Retirement Planning and Employee Benefits for Financial Planners

1. Retirement Planning and Employee Benefits for Financial Planners Chapter 8: Installation, Administration, and Termination of Qualified Plans

2. Introduction • Overall Compensation Package • Recruit • Retain • Selection • Time-Consuming • Expensive • Establishment • Requirements • Filings

3. Qualified Plan Selection • Business Objectives (Exhibit 8.4 Page 353) • 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

4. 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?

5. 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

6. 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

7. 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.

8. 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.

9. 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

10. 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

11. 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

12. 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

13. Excess Contributions • Contributions in excess of permitted deductible amount. • Subject to 10% excise tax penalty. • Carryover amount to subsequent years.

14. 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.

15. 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

16. Prohibited Transaction (2 of 3) • ProhibitedTransactions • 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.

17. 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.

18. 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.

19. 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.

20. 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

21. 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.

22. 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.

23. 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

24. Amending or Terminating a Qualified Plan – How? (2 of 3) • 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

25. Amending or Terminating a Qualified Plan – How? (2 of 3) • 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.

26. Amending or Terminating a Qualified Plan – How? (3 of 3) • 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.