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Unformatted text preview: . [See Example 30, p. 18-35 and 421(a).] An employee would normally prefer a funded retirement plan because of the security offered by the funds themselves. The employer, however, would prefer not to have to tie up cash or other business assets to secure an employee retirement plan. (See pp. 18-33 and 18-34.) 18-2 18-3 18-4 18-5 18-6 18-7 18-8 18-1 18-2 Chapter 18 Employee Compensation and Retirement Plans 18-9 A cash basis taxpayer recognizes income upon receipt of payment, regardless of when the income was earned or the perfected right of the taxpayer to payment. Thus, if a cash basis taxpayer has earned the right to receive compensation at some future date, but has no current right to payment, he is not in constructive receipt of the deferred compensation. [See pp. 18-31 through 18-33 and Reg. 1.451-2(a).] There are two major tax advantages granted to qualified retirement plans. First, the employer's contribution to the plan is not taxed to the employee in the year the contribution is made. Secondly, the earnings of the plan are not taxed until withdrawn by the employee. [See Exhibit 18.2, pp. 18-6 and 18-7, and 402(a) and 501(a).] Under a defined benefit plan, annual contributions are determined actuarially, based upon a specified amount (benefit) that each employee is entitled to receive upon retirement. Under a defined contribution plan, the annual contribution itself is specified, usually in terms of a percentage of current profits. [See p. 18-10 and Reg. 1.401-1(a).] No. (See the discussion of plan participation requirements on pp. 18-14 and 18-15 and 410.) Vesting refers to an employee's nonforfeitable right to the amount of contributions made on his behalf to a qualified retirement plan. (See p. 18-15 and 411.) Participation refers to an employee's right to have his employer make contributions on his behalf to the qualified plan. (See pp. 18-14 and 18-15, and 410.) Employer contributions to a profit-sharing plan are discretionary and generally made only in a year in which the corporate business is profitable. Participation in...
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This note was uploaded on 02/05/2012 for the course ACCT 110 taught by Professor Smith during the Spring '11 term at Adrian College.
- Spring '11