost of capital of 8%. Your firm generally accepts projects that payback in three years or less. What is the discounted payback of the project? Should you accept or reject the project?
You are trying to decide whether to bid on a construction contract for a new bridge...
You are trying to decide whether to bid on a construction contract for a new bridge in South Carolina. You think that it will take 36 months to build and that construction costs will be $2 million per month. You expect tolls to be $10 million per year once the bridge opens, which will be offset by toll collection and maintenance costs of $2 million per year. Your (minimally acceptable rate of return) MARR is 15% per year. To bid...
______     6.      You are trying to decide whether to run your business as a corporation or...
______     6.      You are trying to decide whether to run your business as a corporation or as an individual owner (for example, as a “sole proprietorship”). One of the factors is the problem of double taxation. Assume that the corporate income tax rate is 35%, the individual income tax rate on dividend income is 15%, and the individual income tax rate on other income is 39.6%. (Note – use these tax rates. Don’t use the actual tax rate schedule.) The...
How can you decide whether employee should attend a training program
How can you decide whether employee should attend a training program
You are an undiversified investor trying to decide whether you should invest in Disney or Amgen....
You are an undiversified investor trying to decide whether you should invest in Disney or Amgen. They both have betas of 1.25, but Disney has an R Squared of 73% while Amgen’s R squared is only 25%. Which one would you invest in? A. You would be indifferent B. Disney, because it has the higher R squared C. Amgen, because it has the lower R squared
You are a diversified investor trying to decide whether you should invest in Disney or Amgen....
You are a diversified investor trying to decide whether you should invest in Disney or Amgen. They both have betas of 1.25, but Disney has an R Squared of 73% while Amgen’s R squared is only 25%. Which one would you invest in? A. Disney, because it has the higher R squared B. Amgen, because it has the lower R squared C. You would be indifferent
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT