Axe company sponsors a 401k profit sharing plan with no empl

Axe company sponsors a 401(k) profit sharing plan with no employer match, but the company did make noncontributory employer contributions because the plan was top-heavy. Jack quit today after six years working for Axe and has come to you to determine how much of his retirement balance he can take with him. The plan uses the least generous graduated vesting schedule available. What is Jack’s vested account balance if he has been a participant for 57 months?

EMPLOYER EMPLOYEE

CONTRIBUTIONS   9,000 $12,000

EARNINGS $4,000 $5,000

A. $17,000.

B. $24,800.

C. $27,400.

D. $30,000.

Solution

Answer: The correct answer is D $30,000.

Axe is entitled to 100% of his contributions and the earnings on those contributions. The employer contributions, which were notmatching contributions, will follow the least generous graduated vesting schedule for a top-heavy plan. The least generous graduated vesting schedule is a 2 to 6 yea rgraduated vesting schedule for a 401(k) plan. At six years, Axe would be 100%vested in the employer contributions and the earnings on the employer contributions. Thus, Axe vested account balance is $30,000.