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Qualified Retirement Plans

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  • Qualified Retirement Plans
    As traditional pension plans recede and federal retirement programs see increased pressure to reduce cost, many businesses are struggling to find affordable alternatives to providing a secure retirement for owners and employees. Qualified retirement plans provide an outstanding solution.

    Qualified retirement plans are, by definition, “qualified” for special tax benefits by the Internal Revenue Service (IRS) by meeting requirements that include minimum employee participation coverage in the plan, vesting and funding. To encourage use of qualified retirement plans, the IRS provides significant tax advantages including:
    • Contributions by employer are tax deductible
    • Plan expenses are tax deductible
    • Employee 401(k) contributions are not taxed until withdrawal
    • Earnings on investments are not taxed until withdrawn so they compound on a pretax basis
    Finding an experienced firm to design, install and administer your retirement plan at the right expense can be a challenge. BCG has earned an enviable reputation for providing its clients with innovative solutions that help companies of every size maximize their savings opportunities while reducing expenses.

    Our retirement plan consultants take the time to carefully consider employer objectives, profit constraints and employee demographics before recommending a specific plan and plan options. Getting it right provides you with many benefits:
    • Greater savings opportunities for highly compensated owners and executives
    • A plan that is matched to your business goals
    • A reliable way to attract and retain the best and brightest workforce
    • A program to help you and your employees meet your retirement goals
    • Expanded potential tax advantages (eligible contributions are tax deductible business expense and contributions grow tax-deferred)
    • Increased employee satisfaction and loyalty
    • Lower turnover and ability to attract the best employees
    • Turnkey plan design, installation, employee education, and administration—letting you focus on the important business of running your company
    • Plan assets are protected from creditors
    Compliance Is The Critical Component
    BCG’s qualified retirement plan consultants provide you with peace of mind by keeping you informed every step of the way. We provide all of the needed services to keep your plan IRS/DOL compliant and operating smoothly:
    Definition of a Prototype Plan
    From Section 4.02 of Rev. Proc. 2000-20: A "prototype plan" is a plan (including a plan covering self-employed individuals) that is made available by a sponsor for adoption by employers and under which a separate funding medium is established for each adopting employer. A prototype plan consists of a basic plan document, an adoption agreement and, unless the basic plan document incorporates a trust or custodial account agreement the provisions of which are applicable to all adopting employers, a trust or custodial account document.

    There are certain restrictions and consequences associated with plan options. Contact a BCG qualified retirement plan consultant.

    Definition of a Volume Submitter Plan
    From Section 9.03 of Rev. Proc. 2003-6: A volume submitter plan is a profit-sharing plan without a 401(k) arrangement, a profit-sharing plan with a 401(k) arrangement, a money purchase pension plan, or a defined benefit plan that is submitted under the procedures described in section 9 for filing requests for volume submitter advisory letters (with respect to the specimen plan) and requests for determination letters (with respect to an employer's adoption of a plan that is substantially similar to an approved specimen plan). The IRS will not accept volume submitter requests with respect to ESOPs or other stock bonus plans, cash balance or similar defined benefit plans, or plans that include so-called fail-safe provisions for 401(a)(4) or the average benefit test under § 410(b). The IRS may decline to accept volume submitter requests for other types of plans not described in this section 9.03.

    There are certain restrictions and consequences associated with plan options. Contact a BCG qualified retirement plan consultant.

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    Definition of a Profit Sharing Plan
    A profit sharing plan is a formal arrangement by which an employer or company share a portion of its profits with employees. Profit sharing allows the employer to change the contribution rate each year as the company’s overall profitability may dictate (although the company does not need to have a profit to make contributions to a profit sharing plan). Unless the plan is defined as an elective deferral plan, contributions are not tax deductible. Properly defined, all contributions and earned interest can grow tax-deferred until retirement. Contributions to a profit-sharing plan are discretionary and there is no set amount that you need to contribute. When contributions are made to the plan, a set formula is used to determine how they are divided amongst participants and the money goes into a separate account for each employee. As with 401(k) plans, you can make a profit-sharing plan as simple or as complex as you want to.

    If you establish a profit-sharing plan, you:
    • Can have other retirement plans.
    • Can be a business of any size.
    • Need to annually file a Form 5500.
    Pros and Cons:
    • Greater flexibility in contributions – contributions are strictly discretionary.
    • Good plan if cash flow is an issue.
    • Administrative costs may be higher than under more basic arrangements.
    • Need to test that benefits do not discriminate in favor of the highly compensated employees.
    Who Contributes:
    • Employer contributions only.
    Contribution Limits: Participant Loans:
    • Permitted.
    In-Service Withdrawals:
    • Yes, but subject to possible 10% penalty if under age 59-1/2.
    Additional Resource: There are certain restrictions and consequences associated with plan options. Contact a BCG qualified retirement plan consultant.

