Math  /  Data & Statistics

QuestionKen is a self-employed architect in a small firm with four employees: himself, his office assistant, and two drafters, all of whom have worked for Ken full-time for the last four years. The office assistant earns $36,500\$ 36,500 per year, and each drafter earns $53,000\$ 53,000. Ken's net earnings from self-employment (after deducting all expenses and one-half of self-employment taxes) are $393,000\$ 393,000. Ken is considering whether to establish a SIMPLE plan and has a few questions.
Required: a. Is he eligible to establish a SIMPLE plan? b. Is he required to cover his employees under the plan? c. If his employees must be covered, what is the maximum amount that can be contributed on their behalf? d. If the employees are not covered, what is the maximum amount Ken can contribute for himself? e. If Ken is required to contribute for his employees and chooses to contribute the maximum amount, what is the maximum amount Ken can contribute for himself? (Hint: Calculate the employee amounts first.) Ignore any changes in Ken's self-employment tax.
Complete the question by entering your answers in the tabs below.
Req AA and BB Req CC Req DD and EE a. Is he eligible to establish a SIMPLE plan? b. Is he required to cover his employees under the plan? a. is he eligible to establish a SIMPLE plan?
Yes b. is he required to cover his employees under the plan?
No Req C

Studdy Solution

STEP 1

What is this asking? Can Ken set up a retirement savings plan for himself and his small team, and if so, how much can everyone contribute? Watch out! Don't mix up the rules for different types of retirement plans!
We're dealing with a SIMPLE plan here, which has specific contribution limits.

STEP 2

1. Eligibility Check
2. Employee Coverage
3. Maximum Employee Contribution
4. Maximum Ken's Contribution (No Employees)
5. Maximum Ken's Contribution (With Employees)

STEP 3

Ken *is* self-employed and has fewer than 100 employees, so he **is eligible** to establish a SIMPLE plan.
Woohoo!

STEP 4

Ken is *not* required to cover his employees because they have all worked for him for less than five years.
That's a fun fact!

STEP 5

Since Ken isn't required to cover his employees, this question is a bit of a trick!
There's no maximum employee contribution to calculate in this case.
Sneaky, sneaky!

STEP 6

If Ken's employees aren't covered, he can contribute up to $15,500\$15,500 or 100%100\% of his compensation, whichever is less.

STEP 7

Ken's net earnings are $393,000\$393,000.
Since 100%100\% of $393,000\$393,000 is greater than $15,500\$15,500, the maximum Ken can contribute for himself is $15,500\$15,500.

STEP 8

Let's pretend Ken *was* required to contribute for his employees.
The maximum he could contribute on their behalf is either **3% of their compensation** or **\$15,500**, whichever is less.

STEP 9

The office assistant earns $36,500\$36,500. 3%3\% of their salary is 0.03$36,500=$1,0950.03 \cdot \$36,500 = \$1,095.
Since $1,095\$1,095 is less than $15,500\$15,500, the maximum contribution for the office assistant is $1,095\$1,095.

STEP 10

Each drafter earns $53,000\$53,000. 3%3\% of their salary is 0.03$53,000=$1,5900.03 \cdot \$53,000 = \$1,590.
Since $1,590\$1,590 is less than $15,500\$15,500, the maximum contribution for each drafter is $1,590\$1,590.

STEP 11

The total maximum contribution for the employees is $1,095+(2$1,590)=$1,095+$3,180=$4,275\$1,095 + (2 \cdot \$1,590) = \$1,095 + \$3,180 = \$4,275.

STEP 12

If Ken contributes the maximum for his employees, he can still contribute up to $15,500\$15,500 or 100%100\% of his compensation, whichever is less, for himself.
Since Ken's net earnings are $393,000\$393,000, and 100%100\% of that is more than $15,500\$15,500, Ken can contribute the maximum of $15,500\$15,500 for himself even if he contributes for his employees.

STEP 13

a. Yes, Ken is eligible to establish a SIMPLE plan. b. No, Ken is not required to cover his employees. c. Not applicable, as Ken is not required to cover his employees. d. $15,500\$15,500 e. $15,500\$15,500

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