RPF M1 U2 What Is the Process for Setting Up the Plan

Question 1

What is an Adoption Agreement?

Answer 1

A document used in conjunction with a base plan document to allow individual employers to customize provisions of the plan.

Question 2

What is a Base Plan Document?

Answer 2

A plan document issued by a document provider that has been approved by the IRS and customized for individual employers.

Question 3

What is a Defined Benefit Plan?

Answer 3

A qualified retirement plan that provides participants with a specifically defined retirement benefit payable at a stated retirement age.

Question 4

What is a Defined Contribution Plan?

Answer 4

A qualified retirement plan that allocates contributions, earnings, and forfeitures to individual participant account balances.

Question 5

What is a Fiduciary?

Answer 5

Any person who exercises discretionary authority or control over the management of plan assets or renders investment advice for a fee.

Question 6

What is a Hybrid Plan?

Answer 6

A qualified retirement plan that combines features of both Defined Benefit (DB) and Defined Contribution (DC) plans.

Question 7

What is the first step an employer should take in setting up a retirement plan?

Answer 7

The employer should identify the business and employee goals that should be reached through the plan.

Question 8

What is the primary goal of ‘Owner-driven’ plans?

Answer 8

Owner-driven plans are designed to provide retirement savings primarily for the company owners.

Question 9

What is the primary goal of ‘Participant-driven’ plans?

Answer 9

Participant-driven plans are designed to attract and retain employees and allow all employees to save for retirement on a tax-preferred basis.

Question 10

Why are there many types of retirement plans?

Answer 10

There are many plan types because the retirement plan type and design should fit the needs of the business and due to changes in retirement policy.

Question 11

What are the two dominant types of retirement plans that emerged after ERISA?

Answer 11

Defined Benefit Plans and Defined Contribution Plans.

Question 12

What is a Profit-sharing Plan?

Answer 12

A qualified defined contribution plan with discretionary employer contributions and specific withdrawal rules.

Question 13

What are the advantages of 401(k) plans?

Answer 13

They encourage employees to save for retirement, allow investment selection, and may include employer matching.

Question 14

What are the disadvantages of 401(k) plans?

Answer 14

They have complex operations and recordkeeping, may require employer contributions, and have specific tests.

Question 15

What are SIMPLE plans designed for?

Answer 15

SIMPLE plans are designed to offer simplified retirement savings alternatives for small businesses.

Question 16

What are the advantages of SIMPLE plans?

Answer 16

They have individual participant accounts, simplified documentation, limited filing requirements, and lower administration costs.

Question 17

What are the disadvantages of SIMPLE plans?

Answer 17

They may not maximize retirement contributions for principal employees.

Question 18

What are the advantages of simplified retirement savings alternatives for small businesses?

Answer 18

Individual participant accounts with easier access than 401(k) accounts, simplified documentation, limited government filing requirements, fewer requirements than ERISA qualified plans, and less expensive to administer than qualified plans.

Question 19

What are the disadvantages of simplified retirement savings alternatives for small businesses?

Answer 19

Can limit retirement plan savings due to lower employee contribution limits, unfavorable to owners and principal employees, may have required employer contributions, places the burden of compliance fully on the plan sponsor, and SIMPLE 401(k) plans are subject to many qualified plan rules.

Question 20

What is a defined benefit plan?

Answer 20

A traditional defined benefit (DB) plan provides a guaranteed benefit at the plan’s stated normal retirement age, with employer contributions calculated by an actuary.

Question 21

What are the advantages of defined benefit plans?

Answer 21

Higher tax-deductible employer contributions than DC plans, greater and faster retirement savings for owners and principal employees, and guaranteed benefits in retirement.

Question 22

What are the disadvantages of defined benefit plans?

Answer 22

A larger, fixed contribution, higher required employer contributions for employees than 401(k) plans, more complex and expensive administration, and employee demographic changes can undermine the original goals of the design.

Question 23

What are ERISA and non-ERISA plans?

Answer 23

All qualified plans provide tax advantages and are subject to most IRS rules, but non-ERISA plans are not subject to certain ERISA requirements and are often sponsored by governments, educational institutions, and religious organizations.

Question 24

What are ERISA 403(b) and 457 plans?

Answer 24

These plans can only be sponsored by tax-exempt employers and are similar to 401(k) plans, with both types having employee contributions and potential employer contributions.

Question 25

What are non-ERISA 403(b) plans?

Answer 25

Tax-favored plans offered by public schools and specific tax-exempt organizations, allowing employees to contribute money to an individual annuity.

Question 26

What are nonqualified plans?

Answer 26

Participant-driven plans designed to attract and retain employees, allowing tax-deferred benefits to certain executives beyond qualified plan limits.

Question 27

What are the advantages of nonqualified plans?

Answer 27

Deferred taxation on employer contributions, minimal regulation, ability to target a small group of management employees, customizable timing of benefits, tax deduction for the employer, and allowance for stock options.

Question 28

What are the disadvantages of nonqualified plans?

Answer 28

Assets belong to the employer and are subject to creditors, no current tax deduction for employer contributions, and no tax-deferred rollover for employees.

Question 29

What is a plan document?

Answer 29

A legal document that details specific provisions selected by the plan sponsor to meet retirement plan and business goals, containing required ERISA, IRS, and DOL provisions.

Question 30

What is a Summary Plan Description (SPD)?

Answer 30

A summary required by ERISA that describes participants' rights, benefits, and responsibilities under the plan, provided within 90 days of eligibility.

Question 31

What steps are involved in starting a 401(k) plan?

Answer 31

Select service providers, customize plan documents, adopt the plan, communicate to employees, and provide certain notices during enrollment.

Question 32

How can an employer make changes to the plan?

Answer 32

The plan sponsor can amend the plan document provisions, but must not violate ERISA rules, and must notify participants of material changes.

Question 33

How does a plan come to an end?

Answer 33

Plans can terminate due to business changes, requiring specific steps such as adopting a resolution, notifying participants, vesting accounts, and filing final forms.

Question 34

What is the role of a fiduciary in a retirement plan?

Answer 34

A fiduciary is responsible for managing participants' assets and ensuring the plan operates in their best interest, including hiring service providers.

Question 35

What should an employer consider when selecting service providers?

Answer 35

Employers should use a prudent process, possibly including a written request for proposal (RFP), to select service providers for the plan.

Question 36

What happens if a business needs to terminate its retirement plan?

Answer 36

The employer must follow specific steps, including adopting a resolution, notifying participants, vesting benefits, and filing final forms.

Question 37

What should employers consider when selecting retirement plans?

Answer 37

Employers should consider cost, complexity of administration, tax benefits, contribution limits, and the ability to target benefits to certain employee groups. ## Footnote An advisor and a plan consultant can help the employer make the best decision.

Question 38

What decisions must the employer make when starting the plan?

Answer 38

The employer selects a plan type and makes choices about participation, eligibility requirements, contribution types, investment options, and service providers.

Question 39

Can the employer make changes to the plan later on?

Answer 39

Yes, plans can be updated to adapt to changing business goals and must be amended to reflect changes in the law.

Question 40

What happens to the plan if the employer closes or sells the business?

Answer 40

The plan may be terminated due to various reasons, including business acquisition or closure. Required steps include notifying participants, providing full vesting, distributing benefits, and filing with the DOL and IRS. ## Footnote Some DB plans must also take action with the PBGC.

Question 41

Where can employers find more information on setting up a retirement plan?

Answer 41

Employers can visit www.irs.gov/Retirement-Plans/ for information on types of retirement plans, pre-approved retirement plans, amending or updating a plan, and termination of plans.