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Copyright 2009, The National Underwriter Company 1
Installing a Qualified Plan Chapter 10Employee Benefit & Retirement Planning
Plan Adoption
• Qualified plan must be legally “adopted” by the employer during the taxable year in which it is to be effective. (In contrast, SEP can be adopted up to filing deadline)
• Plan can be retroactive to start of the year of adoption
• “Backdated” adoption not effective
Copyright 2009, The National Underwriter Company 2
Installing a Qualified Plan Chapter 10Employee Benefit & Retirement Planning
• Corporation adopts plan by formal action of its board of directors. Similar resolution should be used by unincorporated businesses.
• If trust used for funding, trust should be established before end of year of adoption
• If funded by insurance contract, insurer must accept application for contract before the end of the year of adoption
Plan Adoption
Copyright 2009, The National Underwriter Company 3
Installing a Qualified Plan Chapter 10Employee Benefit & Retirement Planning
• Small business employers eligible for credit of $500 per year for first three years
• Credit covers up to 50% of “qualified” start-up costs paid or incurred to adopt a new plan
• Eligible employer may have no more than 100 employees earning over $5000
Credit for Startup Costs
Copyright 2009, The National Underwriter Company 4
Installing a Qualified Plan Chapter 10Employee Benefit & Retirement Planning
• Commonly called “determination letter”
• IRS ruling that plan provisions meet Code requirements for being qualified
• Not required for plan to be qualified, but highly recommended
• If plan later found on audit to have disqualifying provision, generally too late to amend.
Advance Determination Letter
Copyright 2009, The National Underwriter Company 5
Installing a Qualified Plan Chapter 10Employee Benefit & Retirement Planning
• A determination letter generally protects the plan from a later finding that the plan document lacked an essential provision or contained a disqualifying provision.
• Does not protect plan from finding of noncompliance in operation.
• Employee Plans Compliance Resolution System (EPCRS) programs allow correction of plan errors at all levels without disqualification.
Advance Determination Letter
Copyright 2009, The National Underwriter Company 6
Installing a Qualified Plan Chapter 10Employee Benefit & Retirement Planning
• Retroactive plan amendments permitted under the Internal Revenue Code up to the employer’s tax filing date for the year
• Determination letter requests extend the time for retroactive amendments for as long as the request is pending
Advance Determination Letter: Retroactive Amendments
Copyright 2009, The National Underwriter Company 7
Installing a Qualified Plan Chapter 10Employee Benefit & Retirement Planning
• Offered by financial institutions as inducement to use their products to fund the plan
• Examples: banks, insurance companies, mutual funds, various service providers
• Of interest to smaller employers because they reduce cost of plan drafting and installation
Master and Prototype Plans
Copyright 2009, The National Underwriter Company 8
Installing a Qualified Plan Chapter 10Employee Benefit & Retirement Planning
• Plans are standardized, use language already approved by the IRS
• Master plan usually uses a single financial institution for finding
• Prototype plan usually does not refer to any particular funding institution or medium
Master and Prototype Plans
Copyright 2009, The National Underwriter Company 9
Installing a Qualified Plan Chapter 10Employee Benefit & Retirement Planning
• Greatly simplifies plan adoption
• Fees much lower than those for custom designed plans
• Determination letter process simplified
• Document preparation services can be customized by use of checklists of plan provisions from central word processors.
Master and Prototype Plans
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