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
© 2007 ME™ - Your Money Education Resource™
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
© 2007 ME™ - Your Money Education Resource™
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?
© 2007 ME™ - Your Money Education Resource™
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
© 2007 ME™ - Your Money Education Resource™
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
© 2007 ME™ - Your Money Education Resource™
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.
© 2007 ME™ - Your Money Education Resource™
Ongoing Notification of Eligible
Employees
8
 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.
© 2007 ME™ - Your Money Education Resource™
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
© 2007 ME™ - Your Money Education Resource™
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
© 2007 ME™ - Your Money Education Resource™
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
© 2007 ME™ - Your Money Education Resource™
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
© 2007 ME™ - Your Money Education Resource™
13
Excess Contributions
 Contributions in excess of permitted
deductible amount.
 Subject to 10% excise tax penalty.
 Carryover amount to subsequent
years.
© 2007 ME™ - Your Money Education Resource™
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.
© 2007 ME™ - Your Money Education Resource™
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
© 2007 ME™ - Your Money Education Resource™
16
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.
© 2007 ME™ - Your Money Education Resource™
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.
© 2007 ME™ - Your Money Education Resource™
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.
© 2007 ME™ - Your Money Education Resource™
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.
© 2007 ME™ - Your Money Education Resource™
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
© 2007 ME™ - Your Money Education Resource™
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.
© 2007 ME™ - Your Money Education Resource™
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.
© 2007 ME™ - Your Money Education Resource™
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
© 2007 ME™ - Your Money Education Resource™
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
© 2007 ME™ - Your Money Education Resource™
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.
© 2007 ME™ - Your Money Education Resource™
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.
© 2007 ME™ - Your Money Education Resource™