In the textbook, The Case Approach to Financial Planning: Bridging the Gap between Theory and Practice, Fourth Edition (Revised) Grable, John E.

A RETIREMENT AND EMPLOYEE BENEFITS MINI-CASE

Nick Edwards owns a used car dealership. He is age sixty, has worked in the business for thirty years, and earns $210,000 per year. He has several employees with varying years of experience and tenure at the dealership. As the owner of the company, Nick has come to you for advice regarding the establishment of a retirement plan. He is also interested in learning more about employee benefits as a tool to help him recruit and retain good salespersons. Over the course of several weeks of meetings with Nick you have compiled a list of attributes he would like to see in a retirement plan:

He wants his employees to contribute to the plan.

He is willing to match employee contributions if necessary.

He wants the plan to be an incentive to increase productivity.

He is willing to pay all the plans administrative costs.

He would prefer not to assume any investment risk on the part of employees.

He would be happy with a payroll deduction for his firm of 10 percent to 15 percent per year. Although he is willing to match contributions, he would prefer to maintain flexibility so that in low-profit years he can skip matching if needed.

He does not want 100 percent immediate vesting for employees.

He has no opinion regarding the ability of employees to make in-service withdrawals.

He would like to maximize his own benefits, but not at the expense of running afoul of IRS highly compensated employee rules.

You have learned that, in addition to retirement benefits, Nick offers a mix of employee benefits, including life, health, and disability insurance for his employees. Information about these plans is summarized below:

Group term life insurance equal to two times annual earnings.

Table IX.1 shows the cost per $1,000 of life insurance protection offered through the Nicks firm on a monthly basis for tax purposes.

Group health insurance benefits:

Traditional plan with a $500 annual deductible and 80/20 coinsurance provision.

Out-of-pocket maximum equal to $5,000 annually.

Benefit coverage includes employee and spouse only.

Financed 100 percent through the dealership.

Group short-term disability insurance:

Benefit equal to 50 percent of salary for six months.

Thirty-day waiting period.

For the Nick Edwards Case question 5,

5.Based on Nicks desires, as outlined in the case narrative, which of the following plans will meet his needs?

I.A 403(b) plan

II.A profit sharing plan

III.A stock bonus plan

IV.A defined benefit plan

a.I and IV only

b.II and IV only

c.II and III only

d.I, II, and III only

e.II, III, and IV only

Table IX.1. Cost per $1,000 of Employer-provided Life Insurance Protection Attained Age on Last Day of Employee's Tax Year Under 25 25-29 30-34 35-39 40-44 45-49 50-54 55 - 59 6-64 65-69 70 and above Cost Per $1,000 of Protection for One- month Period $.05 .06 .08 .09 .10 .15 .23 .43 .66 1.27 2.06 Nick's best employee is Emily James. Emily has worked at the dealership full-time for seven years. She is fifty-six years old and makes $74,000 per year. Other employees' relevant data are shown in Table IX.2. Table IX.2.% Relevant Employee Data Name Salary Status Years w/Firm Age 6 28 Kate $36,000 4 47 4 34 Mark $32,000 Joyce $32,000 Bill $30,000 Jack $15,000 2 36 3 20 Full-time employee Full-time employee Full-time employee Full-time employee Part-time employee (