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    defined contribution plan and a defined benefit plan

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    1) What are the differences and similarities between a defined contribution plan and a defined benefit plan? As an employee, would you rather have a defined contribution plan or a defined benefit plan? Explain why. As an employer, would you rather offer a defined contribution plan or a defined benefit plan? Explain why.

    2) What are the components of pension expense? How is the interest rate determined? Why are prior service costs amortized? How do the components of pension expense differ among the various types of contribution and benefit plans?

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    Solution Preview

    1. A defined contribution plan is a plan invested in by the employer, where the employer contributes a fixed amount annually to each employee's plan. An employee can make elective contributions to the plan also, which are taken as pre-tax deductions. This benefits the employee by reducing the amount of the employee's gross taxable pay, so they end up owing less in federal income taxes. If the plan is set up to have elective contributions taken post-tax, the gross pay isn't affected but the employee continues to reap the benefits of contributions to the plan, and is able to enjoy tax benefits when the employee begins withdrawing from the plan in retirement.

    A defined benefit plan ...

    Solution Summary

    1) What are the differences and similarities between a defined contribution plan and a defined benefit plan? As an employee, would you rather have a defined contribution plan or a defined benefit plan? Explain why. As an employer, would you rather offer a defined contribution plan or a defined benefit plan? Explain why.

    2) What are the components of pension expense? How is the interest rate determined? Why are prior service costs amortized? How do the components of pension expense differ among the various types of contribution and benefit plans?

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