Appendix C - Retirement Plans
Pensions and profit-sharing plans provide one of the most effective means for wealth accumulation available to business owners, employees, and self-employed individuals. Tax-qualified plans offer a number of tax-shelter elements including: complete income tax deduction for contributions, tax-deferred investment returns, favorable tax treatment of various types of distributions, and the ability to borrow from the plan. Along with tax benefits, plans provide powerful incentives for attracting and maintaining employees
Establishing and maintaining pensions and profit sharing plans can be difficult. There are myriad ever-changing government rules and burdensome regulations to contend with as well as investment decisions to make. There are many types of plans and there are numerous key ingredients for an effectively structured plan. Plans can be designed to provide maximum benefits to key employees. However, plans must meet strict requirements, including minimum employee participation standards, minimum employee coverage rules, and maximum contribution and benefit rules.
The major aspects of establishing and maintaining a plan are as follows:
Plan design and implementation - An in-depth analysis of the needs and goals of the business owner, organization, and employees and creation of an appropriate plan. Various professionals provide this type of service, including attorneys, accountants, insurance companies, banks, mutual fund organizations, financial planners, and others. Many have prototype plans to simplify the process.
Care should be exercised in selecting experienced professionals for plan design, administration, compliance, and investment management. Close scrutiny should be given to costs for these plan services.
Administration - The day-to-day detail management of the plan, including maintenance of participant accounts, determination of contributions, etc.
Compliance - Filing of proper forms with the Internal Revenue Service and Department of Labor and monitoring of continuing plan compliance with rules and regulations.
Investment management - Selection and maintenance of plan asset investments. This can be accomplished through the use of brokerage firms, mutual funds, insurance companies, banks, financial planners, or other investment management organizations.
Trusteeship - A trustee is needed to execute plan monetary transactions. This may be accomplished by the plan sponsor or by an outside party such as a bank or insurance company.
Various organizations such as insurance companies, mutual fund organizations, and plan administrators provide more than one or all of the services described above.
There are basically two types of qualified plans: (l) defined contribution plans and (2) defined benefit plans. Defined contribution plans provide for an individual account for each participant and for benefits based solely upon the amounts that have accumulated in each account. For many of these plans, the individual makes his/her own investment decisions within parameters. Defined benefit plans have the goal of providing definitely determinable benefits, and it is the obligation of the employer to make the necessary contributions under the plan to ensure that those benefits can be paid.
The major types of defined contribution plans are: (1) profit sharing plans through which contributions are characteristically made from the employer’s profits; (2) money purchase plans through which the employer’s contributions are based on a predetermined formula, e.g., 10 percent of each employee’s compensation; (3) target benefit plans through which contributions are made in amounts necessary to provide a "target benefit" specified by the plan for each participant; and (4) stock bonus plans, similar to a profit sharing plan except employer stock is used.
A popular arrangement is the qualified "cash or deferred" plan [401(k) plan] through which plan participants can make elective salary deferrals. A 401(k) arrangement must be part of a qualified plan as described above.
Using "Keogh plans" (H.R. 10 plans), self-employed individuals can establish plans for themselves and their employees that are generally the same as those offered by corporations. There are also Simplified Employee Pension Plans (SEPs) which provide a simplified means to establish a pension plan.
Proposed Treasury Department regulations pending at the time of publication of this guide require radiologists to consult with their pension advisors on whether their arrangements with hospitals trigger the "affiliated service group" or "leased employee" sections [414(m) and 414(n)] of the Internal Revenue Code.