Key Factors Affecting Plan Selection for Businesses

Question 1

Profit Sharing Plan Suitability Factors

Answer 1

• 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

Question 2

Profit Sharing Plan Advantages

Answer 2

• 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

Question 3

Profit Sharing Plan Disadvantages

Answer 3

• 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

Question 4

401 k suitability factors

Answer 4

• employer has limited resources
• employees are young
• used to supplement existing pension plan
• when employer wants employees to contribute to the plan

Question 5

SIMPLE 401 k suitability factors

Answer 5

• employer has less than 100 employees and wants something less expensive than a 401k
• wants to avoid the ACP and ADP test
• young employees

Question 6

SIMPLE 401 k Advantages

Answer 6

• 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

Question 7

SIMPLE 401 k Disadvantages

Answer 7

• 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)

Question 8

Age-Based and New Comparability Plan Suitability

Answer 8

• 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

Question 9

Stock Bonus and ESOP Suitability

Answer 9

• 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

Question 10

Thrift or Savings Plan Suitability

Answer 10

• 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

Question 11

Thrift or Savings Plan Disadvantages

Answer 11

• 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

Question 12

Money-Purchase Plan Suitability

Answer 12

• 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

Question 13

Target-Benefit Plan Suitability

Answer 13

• 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

Question 14

Defined-Benefit Plan Suitability

Answer 14

• 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

Question 15

Cash-Balance Plans Suitability

Answer 15

• 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.

Question 16

Cash-Balance Plan Advantages

Answer 16

• 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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Question 17

Defined-Benefit Plan Disadvantages

Answer 17

• 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.

Question 18

412 (i) Plan Suitability

Answer 18

• 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

Question 19

412 (i) plan Advantages

Answer 19

-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
.

Question 20

412 (i) plan disadvantages

Answer 20

• 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

Question 21

Keogh Plan Suitability

Answer 21

• 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.

Question 22

Monitoring the plan

Answer 22

• 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

Question 23

Tax Deferred Annuity Suitability

Answer 23

• 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.

Question 24

Tax Deferred Annuity Advantages

Answer 24

• 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

Question 25

SIMPLE IRA Suitability

Answer 25

-when an employer has less than 100 employees and wants an alternative to 401(k) plan that is simple and less expensive to administer

Question 26

SEP Plan Suitability

Answer 26

• 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.

Question 27

Non-Qualified Deferred-Compensation Plan Suitability

Answer 27

• 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.

Question 28

Non-Qualified Deferred-Compensation Plan Advantages

Answer 28

• 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

Question 29

Non-Qualified Deferred-Compensation Plan Disadvantages

Answer 29

• 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