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 Choosing a Retirement Plan: Payroll Deduction IRA

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Salary Reduction Amounts

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Contributions to a money purchase pension plan, however, may be based on a salary reduction where the reduced amount was used to purchase a tax-deferred annuity for the employee of a tax-exempt employer. The IRS has also ruled that the amount of salary reduction under a §401(k) plan may be counted as compensation for purposes of determining benefits under a defined benefit plan. For purposes of determining nondiscrimination under §401(a)(4), an employee’s compensation is defined as total compensation included in gross income. An employer also has the option to include in the definition of compensation salary reductions under a §401(k) plan or §125 plan. A qualified plan may not consider an employee’s salary in excess of $270,000 (in 2017) for purposes of determining contributions, benefits, and deductibility of contributions or nondiscrimination requirements.

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This limit is indexed to the CPI.

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Benefit Planning

Despite the popularity of qualified retirement or a small closely held company that can operate in the corporate form, a qualified corporate pension, or profit-sharing plan generally is the best vehicle for deferring income until retirement. The principal advantages fall into two categories, current, and deferred.t plans, benefits are rarely planned with any logic. To have sufficient income to meet one’s retirement needs requires some long-term planning. In companies where the key employees are also shareholders, retirement plan contributions are normally tied to the fluctuations in company profits and the desire to “zero out” or equalize the tax rates between the owners and the company rather than any systematic plan to satisfy predetermined retirement needs. In larger companies, little is done to develop benefits based on what is needed by the retiree. Here most planning focuses on what is competitive. While this might appear to be a good approach, there is a defect. Employees can always leave for better pay; retirees cannot leave for better benefits. In either event, a needs analysis should concentrate on after-tax income and expenses upon retirement adjusted for the new lifestyle of the retiree. An excellent text for an accountant in the area of planning for retirement needs is the “Touche Ross Guide to Personal Financial Management” by W. Thomas Porter. The material is good and the chart and calculation sheets are superb. Porter indicates that retirement plans are designed to provide only 35 to 40 percent of one’s retirement income even when properly structured and funded. The remaining 60 to 65 percent will hardly come from Social Secuple do not realize the importance of investment income to their retirementrity. Most daydream until they are just a few years away from retiring.

 

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Benefit Planning

Despite the popularity of qualified retirement plans, benefits are rarely planned with any logic. To have sufficient income to meet one’s retirement needs requires some long-term planning. In companies where the key employees are also shareholders, retirement plan contributions are normally tied to the fluctuations in company profits and the desire to “zero out” or equalize the tax rates between the owners and the company rather than any systematic plan to satisfy pre-determined retirement needs. In larger companies, little is done to develop benefits based on what is needed by the retiree. Here most planning focuses on what is competitive. While this might appear to be a good approach, there is a defect. Employees can always leave for better pay; retirees cannot leave for better benefits. In either event, a needs analysis should concentrate on after-tax income and expenses upon retirement adjusted for the new lifestyle of the retiree. An excellent text for an accountant in the area of planning for retirement needs is the “Touche Ross Guide to Personal Financial Management” by W. Thomas Porter. The material is good and the chart and calculation sheets are superb. Porter indicates that retirement plans are designed to provide only 35 to 40 percent of one’s retirement income even when properly structured and funded. The remaining 60 to 65 percent will hardly come from Social Security. Most people do not realize the importance of investment income to their retirement dreams until they are just a few years away from retiring.

Corporate Plans Advantages

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Current
The current benefits are:
(1) The employer corporation obtains a current deduction for the amounts paid or accruable to the qualified plan (§404(a));
(2) The employee does not recognize income currently on contributions made by his or her employer even though the benefits may be nonforfeitable and fully vested (§402(a) & §403(a)); and
(3) Employee benefit trust accumulates tax-free (see §501(a).

 

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Deferred
Among the deferred tax advantages are:
(1) Lump-sum distributions from a qualified employee benefit plan are eligible for favorable five (or in some cases still ten) year income averaging treatment (§402(e)); and
Note: The Small Business Job Protection Act of 1996 repealed 5-year averaging for tax years beginning after 1999.

(2) Certain distributions may be rolled over tax-free into an IRA.

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Disadvantages

There are two principal disadvantages of a qualified corporate plan:

Employee Costs

For a closely held corporation, it is often the cost to the shareholder-employee of covering rank and file employees. Generally, the objective of qualified retirement plans of closely held companies is to provide the greatest benefit to the controlling shareholders/executives.

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PAYSTUB MAKER team brings you more valuable information about RETIREMENT.

