Key Factors Affecting Plan Selection for Businesses Flashcards
1
Q
Profit Sharing Plan Suitability Factors
A
- profits are unstable and vary year to year
- employer wants a plan tied to profits and provides incentive to increase productivity
- young employees
- when a employer wants a plan to supplement an existing pension plan
- when employees are willing to accept investment risk
2
Q
Profit Sharing Plan Advantages
A
- maximum contribution flexibility
- tax deferred contributions and earnings
- simple and inexpensive
- contributions can be made even if no profits
- from an employer perspective, investment risk is shifted to employee
3
Q
Profit Sharing Plan Disadvantages
A
- inadequate for employees who enter at an older age
- benefits are unpredictable
- contributions may be inadequate for some employees because of the 25% limit on deductible contributions
- from an employee standpoint, investment risk
4
Q
401 k suitability factors
A
- employer has limited resources
- employees are young
- used to supplement existing pension plan
- when employer wants employees to contribute to the plan
5
Q
SIMPLE 401 k suitability factors
A
- employer has less than 100 employees and wants something less expensive than a 401k
- wants to avoid the ACP and ADP test
- young employees
6
Q
SIMPLE 401 k Advantages
A
- less expensive to adopt and administer
- complex nondiscrimination tests are avoided
- top-heavy problems are eliminated
- employees have choice in amounts they want to save
- employer shares cost of funding retirement
7
Q
SIMPLE 401 k Disadvantages
A
- limited salary deferral amounts of $12,500
- inadequate for older employees
- cannot maintain another qualified retirement plan, SEP, SARSEP, TDA, 403 or government plan
- employees bear investment risk
- benefits 100% vested (employer disadvantage, employee advantage)
8
Q
Age-Based and New Comparability Plan Suitability
A
- employer wants a defined contribution plan, but will benefit older employees too
- when an employer intends to terminate a defined benefit plan and wants the successor plan to be less expensive to administer
- when a closely held business has several highly compensated employees over the age of 50.
- when the employer would like to use different funding formulas for different employees
9
Q
Stock Bonus and ESOP Suitability
A
- employer wants to provide tax advantaged method for employees to purchase shares of the company
- employer wants to create a market or increase the existing market for the stock
- For an ESOP, the employer wants a tax-advantaged method for borrowing money
- when the employer wants to broaden its ownership base in order to reduce the possibility of a hostile takeover
- when the employer wants to enhance the liquidity owners estates by arranging for them to sell some of their stock
10
Q
Thrift or Savings Plan Suitability
A
- when an employer wants to add an additional benefit to an existing 401k profit sharing plan
- when there is a wide variation among employees regarding level of retirement savings
- young employees
11
Q
Thrift or Savings Plan Disadvantages
A
- accounting must be done for individual employee contributions and matching accounts, the cost of administration may be higher than for a simple profit-sharing or money-purchase plans
- employee contributions are made on an after-tax basis (non-deductible). However employer contributions are deductible
12
Q
Money-Purchase Plan Suitability
A
- when an employer wants a plan that is simple to administer and easy to explain to employees
- employer has stable profits
- when an employer wants to provide more security and stability for employee expectations of retirement income than if possible in a profit sharing plan
- young employees
- employer wants to retain key employees and keep turnover low
13
Q
Target-Benefit Plan Suitability
A
- when the employer wants a defined contribution plan but there are older employees
- alternative to defined benefit plan (cheaper)
- when a closely held business has many highly compensated employees who are older than 50
- much less expensive and easier to administer than a defined benefit plan
- subject to minimum funding standards
14
Q
Defined-Benefit Plan Suitability
A
- when the employer wants to provide guaranteed retirement income to employees, regardless of ages
- employer wants to allocate plan resources to funding benefits for older employees
- when the owner of a professional corporation wants to maximize his or her own tax-deferred savings
- provide benefits based on past service
15
Q
Cash-Balance Plans Suitability
A
- easier to explain and less costly than a traditional defined-benefit plan, but still provides many of the same guarantees of a defined-benefit plan.
- when an employer wants to provide benefits based on past service
- when an employer wants a plan insured by PBGC
- When an employer has an overfunded defined-benefit plan and wants to amend the plan, rather than terminate it, in order to use the excess fund additional benefits.
- when an employer wants to make larger contributions for his or her retirement plan than the $54,000 maximum with defined contribution plans.
