Section 7 - Qualified Plans

Plan Types, Characteristics and Purchasers Keogh Plan: Self-Employed Only

(Also known as HR10 Plan) is a tax advantage personal retirement program that can be established by a self-employed individual, or by any individual working for an unincorporated business: -Individual can contribute up to 25% of his/her income with max contribution of 20% of total income -If employees have worked for three(3) years or more, then the self-employed individual must contribute the same percent of employees income to the Keogh as he or she did for their own plan. -Plans must be in place before the end or the calendar year for which contributions are made -Once established, the employer is required to make annual contributions to the Keogh plan unless there is an exceptionally bad year, but contributions must be made on a regular basis -Employees are immediately vested in the plan -Employees may not withdraw from the account before age 59.5, without incurring a penalty and withdrawals must begin before age 70.5

Plan Types, Characteristics and Purchasers Individual Tax Shelter Pension/Retirement Plans-Qualified Plans Exceptions to avoid 10% Penalty

-Disability, buying a first home, and paying medical expenses that exceed 7.5% adjusted gross income -Taking money out in 'substantially equal payments' over the insureds lifetime

Plan Types, Characteristics and Purchasers Individual Retirement Account (IRA)

-Interest grows on a tax-deferred basis, being taxed only when finally withdrawn -Contributions are deductible form earned income for the year contributed to the IRA -If the individual is eligible for an employer sponsored retirement plan, then contributions to the IRA may be only partially tax-deductible (part of a qualified plan) or not deductible at all (a non-qualified plan) depending on amount of income.

Non-Qualified Retirement Plans

A non-qualified deferred compensation plan is a written contract between a corporate employer and an employee covering employment and compensation to be provided in the future. The funds, usually paid out as annuities or in lump sums, are taxed when withdrawn at retirement. Non-qualified plans do not meet the IRS guidelines which would allow them to receive favorable tax treatment.

General Requirements Tax-Qualified Plans: Defined Contribution vs. Defined Benefit

A qualified retirement plan falls into one of three general categories: 1. Defined contribution plans 2. Defined benefit plans 3. Hybrid plans, which combine attributes of the first two categories

Plan Types, Characteristics and Purchasers Profit Sharing and 401(k) Plans

Allows participant to elect to defer taxation on portions of current salaries or bonuses by placing the money in the plan. Interest on the money in the plan accumulates on a tax-deferred basis Money put into the plan is 100% vested immediately. It cannot be forfeited due to employment termination or any other reason. Withdrawals are only allowed for retirement, death, disability, separation from service, attainment of age 59.5 or for hardship cases (heavy financial need of the employee, such as medical expenses) 10% fee for early withdrawal.

Plan Types, Characteristics and Purchasers Money Purchase Plans

Also called 401(a) Investment Plans

Plan Types, Characteristics and Purchasers Where can IRAs & Keogh plans may be purchased:

Banks, Government Bonds, Mutual Funds, Stock Brokerage firms and Life Insurance Annuity Plans

General Requirements Tax-Qualified Plans: Eligibility Contribution Limits

Because of tax ramifications of qualified plans, each plan has limits as to the amount of allowed annual contributions

General Requirements Tax-Qualified Plans: Eligibility Participation

Employees are legally eligible to participate if they are at, or over the age of 21 years and have worked for the company for one(1) year (defined as 1,000 hours or more)

Plan Types, Characteristics and Purchasers Money Purchase Plans: Eligibility

Employer contributions are fixed. These plans are fo businesses of any size, or individuals with self employment income. Employers may contribute up to the lesser of 25% of employees compensation or the amount shown on chart. A participants benefit is based on the amount of contributions to their account and the gains or losses associated with the account at the time of retirement.

Plan Types, Characteristics and Purchasers Simplified Employee Pensions (SEPs)

Employer sponsored IRAs that allow corporations to establish retirement plans for eligible employees -SEP plans may be set up until April 15 of the following year (date of reporting to IRS) -Any employees who have been employed for three(3) years or more of the past five(5) years and who are age 21+ must be included in the plan. The employer must invest the same percentage that he/she invests of his/her own income on his/her own behalf for each employees income into a SEP on their behalf. -Employer contributions into the employees SEP are not included in the employees gross income. -Unlike Keogh Plans, an employer is not required to make a set plan contribution each year and may skip making contributions any given years.

General Requirements Tax-Qualified Plans: Eligibility Fiduciary Responsibilities

Fiduciaries are the people who operate, take care of, and provide advice about the retirement plan. They have an obligation to act in the best interests of individuals affiliated with the retirement plan, and to manage the plan with the best intentions of maximizing returns, paying plan expenses, and minimizing losses

General Requirements Tax-Qualified Plans: Eligibility Funding Requirements

Funds that are to be contributed to the retirement plan must legally be separated from other company funds and accounts

Plan Types, Characteristics and Purchasers Individual Tax Shelter Pension/Retirement Plans-Qualified Plans Catch Up Provisions

Individuals over 50 are allowed higher limits of deferral in various plans to help encourage them to save more toward retirement

Federal Tax Considerations Taxations of Distributions (Age-Related)

Individuals who withdraw money from a qualified plan before age 59.5 must pay 10% penalty as well as income tax on withdrawn amount.

