A general contractor has 20 employees and pays them bi-weekly. The total bi-weekly payroll is $48,000. If the company matches 50% of employee 401(k) contributions up to 6% of salary, and employees contribute an average of 4% of their salary, what is the company's bi-weekly 401(k) matching cost?
Correct Answer
B) $960
Employee contributions: $48,000 × 4% = $1,920. Company match is 50% of employee contributions: $1,920 × 0.5 = $960 bi-weekly.
Why This Is the Correct Answer
The correct answer is A ($960) because the company matches 50% of what employees contribute to their 401(k). First, calculate the total employee contributions: $48,000 × 4% = $1,920. Then calculate the company's 50% match: $1,920 × 0.5 = $960. This represents the bi-weekly matching cost since the payroll is paid bi-weekly.
Why the Other Options Are Wrong
Option C: $1,920
This would result from calculating 6% of the total payroll ($48,000 × 0.06 = $2,880), which incorrectly uses the maximum contribution percentage rather than the actual employee contribution rate and matching formula.
Option D: $1,440
This would be the result if you calculated 3% of the total payroll ($48,000 × 0.03 = $1,440), which incorrectly assumes the company matches the full 6% maximum rather than 50% of the actual 4% employee contribution.
Memory Technique
Remember 'Half of What They Give' - the company matches 50% of employee contributions, so take the employee contribution amount and cut it in half for the company cost.
Reference Hint
Business and Finance chapter covering employee benefits and payroll calculations, specifically sections on retirement plan contributions and employer matching formulas.
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