16
Q
Cash-Balance Plan Advantages
A
- forfeitures must be used to reduce the employers contributions
- an employer can amend a defined-benefit plan to a cash-balance plan to reduce plan costs
- benefits are more portable because employees have hypothetical account balances
- investment risk is on the employer, employees receive a fixed investment rate
- younger employees can accrue more benefits.
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17
Q
Defined-Benefit Plan Disadvantages
A
- benefits are not based on final salary like traditional defined-benefit plans, so benefits are not inflation-adjusted before retirement and do not replace a specified percentage of preretirement income.
- contributions are bookkeeping entries, and benefits are not always fully funded as in a defined contribution plan
- PBGC does not guarantee all benefits.
18
Q
412 (i) Plan Suitability
A
- when an employer wants to provide guaranteed retirement income to employees, regardless of age
- when the employer wants to allocate plan resources to funding benefits for older employees, in many cases, the owners and other key employees
- when the owner of a professional corporation wants to maximize his or her own tax-deferred retirement savings
- when the owner wants a plan insured by PBGC
- when the employer wants a plan funded solely with life insurance and annuities
- when the employer is a small business owner, typically less than 5 employees
- when the employer has stable revenue streams and is looking for ways to shelter business income
19
Q
412 (i) plan Advantages
A
-benefits are promised under the plan are tax-deferred
-both the employer and the PBGC guarantee benefits
-older employees generally receive more favorable benefits than are possible under defined-contribution plans
-plan contributions can be higher than traditional cash-balance defined-benefit plan contributions, due to the lower guaranteed returns by the insurance companies on the life insurance and annuities
.
20
Q
412 (i) plan disadvantages
A
- actuarial costs and PBGC premiums cause defined-benefit plans to have higher costs
- complex and difficult to explain to employees
- funding obligations are the most stringent. The employer must make contributions to the plan no less frequently than quarterly
21
Q
Keogh Plan Suitability
A
- when the owner of a sole proprietorship or partners in a partnership want to adopt a plan that provides retirement benefits for themselves and their employees
- when self-employed individual wants to shelter some earned income from current taxation.
22
Q
Monitoring the plan
A
- annual reports must be filed with the IRS to ensure the plan continues to meet the ongoing ERISA rules and regulations.
- periodic review of the plan’s investment performance and funding adequacy
- periodic revisions to the plan as business conditions change, as laws change, as client objectives change, and as the company personnel change
23
Q
Tax Deferred Annuity Suitability
A
- when the employer is a tax-exempt organization described in section 501(c)(3)
- can only afford minimal expense
- when the employees are young
- when employees want a choice between cash compensation and tax-deferred savings
- when employees are willing to accept investment risk in return for the potential of good investment results.
24
Q
Tax Deferred Annuity Advantages
A
- employees have a choice in the amount they want to save
- TDA’s can be funded entirely through employee salary reductions (no employer contribution), and the employer is only required to pay administrative costs
- in-service distributions are permitted
25
Q
SIMPLE IRA Suitability
A
-when an employer has less than 100 employees and wants an alternative to 401(k) plan that is simple and less expensive to administer
26
Q
SEP Plan Suitability
A
- when a small employer (typically less than 10 employees) is looking for a simple plan that is easy to install and administer
- when an employer wants to install a plan, and it is too late to adopt a qualified retirement plan for the tax year in question.
- SEPs may be adopted up to the due date of the employers income tax return, including extensions.
27
Q
Non-Qualified Deferred-Compensation Plan Suitability
A
- when the employer wants to provide deferred compensation to a select group of executives and does not want to cover the rank-and-file employees
- when the employer wants to help in recruiting, retaining, rewarding, and retiring key employees.
- when a closely held corporation wants to compete with publicly held corporations in attracting and retaining non-shareholder employees.
28
Q
Non-Qualified Deferred-Compensation Plan Advantages
A
- no nondiscrimination requirements
- no benefit limits
- opportunity to create different benefit structures for different levels of employees
- minimal ERISA and regulatory requirements
- binds the employee to the employer
29
Q
Non-Qualified Deferred-Compensation Plan Disadvantages
A
- tax deduction is not available until benefits are actually paid and taxable to the employee
- benefits represent the employer’s unsecured promise to pay
- not suitable for S-Corporations because of their pass-through tax structure
