Qualified Retirement Plans

Transcription

1 Qualified Retirement Plans Who Is An Employee? Advisor s Version Not for Distribution or Use by the General Public. The Guardian Life Insurance Company of America New York, NY 10004

2 The information in this presentation is designed to be general in nature and for educational purposes only. Guardian, its agents and employees do not give tax or legal advice. For specific advice, seek and rely upon the advice of a qualified tax advisor or attorney.

3 Qualified Retirement Plans Qualified Retirement Plans Tax Deductible Contributions Must Include Most of Employees

4 Fully Insured Plan Very Good Prospect Age Salary Contribution ** % Total Contrib. Owner , , % *Based on 2008 max. benefits, max. dollar limits Indexed for inflation & may increase in the future, uses death benefit & PTW3Gold policies, Pref., NRA 62

5 Fully Insured Plan Few Employees on Census Owner , , % Total Age Salary Contrib * Contrib. A 29 29,120 11,430 B 20 27,040 7,285 Employee Totals 18, 715 *Based on 2008 max. benefits, max. dollar limits Indexed for inflation & may increase in the future, uses death benefit & PTWL3Gold -B policies, Pref., NRA 62

6 Fully Insured Plan With Older Employees Age Salary Contrib * % Total Contrib. Owner , , A 55 52,000 89,427 B 50 52,000 79,077 Employee Totals 168,504 *Based on 2008 max. benefits, max. dollar limits Indexed for inflation & may increase in the future, uses death benefit & PTWL3Gold-B policies, Pref., NRA 62

7 Fully Insured Plan Age Salary Contrib * % Total Contrib. Owner , ,825 68% A 50 15,880 24,546 B 36 39,520 22,083 C 34 42,078 21,105 D 29 29,120 11,430 E 20 27,040 7,285 F 55 52,000 89,427 Employee Totals $175,592 *Based on 2008 max. benefits, max. dollar limits Indexed for inflation & may increase in the future, uses death benefit & PTWL3 Gold & PTAPRA 3B policies, Pref., NRA 62

8 Not Included in Plan Tests Those Not Eligible to be in Plan Under Age 21 Less Than Two Years of Service Part-Time Under 1,000 Hours in 12 Month Period Union Employees

9 Highly Compensated Employees Highly Compensated Employees Own 5% of Business Earn $105,000* or more Family Members of Owners *2008 Limit, indexed for inflation & may increase in future

10 Participation Requirements Defined Benefit Plans Only Including Fully Insured Plans Must Include Greater* of 40% All Eligible Employees or 2 Employees *Plans with less than 50 lives

11 Participation Requirements Defined Benefit Plans - 40% Rule 10 Eligible Employees 2 Partners 8 Non Highly Compensated Employees How Many Must Be Included in the Plan?

12 Participation Requirements How Many Must Be Included in the Plan? Defined Benefit Plans - 40% Rule 10 Employees X 40% = 4 Four Must Be Included Exclusions Must be Nondiscriminatory Cannot Just Exclude Non Highly Compensated Employees

13 Participation Requirements Defined Benefit Plans - 40% Rule 2 Employees 1 Owner 1 Secretary (Non Highly Comp.) How Many Must Be Included in the Plan?

14 Participation Requirements How Many Must Be Included in the Plan? Defined Benefit Plans - 40% Rule Must Include: 2 Employees- Boss & Secretary Greater of 40% or 2 Employees Two Must Be Included

15 Participation Requirements Defined Benefit Plans - 40% Rule Profit Sharing Plan 100 Employees 10 Owners (5%) 90 Non Highly Compensated Employees How Many Must Be Included in the Plan?

16 Participation Requirements How Many Must Be Included in the Plan? Defined Benefit Plans - 40% Rule 40% Rule Does Not Apply to Profit Sharing Plans 10 Owners & 90 Non Highly Comp. Minimum Possible: 8 Employees

17 Coverage Tests In Addition to Participation Test Qualified Plans Must Satisfy One of Two Coverage Tests Ratio Percentage Test Average Benefits Test

18 Average Benefits Test Three Part Test Complex Must Be Done by Computer Perform Test if Ratio Percentage Test Fails

19 Ratio Percentage Test (70% Rule) All Qualified Retirement Plans Must Benefit Non Highly Compensated Employees % of Non Highly Comp. Benefiting Must = 70% of % of Highly Comp. Employees Benefiting

20 Ratio Percentage Test Profit Sharing Plan 100 Employees 10 Owners - Highly Compensated (HCE) 90 Non Highly Compensated (NHCE) 10 Owners Participate in the Plan How Many Must Benefit from the Plan?

