Michael Johnson, your friend from ASU just started his new job at XCite Biotechnology, Inc. onFebruary 1, 2017
Michael Johnson, your friend from ASU just started his new job at XCite Biotechnology, Inc. onFebruary 1, 2017.He called you on a quick question because he needs to make an election on howmuch to defer for his 401(k) Plan.You write down everything he says.His company was newly formed company in April, 2015 and is backed by several venture capitalfirms.They currently have just a small number of employees and four principals or owners.It is offto a great start.It is likely to be very successful based on recent FDA approvals on their prototype.Italready has the interests of larger Biotech private equity firms in the medical device industry sector.The office manager was working with Michael to complete his paper work on the number ofexemptions for income tax withholdings, the enrollment in employee benefit plans and other relatedpayroll matters.She gave Michael his 401(k) election form and asked him how much he wanted todefer into the 401(k) plan.The office manager has only been there since January 3, 2017 and she haddecided not to defer anything into the plan.Michael recalls learning from his ASU tax professor howimportant it is to start early in saving for retirement and 401(k) plan seemed like a great ideabecause of its favorable tax status.Here is what Michael knows:The Company adopted and implemented a 401(k) profit sharing planeffective January 31, 2017.It was a proto type plan sponsored by Fidelity Investments.Each of theowners completed and signed their election forms for the deferral of 15% of their compensation onthe date the plan was adopted.The 401(k) plan provides for employee deferrals of 0 to 15% ofcompensation of which the employer will match 50% of the employee’s deferral but only up to theextent of 10% of the compensation.Meaning the employer will match 50% up to the first 10% ofcompensation deferred.Michael is the financial accountant, tax accountant and IT person (all around get it done person) forthe company.He and the office manager do everything else not done by the primary principals andthe business development person.He and the office manager are scheduled to be paid $75,000 ofgross pay per year that translates to $2885 of gross pay per payroll period over 26 pay periods.He isalso scheduled to receive a year-end bonus of $10,000 at the end of 2017.This is the target amount.In other words, the bonus amounts for Michael and Office Manager could be zero to $20,000.He willnot know his final bonus until after the 2017 year end when the financial statements are completeand the March board meeting is conducted.He expects it will take about 2 months to 2 ½ months tofinalize financials, obtain approvals and get checks issued to employees and owners for theirbonuses.He also understands that the principals make about $200,000 per year in salary orapproximately $7,700 per pay period over 26 pay periods.They can also earn up to $200,000 ofbonus while the business development executive makes $100,000 per year and can earn up to$100,000 of bonus.There is not a bonus for the owners for 2016 being paid in 2017 as they only gotthe recent FDA approval.You had recently started working at a CPA firm.Michael called you to ask:What do you know about401(k) plans?How much should I defer?Can I also defer my bonus for 2017?He also asked aboutextending the tax return because it was unlikely he will get the corporate tax return complete byMarch 15, 2017.“Sure”.“You can extend the due date of your tax return beyond March 15, but you cannot extend thetax payment due date.” As for the 401(k) plan, if you remember what our tax professor said in class;“defer as much as you can and as early as you can.”In addition, the employer is going to match you50% on the first 10% of income you defer.That would be nearly $3,700 of a match for you if you
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