CHAPTER 19--DEFERRED COMPEN

# 3 b smaller of 195000 in 2010 indexed each year or

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3 b. Smaller of: \$195,000 in 2010 (indexed each year) or 100% times highest three years average salaries, or \$212,000. Thus, \$195,000 is Jacob’s maximum allowable benefit. 91. Determine the maximum annual benefits payable to a participant from a defined benefit plan in the following independent situations: a. Joey, age 69, has been a participant for 16 years, and his highest average compensation for 3 years is \$107,000. b. Stacey, age 66, has been a participant for 9 years (11 years of service), and her highest average compensation for 3 years is \$131,000. a. \$107,000 in 2010. The maximum allowable benefits payable to Joey from a defined benefit plan is the smaller of \$195,000 in 2010 (indexed each year) or 100% of his average compensation for his highest three years of employment. b. \$131,000 in 2010. The defined benefit plan must reduce Stacey’s maximum benefit payable [e.g., \$195,000 in 2010 (indexed each year)] by one-tenth for each year of participation under 10 years (e.g., \$195,000 ´ 9/10 = \$175,500). Thus, the \$131,000 average compensation amount is below the ceiling. 92. Mahendra, age 37, is an employee of a retail outlet. He defers \$19,000 in a § 401(k) plan in 2010. Compute any tax ramifications. The \$2,500 excess over the \$16,500 limit, along with any appropriate earnings, must be returned to Mahendra by April 15, 2011. This \$2,500 excess amount plus related income is taxable to him in 2010 and will be taxed again upon distribution (if made after April 15, 2011). There is a 10% tax on his employer on any excess contributions not returned within 2 1/2 months after the close of the plan year. 93. Yao, a self-employed lawyer, has a profit sharing plan with a contribution rate of 15% of compensation. Yao’s earned income after the deduction of one-half of self-employment tax, but before the Keogh contribution, is \$260,000. Calculate Yao’s maximum contribution in 2010. The 25% limitation on the employee’s contribution is computed on the first \$245,000 in 2010 of earned income. Thus, Yao's maximum contribution in 2010 is \$36,750 (\$245,000 – .15X = X; X = \$213,043). Therefore, \$245,000 – \$213,043 = \$31,957. 13

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94. On July 1, 2006, Blue Corporation sold 100 of its common shares (worth \$15 per share) to its employee Bobby for \$5 per share. The sale was subject to Bobby’s agreement to resell the shares to the corporation for \$5 per share if his employment is terminated within the following four years. The shares had a value of \$26 per share on July 1, 2010. He sold the shares for \$30 per share on September 15, 2010. No special election under § 83(b) was made. Identify the correct answer. a. Bobby will be taxed on what amount, if any, on July 1, 2006? (1) Ordinary income of \$1,500. (2) Short-term capital gain of \$1,500. (3) Long-term capital gain of \$1,000. (4) Tax-exempt income of \$1,500. (5) None of the above. b. Bobby will be taxed on what amount, if any, on July 1, 2010? (1) Ordinary income of \$2,500. (2) Long-term capital gain of \$2,500. (3) Ordinary income of \$2,100. (4) Long-term capital gain of \$2,100. (5) None of the above. c. Bobby will be taxed on what amount, if any, on September 15, 2010?
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• a. b. c., b. c. d., C. D. E.

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