retirement planning and employee benefits for financial planners

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Retirement Planning and Employee Benefits for Financial Planners

Chapter 8: Installation, Administration, and Termination of Qualified Plans

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© 2007 ME™ - Your Money Education Resource™

Introduction Overall Compensation Package

Recruit Retain

Selection Time-Consuming Expensive

Establishment Requirements Filings

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Qualified Plan Selection Business Objectives (Exhibit 8.4 53)

Competitive Employment Tax-deferred Savings

Employee Census Old vs. Young Level of compensation Peons vs. Top Dogs Turnover Length of service

Cash Flow Considerations Administration Costs Owner’s Business and Personal Objectives

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Qualified Plan Selection Cash Flow Considerations

Stable Pension

Varies Profit sharing

None 401(k)

Administration Costs Defined benefit versus 401(k) versus ESOP

Owner’s Business and Personal Objectives Maximize her benefits? Minimize peons?

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Establishing a Qualified Plan (1 of 2)

Select and adopt appropriate plan: Must be in writing and adopted by the

last day of the company’s tax year. Must be funded by the due date of the

company’s tax return. Individually Designed

Most Expensive Determination Letter

Only means plan qualified if it does what it says it will

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Establishing a Qualified Plan (2 of 2)

Master or Prototype Plan: Master – Single trust or account used by

all adopting employers. Prototype – Each employer establishes

their own separate trust or account. Cheap

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Initial Notification of Eligible Employees

Who? Present employees who are eligible to

participate in the plan, and Present employees who are not eligible to

participate but are in the same location as those eligible to participate.

How and When? In person or posting – 7 to 21 days before

request to IRS. Mailed – 10 to 24 days before request to IRS.

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Ongoing Notification of Eligible Employees

Summary Plan Description Employer must furnish to employee within 90

days after the employee becomes a participant, or Within 90 days after the employee receives a

benefit from the plan, or Within 120 days after the plan is established.

Summary of Material Modifications Employer must furnish to plan participants

within 210 days after the end of the plan year in which an amendment is adopted.

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Qualified Trust

Qualified plan assets must be placed in a qualified trust or custodial account. Generally maintained by a bank or other

financial institution. Don’t commingle Do deposit quickly

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Investing Plan Assets

Plan Sponsor Asset management firm hired by plan sponsor

Usually, defined benefit plans Fiduciary: act in participants best interest

Self-Directed Plan Participant Usually, defined contribution plans Sponsor must provide participants with a broad

range of investment alternatives Provide diversification

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Qualified Plan Administration

Operating the Plan Meeting coverage requirements Contributions

Installments Quarterly: defined benefit plans

In following year: if by date tax return is filed

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Deduction of Contribution

Limited to 25% of overall employee covered compensation

Self-Employed persons calculation (Keogh Plans) Self-Employment Income - ½ Self-Employment Tax =Adjusted S-E Income X 20% S-E Contribution Percent =Contribution Limit

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Excess Contributions

Contributions in excess of permitted deductible amount.

Subject to 10% excise tax penalty. Carryover amount to subsequent

years.

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Forfeitures

Defined Benefit Plans Forfeitures reduce employer plan funding

costs.

Defined Contribution Plans Forfeitures reduce employer plan funding

costs, or Allocate forfeitures to accounts of

remaining participants.

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Prohibited Transactions (1 of 3)

Transactions between a qualified plan and a disqualified person that are prohibited by law. Disqualified Person

Plan Fiduciary Service Providers Plan Sponsor Owners, partners of plan sponsor Family members of owners Officers and directors of plan sponsor

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Prohibited Transaction (2 of 3)

Prohibited Transactions Transfer of plan income or assets to, or use of

them by or for the benefit of a disqualified person.

Self dealing by a fiduciary. Receipt of consideration by a fiduciary for his

own account when dealing with a party in interest.

Selling, exchanging, leasing, buying as well as lending or borrowing between a disqualified person and the plan.

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Prohibited Transactions (3 of 3)

Penalty 15% of the amount involved per year. 100% if not corrected within the taxable

year. Payable by disqualified person. Can be avoided by correcting the

transaction as soon as possible.

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Employee Retirement Income Security Act (ERISA)

Protects employee benefits. Anti-alienation: can’t lose them

Imposes fiduciary responsibility on plan management. Care, skill, and diligence of a prudent

person acting solely in the interest of plan participants and their beneficiaries.

Obligation to diversify plan assets. Must act in accordance of plan document. Must refrain from acts forbidden by law.

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Department of Labor

Enforces the rules governing the following: Plan managers. Plan investments. Reporting and disclosure of plan

information. Enforcement of fiduciary provisions of

the law. Workers’ benefits as regulated by ERISA.

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Pension Benefit Guaranty Corporation (PBGC)

Guarantees Pension Benefits Defined Benefit Pension Plans Cash Balance Pension Plans 44 million participants As of 9/30/06, $60 billion of assets, $78 billion of

liabilities Does not cover defined contribution plans, or plans of

professional service corporations with 25 or fewer participants.

Plan sponsor pays premiums of: $49 per plan participant, and

Maximum annual PBGC benefit of $59,320 for 2014. No COLA

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Reporting Requirements

Form 5500 Filed with Department of Labor. Due by the last day of the 7th month after the plan

year end. See Exhibit 8.20 on page 388 for various schedules.

Form 5500-EZ If the plan ONLY provides benefits for the employer,

his spouse, or a partner of the employer. No filing requirement for a plan with one participant

and plan assets of $100,000, or less.

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Amending or Terminating a Qualified Plan – Why?

To maximize benefits for key employees.

Law changes. Employer is unable to support plan

contributions. Benefits provided to plan participants

were not sufficient.

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Amending or Terminating a Qualified Plan – How? (1 of 3)

Amending Amend the Plan Document Revise the Summary Plan Description Notify the Plan Participants

Summary of Material Modifications

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Terminating All participants become fully vested. Plan must not have been established as

a temporary program. Defined Benefit Plans

Standard Voluntary: plan has assets to pay all benefits Distress: unable to continue plan due to

financial distress/bankruptcy Involuntary: PBGC takes over to limit exposure

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Terminating All participants become fully vested. Plan must not have been established as

a temporary program. Defined Benefit Plans

Standard, Distress, Involuntary Defined Contribution Plans

Terminate contributions after fulfilling all contribution requirements.

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Plan Freeze Defined contribution

Plan sponsor no longer makes contributions to the plan.

Defined benefit Participants can’t accrue additional benefits

Participants must still meet vesting requirements.

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