Installing a Qualified Plan Chapter 10 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company1 Plan Adoption Qualified

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



• 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



• 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



• 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



• 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



• 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



• 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



• 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




• 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.


Documents

Installing a Qualified Plan Chapter 10 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company1 Plan Adoption Qualified