Although saving for retirement is a good financial strategy, many employees still fail to take part in their employer-sponsored retirement strategies. Others do not participate due to insufficient income to enable them contribute toward their retirement. Also, many employees may fail to participate due to inadequate knowledge regarding the benefits and requirements of these plans. Based on Bubba’s objectives, there exist several retirement plans that will suit his plans. For instance, Bubba can settle on individual retirement arrangements, government plans, 401(k) plans, defined benefit plans, profit-sharing plans, etc. Since Bubba only wants to contribute on years that his business generates a profit and does not want to incur much if anything on administrative expenses, then the suitable strategy will be the type of qualified profit-sharing where the employer contributes on behalf of the employee to the plan. In return, Bubba will get an instant deduction for the contribution on his income. In this plan, the amount accrues tax-free earnings while his employees will not be taxed on the contribution until such a time when they will be willing to withdraw ("shift: Pensions to 401(k) plans," 2015) .
Question 2
Further, the strategy is special in that a section of the 401(k) plan gives employees the freedom to decide whether to receive the contribution in cash or have it channeled to the plan on their behalf. Due to special tax rules, his employees will be taxed only on the amount they will choose to receive in cash ("shift: Pensions to 401(k) plans," 2015) . This means that the amount Bubba will contribute towards the retirement plan will be excluded from tax until distributed just like any other employer's contribution to a qualified profit-sharing plan.
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One of the most noticeable benefits of section 401 (k) plan is that it permits employees to plan their finances in deciding how much to defer into a qualified tax-shelter plan and the amount to take in current cash. Reduction of the salary enables an employee to contribute to the strategy out of his income to offer themselves more remunerations during retirement than his employer can and willing to provide. Since the contribution from the salary is tax-free, an employee, through salary reduction, is able to contribute the same amount to a traditional thrift strategy, the employee, in turn, would be able to save the income taxes he would have been deducted on the salary reduction amounts. This means that the contribution chosen by employee are made with ("post taxed") dollars meaning that the amount has already been taxed, whereas a Section 401(k) plan's contributions are made with dollars that are yet to be taxed ("shift: Pensions to 401(k) plans," 2015) .
Further, special section 401(k) dictates contribution discrimination, which permits equitably more deduction for highly paid employees than employees who are paid lower salaries than would be acceptable under traditional profit-sharing plans. In many ways, a section 401 (k) plan can be applied in the same manner as an IRA, except that as much as 25 percent or $30,000 of compensation (whichever is lower) might be put into the strategy of section 401 (k) every year compared to100 percent or $2, 000 of compensation (whichever is lower) for the IRA. Besides, in salary reductions for top-heavy plans, it is possible to avoid a 3 percent minimum contribution requirement ("shift: Pensions to 401(k) plans," 2015) .
Question 3
Which employee may be excluded if the plan was SEP:-
Eligibility criteria for SEP Plan:-
For an employee to qualify for the SEP plan, they must be 21 years old or older, earning a salary of $600 or more, and worked for the firm in 3 of the past five years (2019 and 2020 compensation limit is $600). Further, there is an exclusion of non-resident aliens. One has to complete a short form known as IRS form 5305 for a SEP IRA to be established, stating the eligibility requirement ("shift: Pensions to 401(k) plans," 2015). Therefore, based on the criteria mentioned above, Mr. Rice, whose age is 18 years, and Mr. Trey, whose age is 22 years, have been excluded from the SEP plan.
Which employee may be excluded if the plan was SIMPLE:-
Eligibility criteria for Simple plan:-
For an employee to be eligible for a simple plan, they must expect to receive not less than $5, 000 during the current year. Further, they must have earned compensation of not less than $5, 000 during any two years before the current calendar year. An employer can also impose a less restrictive participation requirement, as opposed to more restrictive ones. For instance, a manager can reduce or eliminate the current or prior year's compensation amounts. However, a manager cannot impose any other conditions for a SIMPLE IRA plan participation ("shift: Pensions to 401(k) plans," 2015). Therefore, based on these eligibility criteria, Mr. Bubbas will exclude Mr. Rice, who is 18 years old, from a simple plan since he has been employed for only one year and has not earned less than $5,000 in the previous two years.
Eligibility criteria for 401(K) plan:-
For an employee to be eligible for a 401 (k) plan, they must be 21 years and above. The worker may join the 410 (k) plan on the first day of the current year quarter after the first year is over service, January 1, April 1, Jury 1, or October 1 ("shift: Pensions to 401(k) plans," 2015). Based on these eligibility criteria, Mr. Bubba will exclude Mr. Rice, 18 years old, from the 401 (k) plan since he has been employed for only one year.
References
The shift: Pensions to 401(k) plans. (2015). 401(k) Day Trading , 27-53. https://doi.org/10.1002/9781119202684.ch2
