Chapter 8 Flashcards
What is one of the first considerations and adviser must have when helping a business select qualified plans?
Consider business objectives as to why a company wants to offer a qualified plan such as: to provide competitive employment, to provide tax-deferred savings for employees.
What is the second step for qualified plan selection?
Prepare an employee census which includes: identify each employee, their age, compensation, date of hire, and ownership interest.
Cash flow considerations
Don’t select a plan that requires mandatory funding if there are not stable cash flows.
Administration Costs
Consider costs when selecting a plan
Owner’s business and personal objectives
Select a plan that meets the owner’s business and personal objectives.
Assume that the sponsor company wants a qualified plan. The sponsor company must be willing to comply with the qualifying plan requirements such as:
nondiscrimination and broad coverage, eligibility rules, coverage rules, reporting rules, testing rules, disclosure rules, vesting rules.
How do you determine which mandatory funding plan would be beneficial to a company?
Determine whether investment risk will be borne by the employer or the employee. If it will be borne by the employer, wither a defined benefit pension plan or cash balance pension plan would be appropriate. If the plan favors older entrants- defined benefit pension plans. If the plan favors younger entrants- cash balance pension plan. If the risk will be borne by the employee, either a target benefit pension plan or money purchase pension plan. If the employer is willing to endure larger establishment costs- target benefit pension plan. If the employer wants to keep costs low- money purchase pension plan.
How do you determine which discretionary funding plan would be beneficial to a company.
If the employee contributions to the qualified plan are desires: pretax 401k plan, after tax thrift plan 401k roth. If only the employer contributes to the qualified plan then if contributions are of company stock, then a profit sharing plan, stock bonus plan, or ESOP should be used. Test benefits for discrimination rather than contributions. If the employer wants to keep costs low- profit sharing plan. If the employer is willing to pay additional costs- stock bonus plan, ESOP, age-based profit sharing plan, or new comparability plan. If the employer wants integration- profit sharing plan or stock bonus plan.
How to select and adopt an appropriate qualified plan
The plan must be in writing and adopted by the last day of the company year. The plan must be funded by the due date of the company’s tax return with extension
What are the characteristics of an individually designed plan?
An individually designed plan is drafted specifically for a company. The issues with this type of plan are that they are costly to design and draft. Determination letter can be filed with the IRS when the plan is adopted, amended or terminated to ensure the plan meets the IRC requirements. The IRS will notify the plan sponsor if there are any issues with the plan.
What is a Master Plan
Single trust or account used by all adopting employers.
What is a prototype plan?
Each employer establishes their own separate trusts or account.
T/F Most prototype plans are based on a prototype plan document?
True
What are the characteristics of a prototype plan?
Prototype plans use an adoption agreement that allows the employer to check the box to select various options such as: participation requirements, vesting schedules, contribution limits, investment options, conditions for withdrawal.
Interested parties to a qualified plan include:
Present employees who are eligible to participate in the plan, present employees who are not eligible to participate but are in the same location as those eligible to participate.
T/F Notice regarding the qualified plan must be provided to interested parties?
True.
T/F If the notice to interested parties is done in person or posted, it must be done 30-60 days before the determination letter request sent to the IRS.
False, it must be done 7-21 days prior to the determination letter request being sent to the IRS.
T/F If the notice is mailed to interested parties, it must be mailed 10 to 24 days before the determination letter request is sent to the IRS.
True.
What is a summary plan description and what are the requirements?
A summary plan document is meant to summarize the legal language and characteristics of the qualified plan. The employer must furnish to employees within 90 days after the employee becomes a participant or within 90 days after the beneficiary receives a benefit from a plan, or within 120 days after the plan is established.
What is a periodic benefit statement and what does it require?
A defined contribution plan must provide a periodic benefit statement to: a participant or beneficiary who has the right to direct the investment of assets in their account, at least quarterly. Any participant or other beneficiary who has their own account under the plan at least annually. Other beneficiaries, upon written request, but limited to one request during any 12 month period.
What are the requirements for periodic benefit statements for defined benefit plans?
Must be provided at least once every three years to each participant who has a vested accrued benefit under the plan and who is employed by the employer at the time the benefit statements are furnished to participants. To furnish at least annually to each participant notice of the availability of the benefit statement and the manner in which a participant can obtain it. To a participant or beneficiary upon written request, limited to one request during any 12-month period.
What is a qualified trust?
Qualified plan assets must be placed in a qualified trust or custodial account. A qualified trust is maintained by an employer for the exclusive benefit of the employer’s employees. They are generally maintained by a bank or other financial institution.
How are assets in qualified plans typically managed by a plan sponsor?
Directed by the plan sponsor or an asset management firm hired by plan sponsor. Usually, defined benefit plans only. The plan sponsor takes on a Fiduciary Duty to the participants.
How are assets normally manged under Self-Directed or Individually managed funds?
Direct by plan participant. Usually, defined contribution plans. The sponsor must provide participants with a broad range of investment alternatives (at least 3). Usually stock, bond, and a cash or money market account.
