Ross works for Houston Corporation,which has a contributory defined contribution pension plan.The employer's monthly contribution to the plan is 8 percent of each participating employee's monthly salary,while the employee contributes only 6 percent.Which of the following statements best describes the benefits of the plan?
A)Houston receives a deduction for its contributions to the plan when Ross receives a distribution from the plan.
B)While Ross is taxed on the employer's contributions to the plan,his own contributions are not taxed until he receives a distribution from the plan.
C)Ross may deduct his own contributions to the pension plan,and Ross reports income from the plan each year until he receives distributions from the plan.
D)The amounts contributed to the plan and the earnings on those contributions are not taxed to Ross until he retires or receives a distribution from the plan.

Question

Quizplus · Accepted Answer

Under a defined contribution pension plan, such as Houston Corporation's, the amounts contributed to the plan by both the employer (in this case, 8%) and the employee (in this case, 6%) are not taxed until the employee retires or receives a distribution from the plan. Additionally, the earnings on those contributions are also tax-deferred. Therefore, statement D is the best choice as it accurately describes the benefits of the plan. Statements A, B, and C are incorrect as they either do not accurately describe the tax treatment of contributions and distributions or assume the employee can deduct their own contributions (which is not typically the case for a contributory pension plan).

Ross Works for Houston Corporation,which Has a Contributory Defined Contribution