Question

paul's employer maintains a qualified defined benefit pension plan. there are 100 eligible employees working for the company. what is the minimum number of employees the retirement plan must cover to satisfy the 50/40 test?

Answer 1

The 50/40 test is a requirement for nondiscrimination in pension plans. For a company with 100 eligible employees, the test is satisfied if at least 50 employees are covered. Defined benefit pension plans are now less common than defined contribution plans like 401(k)s.

Step-by-step explanation:

The student is inquiring about the 50/40 test in connection with a qualified defined benefit pension plan. The 50/40 test is a nondiscrimination test that ensures a pension plan does not favor highly compensated employees. The minimum number of employees a retirement plan must cover to satisfy this test is the lesser of 40 employees or 50% of the workforce. In the scenario provided, where there are 100 eligible employees, at least 50 employees must be covered because 50% of the workforce is exactly 50 employees, satisfying the test criteria.

Pension insurance is a safeguard for employees invested in such plans. Employers contribute to the Pension Benefit Guarantee Corporation, which offers a level of protection if the company cannot meet its pension obligations. This scenario highlights traditional defined benefit pension plans, which are much less common today, having been largely replaced by defined contribution plans such as 401(k)s and 403(b)s.

Answer 2

To satisfy the 50/40 test, the retirement plan must cover a minimum number of eligible employees. In this case, with 100 eligible employees, the plan must cover 50 eligible employees.

Step-by-step explanation:

The 50/40 test is a requirement for defined benefit pension plans under the Employee Retirement Income Security Act (ERISA). It stipulates that at least 50% of the non-highly compensated employees of a company must participate in the plan.

The other requirement is that at least 40% of the non-highly compensated employees must also be participating in the plan regardless of the participation of highly compensated employees.

In this case, there are 100 eligible employees working for the company. To satisfy the 50/40 test, the minimum number of employees that the retirement plan must cover is calculated as follows:

50% of 100 eligible employees = 50 eligible employees

40% of 100 eligible employees = 40 eligible employees

Therefore, the retirement plan must cover 50 eligible employees to satisfy the 50/40 test.