Installing a Qualified Plan
Chapter 10
Employee Benefit & Retirement Planning
Plan Adoption
• Qualified plan must be legally “adopted” by the
employer during the taxable year in which it is to be
effective. (In contrast, SEP can be adopted up to
filing deadline)
• Plan can be retroactive to start of the year of
adoption
• “Backdated” adoption not effective
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Installing a Qualified Plan
Chapter 10
Employee Benefit & Retirement Planning
Plan Adoption
• Corporation adopts plan by formal action of its board
of directors. Similar resolution should be used by
unincorporated businesses.
• If trust used for funding, trust should be established
before end of year of adoption
• If funded by insurance contract, insurer must accept
application for contract before the end of the year of
adoption
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Installing a Qualified Plan
Chapter 10
Employee Benefit & Retirement Planning
Credit for Startup Costs
• Small business employers eligible for credit of $500
per year for first three years
• Credit covers up to 50% of “qualified” start-up costs
paid or incurred to adopt a new plan
• Eligible employer may have no more than 100
employees earning over $5000
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Installing a Qualified Plan
Chapter 10
Employee Benefit & Retirement Planning
Advance Determination Letter
• Commonly called “determination letter”
• IRS ruling that plan provisions meet Code
requirements for being qualified
• Not required for plan to be qualified, but highly
recommended
• If plan later found on audit to have disqualifying
provision, generally too late to amend.
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Installing a Qualified Plan
Chapter 10
Employee Benefit & Retirement Planning
Advance Determination Letter
• A determination letter generally protects the plan from
a later finding that the plan document lacked an
essential provision or contained a disqualifying
provision.
• Does not protect plan from finding of noncompliance
in operation.
• Employee Plans Compliance Resolution System
(EPCRS) programs allow correction of plan errors at
all levels without disqualification.
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Installing a Qualified Plan
Chapter 10
Employee Benefit & Retirement Planning
Advance Determination Letter: Retroactive
Amendments
• Retroactive plan amendments permitted under the
Internal Revenue Code up to the employer’s tax filing
date for the year
• Determination letter requests extend the time for
retroactive amendments for as long as the request is
pending
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Installing a Qualified Plan
Chapter 10
Employee Benefit & Retirement Planning
Master and Prototype Plans
• Offered by financial institutions as inducement to use
their products to fund the plan
• Examples: banks, insurance companies, mutual
funds, various service providers
• Of interest to smaller employers because they reduce
cost of plan drafting and installation
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Installing a Qualified Plan
Chapter 10
Employee Benefit & Retirement Planning
Master and Prototype Plans
• Plans are standardized, use language already
approved by the IRS
• Master plan usually uses a single financial institution
for finding
• Prototype plan usually does not refer to any particular
funding institution or medium
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Installing a Qualified Plan
Chapter 10
Employee Benefit & Retirement Planning
Master and Prototype Plans
• Greatly simplifies plan adoption
• Fees much lower than those for custom designed
plans
• Determination letter process simplified
• Document preparation services can be customized
by use of checklists of plan provisions from central
word processors.
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