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Employer Sponsored Savings

Objective:Calculate investments made into employer sponsored savings plans.

INTRODUCTION: Employers offer their employees savings plans as a benefit. Employer sponsored savings plans all employees to contribute a certain portion of their salaries into different kinds of investment options. Often times the employers will match all of or a percentage of the employee contributions into these investment options. The advantage to the employee is their taxable income is reduced by the amount of their contribution. After the employee reaches a certain age the money can be withdrawn from the account at a lower tax rate.

Atax-sheltered annuityallows employees to make regular deposits into an account. Interest is earned is earned on the deposit amounts and are money is not taxed until it is withdrawn.

401(k) plans are tax-deferred savings plans that many employees use as a retirement account. In some cases employers match all or a certain percentage of the employees contributions. IRAs are are similar to 401(k) plans but they are not arranged by the employer. Individuals arrange their IRA plan through a financial counselor.

Profit sharing plansare plans where employees share in the profits of the company. Money is given to employees yearly and is based on the performance of the company for the year. This type of plan motivates employees to do their best at all times.

EXAMPLE:Remi works for America's Best Pet Store. The company allows Remi to invest in a 401(k) savings plan. Remi can contribute up to 10% of her weekly salary into her 41(k), and the company will contribute an additional 3.5%. Remi makes $610.00 per week and she contributes 7% of her earnings into her savings plan. What is the total contribution to Remi's savings plan each week?

EXAMPLE 1 SOLUTION:

Compute the amount that Remi contributes to her 401(k) each week.	$610.00 pre-tax earnings. x.07 contribution percentage as a decimal $42.40 Remi's weekly contribution to he 401(k)
Compute the amount of the employer's contribution to Remi's 401(k) each week.	$610.00 pre-tax earnings. .035 matching contribution as a decimal $ 21.35 amount of employer contribution
Find total weekly contribution into Rem's 401(k) plan.	$42.40 Remi's contribution +$21.35 America's Best Pet Store contribution $63.75 total contribution
Total weekly contribution to Remi's 401(K) is 63.75

PRACTICE EXERCISES:

Find each amount to the nearest cent

1. 17% of $250.75 __________________ 2. 27% of $16,125 _________________

3. 3.5% of $725.50 __________________ 4. 12% of $3,014 __________________

5. Bronson works at America's Best Pets, Inc. His salary is $72,000 as a store manager. Bronson can contribute up to $15,000 per year to his savings plan. Bronson wants to contribute 20% of his salary. What is the most that he can contribute in a year? _______________________________________

6. Money withdrawn from an IRA is subject to a 10% federal tax penalty if taken before a stipulated age. Lisa wishes to withdraw $24,000 from her IRA to purchase a new car. What is the federal tax penalty? _________________________________

7. Jon's employer, We Build Houses Construction, Inc., offers a profits sharing plan to its' employees. The plan allows employees to purchase company stocks at a 30% discount. When Jon buys his stock, they were selling for $32.50 per share to non-company employees. How much does Jon pay for 225 shares of his company's stock? ________________________________________________________

8. Aus invested in a savings plan that earned 10% compounded annually. His original investment was $2,500. For four (4) Aus did not make any additional contributions to his account. He did not make any withdrawals during this time. What is his balance at the end of 4 years? _________________________?

9. Blue Bonnet Dairy farms match 4% of employee contribution dollar for dollar up to a maximum of $7,000 per year. Bronson contributes $150 out of each bi-weekly check for 4 years. How much did his employer match each time? _________________________________________________________

10. Lisa invest 12% of her $98,000 salary in the employee savings plan of Fast Jet Airways each year. Fast Jet matches 3% of her contribution up to $8,500 annually. How much does Fast Jet Airways pay in matching funds over a 4 years? _______________________________________