General Requirements Tax-Qualified Plans:

Meets IRS guidelines and receives favorable tax treatment, such as deducting money from current income for income tax purposes. Qualified retirement plan meets requirements of the Internal Revenue Code and the Employee Retirement Income Security Act of 1974 (ERISA). Retirement plans whose attributes fall under these guidelines qualify for favorable tax treatments, such as the following: -Employers may deduct yearly allowable contributions for plan participants -Taxes on contributions and all associated earnings are fevered until the year they are withdrawn -Taxes can be further delayed by transferring the plans proceeds into another tax-deferred vehicle (such as an Individual Retirement Account, IRA)

Plan Types, Characteristics and Purchasers SIMPLE Plans (Savings Incentive Match Plan for Employees)

Plans target business with 100 employees or less -All employees with compensation of $5,000 or more can participate -Eligible employees must include those with one(1) year of service and who are over the age of 21 (part time employees may be excluded/participants are immediately 100% vested) -Employers may not also contribute to or accrue benefits from a qualified plan during the same year -Employee can elect to defer a percentage of compensation and set it aside into a simple IRA (every W-2 individual employee, including husbands, wives, and children can also contribute to the plan) -Highly compensated employees should talk to their HR dept. to understand the limits that apply to them -Employees are not taxed on amounts deferred in this manner until they are withdrawn -Early withdrawals are subject to 10% penalty or a 25% penalty if the withdrawal is made during the first two years -Employers must take a matching contribution up to three(3) percent of the eligible employees compensations or a flat two(2) percent of compensation on a non participating basis

Plan Types, Characteristics and Purchasers Individual Tax Shelter Pension/Retirement Plans-Qualified Plans

Plans that meet certain guidelines set by Congress and allow tax advantages, usually tax-deferred growth. Contributions are tax-deductible and interest accumulates on a tax-deferred basis. Both principal and interest are taxed when money is withdrawn from these qualified retirement funds.

General Requirements Tax-Qualified Plans: Defined Contribution Plans

Provides an individual account for each participant. The employer contributes a certain amount to the plan but does not guarantee any certain payment at retirement. The retirement amount will be determined by the performance of the plan, and the employee can often determine where funds will be invested with certain perimeters. Plans include: 401(k), 403(b), employee stock ownership plans, and profit sharing plans

Plan Types, Characteristics and Purchasers Employee Stock Ownership Plans (ESOP)

Qualified defined contribution plan in which benefits are given in the form of company stock. Because the value of the stock determines the performance of these plans, Life Insurance on the lives of key managers can be an important tool to provide funds for the search for replacements in event of the death of these managers

Federal Tax Considerations Tax Advantages for Employers and Employees

Qualified plans allow the employer a tax deduction for the contributions it makes to the plan each year. For employees, income taxes on all contributions, interest and earnings are deferred until withdrawal, usually at retirement.

General Requirements Tax-Qualified Plans: Defined Benefit Plans

Requires the employer, not employee, to contribute to the plan and has a set benefit (often an exact dollar amount or formula amount) that will be paid to employees upon retirement. The employer invests the funds, and if the investment fo the plan doesn't do well, then the employer makes up the difference to provide the benefit. A defined benefit plan is sometimes referred tp as a fully funded pension plan. Monthly benefits could also be calculated through a formula that considers a participants salary and service. Participant generally not required to make contributions in a private sector fund but most public sector funds require employee contributions. Unlike defined contribution plans, the participant is not required to make investment decisions.

Plan Types, Characteristics and Purchasers 403(b) Tax-Sheltered Annuities (TSAs)

Tax advantage retirement savings plan available to public education organizations, self employed ministers, and some nonprofit organizations EX: Old age homes, parent-teacher associations, charitable hospitals, alumni associations, schools, chapters of the Red Cross or Salvation Army, Boys or Girls clubs and churches -Tax treatment is similar to 401(k) plans -Employees make contributions before taxes are paid -No tax is paid on contributions or growth until distribution -Employee can withdrawal before 59.5 with certain parameters -TDAs & TSAs can be used in conjunction with or in lieu of other retirement plans -Combined employer and employee contributions are limited to up to 100% of the employees income with max contribution of the lesser of the employees income or the amount shown in chart

Plan Types, Characteristics and Purchasers Employee Stock Ownership Plans (ESOP): Executive Bonus Plan

Tax-deductible way to reward key executives Plan can be offered to specific employees. The company gives the executive a bonus equal to the cost of the Life insurance policy premium. The executive owns the policy and pays the premium. Cash values build on a tax-deferred basis and accumulated cash value is available for retirement. Any death benefit is income tax-free

General Requirements Tax-Qualified Plans: Eligibility Vesting Provisions

The ERISA requires that pension plan sponsors must either: -Have 100% vesting of employers contributions in defined contribution plans after a certain number of years OR -Vest incrementally by 20% annually so after two(2) years of service so that: 1. There is 40% vested after three(3) years 2. The employee is 60% vested after four (4) years 3. There is 80% vested after five(5) years 4. Full vesting occurs in the sixth(6) year Vestment is applicable even if employees leave the company.

General Requirements Tax-Qualified Plans: Eligibility Retirement Age

There are not normal and early retirement age considerations