The XYZ Company has 2 employees: John, who earns $300,000 annually, and his assistant, Sally, age 26, who has worked for John for 4 years. Sally earns $20,000 annually. XYZ has a profit-sharing plan with Section 401(k) provisions using graded vesting. Sally's total account balance of $5,500 in the plan consists of the following: Employee contributions: $1,500 Employer contributions: $2,000 Earnings on employee contributions: $800 Earnings on employer contributions: $1,200 If Sally terminated employment with XYZ this year after 4 years of employment, what is her vested account balance?

A. $4,220
B. $2,940
C. $3,580
D. $4,860

The correct answer is A - $4220

Explanation:

Working      

Employee Name       Annually SalarySalary for 4 Years    

John                         $ 300,000.00$ 1,200,000.00    

Sally                           $ 20,000.00$ 80,000.00            

Calculation:      

List Of Account Balance Actual BalanceDeductions as per 401(k) ruleAs per 401(K) provisions balance    

Employee Contribution            $ 1,500.00     $ 0.00           $ 1,500.00    

Employer Contribution               $2,000.00$800.00    $ 1,200.00    

Earnings on Employee Contribution$800.00   $0.00      $ 800.00    

Earnings on Employer Contribution$1,200.00$480.00   $720.00    

Sally's Total Balance                      $5,500.00  $1,280.00  $4,220.00          

Clarification of above working: After 3 years but before 5 years completion of service, Miss Sally will be entitled only 60% of the amount of money that XYZ contributed in 401(k) provision, hence out of total employer contribution and earnings on that will be reduced by 40%. Employee contribution part remains constant.        

$4220

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