Type of plan: Statutory hybrid planAccount balance: The sum of pay credits and interest creditsPay credits: 3% of annual pay, credited at the end of the yearInterest credits: Equal to the actual annual rate of return on plan assets multiplied by the beginning of year account balance Vesting: The minimum vesting schedule allowedData for participant Smith: Date of hire 1/1/2008 Date of termination 12/31/2011 Compensation (each year) $50,000 Historical returns on plan assets: 2008 8% 2009 6% 2010 2% 2011 ?22% The plan provides for a lump sum in the amount of the vested account balance.In what range is Smith's lump sum payable at 1/1/2012?
A)Less than $3,650
B)$3,650 but less than $4,450
C)$4,450 but less than $5,250
D)$5,250 but less than $6,050
E)$6,050 or more

Question

Quizplus · Accepted Answer

Smith's account balance is calculated by adding pay credits (3% of annual pay) and interest credits (based on the plan's actual annual rate of return) for each year of employment. With an annual compensation of $50,000, the pay credit each year is $1,500. The interest credits are calculated based on the returns and the beginning balance each year. For 2008, the interest credit is 8% of the initial balance (which starts at $0, so $0 for 2008). For subsequent years, the interest credits are added based on the returns and the updated balance. The negative return in 2011 reduces the account balance but does not bring it below zero. Considering the contributions and the fluctuating returns, including the significant loss in 2011, the account balance at the end of 2011, before considering vesting, would be calculated as follows:1. 2008: $1,500 pay credit + ($0 * 8% interest) = $1,5002. 2009: $1,500 pay credit + ($1,500 * 6% interest) = $1,590 + $1,500 = $3,0903. 2010: $1,500 pay credit + ($3,090 * 2% interest) = $61.8 + $1,500 = $4,651.84. 2011: $1,500 pay credit - ($4,651.8 * 22% loss) = $1,500 - $1,023.396 = $5,128.404Given the negative return in 2011, the account balance would decrease, but considering the contributions and the positive returns in the earlier years, the balance would likely fall in the range of "D) $5,250 but less than $6,050," even after the significant loss in 2011. This calculation assumes full vesting, as the question specifies the lump sum is based on the vested account balance and mentions the plan follows the minimum vesting schedule allowed, which typically would result in full vesting by the end of the period described.

Type of Plan: Statutory Hybrid PlanAccount Balance: the Sum of Pay