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    Definition of 401(k) Plans
    A section 401(k) plan is a type of tax-qualified deferred compensation plan in which an employee can elect to have the employer contribute a portion of his or her cash wages to the plan on a pretax basis. These deferred wages (commonly referred to as elective deferrals) are not subject to income tax withholding at the time of deferral, and they are not reflected on your Form 1040 since they were not included in the taxable wages on your Form W-2. However, they are included as wages subject to social security, Medicare, and federal unemployment taxes. The amount that an employee may elect to defer to a 401(k) plan is limited. Employers should consult a qualified retirement plan consultant for information about setting up and maintaining retirement plans for employees, including 401(k) plans. Distributions received before age 59 1/2 are subject to an early distribution penalty of 10% additional tax unless an exception applies.

    Instituting a 401(k) offers employers many benefits:
    • A well-designed 401(k) plan can help attract and keep talented employees;
    • It allows participants to decide how much to contribute to their accounts;
    • Employers are entitled to a tax deduction for their contributions to employees’ accounts;
    • A 401(k) plan benefits both owners and employees;
    • Contributions to a 401(k) plan have the opportunity to grow through investing in a variety of investments including stocks, mutual funds, money market funds, savings accounts, and other investment vehicles;
    • Contributions and earnings generally are not taxed by the Federal government or by most State governments until they are distributed;
    • A 401(k) plan may allow participants to take their benefits with them when they leave the company.
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    A Safe Harbor 401(k) plan is a qualified retirement plan, meaning it qualifies for special tax deferred status under IRS 401(k) regulations. Traditional 401(k) plans must meet IRS requirements to prevent the plans from becoming “top heavy,” meaning that the plans can’t discriminate in favor of highly compensated plan participants.

    A Safe Harbor plan allows employers more flexibility in offering plans to their employees and encourages employee participation. Safe Harbor plans can be an attractive alternative for companies that might have trouble satisfying antidiscrimination testing, or whose owners might be unable to maximize their contributions due to low employee contributions. In a Safe Harbor 401(k) plan, all contributions must be fully vested immediately. The employer also must provide advance notice to employees about their rights under the plan.

    Under a safe harbor plan, you can match each eligible employee’s contribution, dollar-for-dollar, up to 3 percent of the employee’s compensation, and 50 cents on the dollar for the employee’s contribution that exceeds 3 percent, but not 5 percent, of the employee’s compensation. Alternatively, you can make a non-elective contribution equal to 3 percent of compensation to each eligible employee’s account. Each year you must make either the matching contributions or the non-elective contributions.

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    Definition of Money Purchase Plan
    A money purchase retirement plan is a defined contribution plan that allows an employer to contribute an amount for each employee that is proportional to that employee’s wages. For example, if your money purchase plan has a contribution of 5% of each eligible employee’s pay, the employer needs to make a contribution of 5% of each eligible employee’s pay to their separate account. A participant’s 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. That type of arrangement is different than a profit-sharing plan where the employer can decide to contribute a certain amount, say $10,000. Then, depending on the plan’s contribution formula, can allocate that $10,000 to the separate accounts of the eligible employees.

    If you establish a money purchase plan, you:
    • Can have other retirement plans.
    • Can be a business of any size.
    • Need to annually file a Form 5500.
    Pros and Cons:
    • Possible to grow larger account balances than under some other arrangements.
    • Administrative costs may be higher than under more basic arrangements.
    • Need to test that benefits do not discriminate in favor of the highly compensated employees.
    • An excise tax applies if the minimum contribution requirement is not satisfied.
    Who Can Contribute?
    • Employer and/or employee contributions.
    Contribution Limits: [back to top]

    Definition of Davis-Bacon Plan
    Davis-Bacon plans are defined contribution plans (retirement savings plans) utilized by non-union contract employers who perform duties for governmental agencies. The Davis-Bacon Act is a Depression era law (1931) that was designed to prevent unfair labor practices involving nonunion employees for the construction, alteration, or repair of public buildings or public works. This Act set minimum wages to be paid to various classes of laborers and mechanics employed under the contract work. Prevailing wage is used in reference to jobs performed on a local, county and state basis while Davis-Bacon refers to jobs performed for the federal government.

    Governmental wages are set by the U.S. Department of Labor and the Davis-Bacon Act is governed by the DOL which sets forth general rules with respect to timing of contributions and appropriate wages. Wages are broken into two pieces, the base rate and the fringe rate. The base rate is comparable to local wages while the fringe rate is additional compensation mandated for providing services to the government.

