Retirement Plan Consideration by ACME Company
What are some advantages of a profit-sharing retirement plan?
A) The employer's cost is not affected by the age and the number of employees.
B) Profit sharing plans provide an incentive for employees to work harder and more efficiently.
C) The 10 percent penalty tax does not apply to distributions prior to age 59.5.
D) ACME enjoys greater flexibility in employer contributions.
Answer:
All of the following are advantages of a profit-sharing retirement plan EXCEPT the 10 percent penalty tax does not apply to distributions prior to age 59.5.
When considering a retirement plan for its employees, ACME Company is exploring the benefits of a profit-sharing plan. One key advantage of a profit-sharing retirement plan is that it provides an incentive for employees to work harder and more efficiently, ultimately benefiting both the employees and the company. Additionally, this type of plan allows ACME to enjoy greater flexibility in employer contributions, providing more options for customizing the retirement benefits offered to employees.
However, it's important to note that the 10 percent penalty tax does not apply to distributions prior to age 59.5, which is a disadvantage for employees who may need to access their retirement funds earlier than expected. This penalty tax serves as a deterrent for early withdrawals and is designed to encourage individuals to preserve their retirement savings for the long term.
Overall, while a profit-sharing retirement plan offers many advantages, it's crucial for ACME to carefully consider the potential drawbacks and limitations associated with this type of plan before making a final decision.