 Choosing a Retirement Plan: Payroll Deduction IRA

Salary Reduction Amounts

Contributions to a money purchase pension plan, however, may be based on a salary reduction where the reduced amount was used to purchase a tax-deferred annuity for the employee of a tax-exempt employer. The IRS has also ruled that the amount of salary reduction under a §401(k) plan may be counted as compensation for purposes of determining benefits under a defined benefit plan. For purposes of determining nondiscrimination under §401(a)(4), an employee’s compensation is defined as total compensation included in gross income. An employer also has the option to include in the definition of compensation salary reductions under a §401(k) plan or §125 plan. A qualified plan may not consider an employee’s salary in excess of $270,000 (in 2017) for purposes of determining contributions, benefits, and deductibility of contributions or nondiscrimination requirements. This limit is indexed to the CPI.

 

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Benefit Planning

Despite the popularity of qualified retirement plans, benefits are rarely planned with any logic. To have sufficient income to meet one’s retirement needs requires some long-term planning. In companies How to Pay Yourself out of Your Business where the key employees are also shareholders, retirement plan contributions are normally tied to the fluctuations in company profits and the desire to “zero out” or equalize the tax rates between the owners and the company rather than any systematic plan to satisfy predetermined retirement needs. In larger companies, little is done to develop benefits based on what is needed by the retiree. Here most planning focuses on what is competitive. While this might appear to be a good approach, there is a defect. Employees can always leave for better pay; retirees cannot leave for better benefits. In either event, needs analysis should concentrate on after-tax income and expenses upon retirement adjusted for the new lifestyle of the retiree. An excellent text for an accountant in the area of planning for retirement needs is the “Touche Ross Guide to Personal Financial Management” by W. Thomas Porter. The material is good and the chart and calculation sheets are superb. Porter indicates that retirement plans are designed to provide only 35 to 40 percent of one’s retirement income even when properly structured and funded. The remaining 60 to 65 percent will hardly come from Social Secuple do not realize the importance of investment income to their retirement city. Most daydream until they are just a few years away from retiring.

Corporate Plans Advantages

For a small closely held company that can operate in the corporate form, a qualified corporate pension, or profit-sharing plan generally is the best vehicle for deferring income until retirement. The principal advantages fall into two categories, current and deferred.

Current

Comparison with IRAs & Keoghs

Qualified corporate plans permit substantially larger contributions than an IRA. Formerly, corporate plans also exceeded Keogh plans as well, but effective 1984, such plans are essentially equal in terms of benefits. As a result of TEFRA (Tax Equity and Fiscal Responsibility (Act of 1982) maximum benefits were reduced, the early retirement age was raised, new rules were enacted for corporate and non-corporate plans, and restrictions were established for “top-heavy” plans.

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Basic ERISA Provisions

ERISA consists of four main sections (Titles): Title I is primarily concerned with all types of retirement and welfare benefit programs. Health insurance, group insurance, deferred compensation plans, etc. must all be considered from the standpoint of the Department of Labor regulations. Reporting and disclosure requirements are provided under Title I which requires that detailed plan summaries be provided to all plan participants and beneficiaries. Similarly, any plan amendments must also be reported to the participants and beneficiaries. All participants must also receive copies of the plan’s financial statement from the annual report, as well as an annual statement of accrued and vested benefits. Title II covers only qualified retirement plans and tax-deferred annuities,

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primarily from a federal tax standpoint. Title III involves jurisdiction, administration, enforcement, and the enrollment of actuaries. Title IV outlines the requirements for plan termination insurance. Because of the complexity and length of these provisions (the DOL it seems, feels obligated to equal or exceed the standards of administrative confusion which have been so competently laid out by the IRS), we will attempt 9only to cursorily cover some of the provisions commonly affecting qualified plans.

ERISA Reporting Requirements

ERISA imposes a large paperwork burden in connection with any qualified retirement plan. This burden includes preparing reports that must be sent to the IRS, plan participants, plan beneficiaries, the Department of Labor, and the Pension Benefit Guaranty Corporation. When a qualified plan is first installed, the IRS approval of the plan is usually sought. In addition, the Department of Labor must receive a plan description when the plan is first installed (plus additional reports every time the plan

is amended). Most plans must file an annual report that includes financial statements (certified by a Certified Public Accountant), schedules, an actuarial statement (certified by an enrolled actuary), and other information. Participants and beneficiaries are required to receive a summary plan description and a summary annual plan report from the plan. Moreover, participants and beneficiaries are entitled to receive, on request, statements concerning certain benefit information.

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Fiduciary Responsibilities

The fiduciary responsibilities of plan administration are also detailed by Title I. A federal prudent man investment rule is imposed on fiduciaries and adequate portfolio diversification is normally required. Any person who exercises any discretionary control or authority over the management

of a plan or any authority over the management of the plan’s assets is a fiduciary. Therefore, while plan trustees are clearly fiduciaries, other not-so-obvious persons may also be so classified by ERISA and, therefore, be liable for losses if they violate their fiduciary duties. The law defines a

“party-in-interest” as an administrator, officer, fiduciary, employer, trustee, custodian, and legal counsel, as well as certain other parties.

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