    A qualified plan that is funded in part or entirely with Davis-Bacon contributions must comply with the Davis-Bacon regulations and all of the terms of ERISA and the Internal Revenue Code. A Davis-Bacon plan offers employers undertaking government work a retirement plan that is cost-competitive with other qualified retirement plans.

    A BCG retirement plan specialist can help you create a plan to take advantage of these opportunities or review your current plan to see if it is meeting your current needs in a cost efficient manner.

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    Definition of Cross-Tested Plan
    Cross-tested retirement plans, also referred to as new comparability or tiered plans, are retirement planning tools designed for small businesses. They allow more flexibility than a traditional 401(k) because they allow different levels of employer contributions to be given to different classes of employees. In addition, a well-designed cross-tested retirement plan can be a more visible and valued employee benefit than a traditional plan, something that can help smaller companies to hire more competitively.

    These plans benefit older, more highly compensated employees. Contributions are calculated based on compensation and length of time to retirement. A cross-tested plan is generally used when business owners want to maximize their benefit and have a shorter time span until retirement than most of their employees. Employer contributions are also discretionary, which means the business is not obligated to make a contribution in years where profits are slim or negative.

    A cross-tested plan allows the employer to decide on a year-to-year basis how much it will contribute for each employee based on established tiers for various individuals for job classifications. This type of plan offers small business owners great flexibility in providing more meaningful benefit to employees, particularly key employees, as well as in controlling its employee benefit costs and cash flows.

    A BCG retirement plan advisor can run scenarios, provide more information and help you determine if a cross-tested plan is right for your business.

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    Definition of Defined Benefit Plan
    A defined benefit plan is a retirement plan offered by an employer in which the retiree receives a set amount in benefits each month once he or she has retired or begun receiving benefits. A defined benefit plan states what the benefit will be in advance.

    The amount of benefit is typically determined by a formula based on the employee's salary history and years of service with the company. Benefits paid are not dependent on the performance of the portfolio investments because the employer bears all of the investment risk and liability for paying the defined benefit to the employee.

    The disadvantage to a defined-benefit plan, from the company's perspective, is the possibility that the investment portfolio will not perform as expected, forcing the company to make payments from its earnings, or, worse, to borrow money.

    To learn more about defined benefit plans, their benefits and their alternatives, contact A BCG retirement plan specialist.

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    Definition of Daily Valuation
    Daily valuation is a method of valuing contributions and underlying investments within qualified plans on a daily basis. A direct advantage is daily valuation allows purchases of stocks, mutual funds, bonds and other investable assets to be completed and posted quickly to member accounts. Contributions will be invested quicker, and members will be able to see their account balances sooner, using up-to-date share values. Daily valuation of retirement plans provides managers and plan participants immediate access to information through the Internet and helps satisfy Department of Labor requirements when employers shift the fiduciary responsibility for investing plan assets to plan participants through self-directed retirement accounts.

    To learn more about daily valuation plans, their benefits and investment alternatives, contact A BCG retirement plan specialist.

    Definition of Participant-Directed
    Participant-directed retirement plans are those including 401(k) plans that allow the plan participants to make their own investment decisions based on the investment vehicles that are available within the plan. The goal when designing a participant-directed retirement plan is to provide ample investment options to provide appropriate diversification for proper asset allocation and ability to meet the participants’ tolerance for risk vs. reward. Equally important is providing enough investment options to satisfy each participant’s needs while not offering so many as to create confusion and inaction.

    A BCG retirement plan specialist can review all plan options with you and help you to design a custom program that exactly fits your business.

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    Compliance Testing
    Compliance and non-discrimination testing for tax qualified defined contribution plans and 401(k) plans is critical to ensuring that plan sponsors are indeed following the rules and laws established by the Internal Revenue Service and the Department of Labor. Compliance testing functions to verify that participant funds are being invested properly and in a timely manner and that all promised employer matching funds are as well. Non-discrimination compliance testing ensures that all participants have an equal opportunity to participate and that no participants have unfair advantage within the plan.

    Required compliance and non-discrimination tests include:
    • ADP/ACP or Actual Deferral Percentage Test / Actual Contribution Percentage Test
    • 410(b) or Internal Revenue Code 410(b) Minimum Coverage Requirements
    • 415 or Internal Revenue Code §415 Maximum Limits for Qualified Plans
    • Top Heavy
    • Employer Deductibility
    • 402(g) or Internal Revenue Code 401(g) Maximum Elective Deferral Amounts
    A BCG retirement plan specialist can provide additional detail and walk you through the many options that are available to you.

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