21 Ratio Percentage Test How Many Must Benefit in the Plan? Profit Sharing Plan % of HCE Benefiting - 100% 10/10 Owners= 100% x 70% = 70% % of NHCE Who Must Benefit 90 NHCE x 70% = NHCE Must Participate

22 Ratio Percentage Test Profit Sharing Plan 100 Employees 10 Owners 90 Non Highly Compensated Employees 1 Owners Participates in the Plan How Many Must Benefit from the Plan?

23 Ratio Percentage Test How Many Must Benefit in the Plan? Profit Sharing Plan % of HCE Benefiting - 10% 1/10 Owners = 10% x 70% = 7% % of NHCE Who Must Benefit 90 NHCE x 7% = 7 7 NHCE Must Benefit

24 Coverage & Participation Tests Defined Benefit Plan 100 Employees 10 Owners 90 Non Highly Compensated Employees 1 Owner Participates in the Plan How Many Must Be in the Plan?

25 Coverage & Participation Tests How Many Must Be in the Plan? Defined Benefit Plan Ratio Percentage Test (70% Rule) % of HCE Benefiting - 10% 1/10 Owners = 10% x 70% = 7% % of NHCE Who Must Benefit 90 NHCE x 7% = 7 8 Employees Must Benefit 40% Rule - 40% x 100 = Employees Must Be in Plan

26 Hidden Employees Owners Often Look for Ways to Exclude Employees Avoid Cost of Employee Benefits Tricks Don t Work

27 Watch Out for Hidden Employees Types of Hidden Employees Leased Employees Multiple Businesses Walks Like a Duck Employees

28 Leased Employees Employees Hired from Another Company

29 Leased Employees Example Doctor Jeff Numerous Employees in Office Receptionist, Nurse, Technician, etc. He Says He Has No Employees Entire Staff Hired from a Leasing Company

30 Leased Employees Doctor s View They Are Not His Employees Leasing Firm Should Provide Any Benefits

31 Leased Employees IRS s View They May Have to Be Included in the Plan Tests Doctor Jeff May Have to Provide Retirement Benefits for Them

32 Leased Employees Must Be Included In Plan Tests if: Work Full-time for a Year More Than 20% of Non Highly Compensated Work Force If Less Than 20% Can Exclude if: Leasing Company Has Special Retirement Plan

33 Leased Employees Leasing Organization s Special Retirement Plan Money Purchase Plan Immediate Participation Full & Immediate Vesting Flat 10% of Pay Contribution Formula

34 Multiple Businesses Employer Owns Two Companies Company X No Non Owner Employees Company Y 10 Non Owner Employees Can He Have a Plan Which Covers Just the Owner in Company X?

35 Multiple Businesses Multiple Businesses Must Be Included in Plan Tests if: Controlled Group Affiliated Service Group

36 Multiple Businesses What Do You Need to Know? Controlled Group Percentage of Ownership Affiliated Service Group Percentage of Ownership Function of Each Company Who Are Their Customers?

37 Controlled Group Parent-Subsidiary Group Connected through 80% Stock Ownership Brother-Sister Group 5 or Fewer People Own 80% Plus Same 5 or Fewer Own More than 50% Only Count Identical Ownership

38 Controlled Group Parent-Subsidiary Example V Corp 100% J Corp E Corp 80% R Corp 70% J, V and E are all members of a controlled group

39 Controlled Group Brother-Sister Group 5 or Fewer People Own 80% Plus Same 5 or Fewer Own More than 50% Only Count Identical Ownership

40 Controlled Group Example #1 Ralph Owns Two Companies Violin Repair Shop No Non Owner Employees Fish Restaurant 10 Non Owner Employees Can Ralph Have a Plan Which Covers Just the Employees in the Violin Shop?

41 Controlled Group Example #1 80% Test Violin Repair Shop Ralph Owns 90% Bill Owns 10% Fish Restaurant Ralph Owns 50% Bill Owns 50% 5 or Fewer Employees Own 80% of Each

42 Controlled Group Example #1 Identical Ownership Test Violin Shop Restaurant Identical % Owned % Owned Ownership Ralph 90% 50% 50% Bill 10% 50% 10% Total Identical Ownership 60% Identical Ownership of Over 50% It IS a Controlled Group All Employees from Both Companies Must Be Included in Plan Tests

43 Controlled Group - Example #2 80% Test Violin Repair Shop Ralph Owns 100% Fish Restaurant Ralph Owns 60% Bill Owns 40% 5 or Fewer People Do Not Own 80% You Need Not Count Anyone Who Doesn t Own Part of Both Companies

44 Controlled Group - Example #2 It is NOT a Controlled Group Ralph Can Have a Retirement Plan Which Covers Just One Company

45 Brother-Sister Controlled Group Family Attribution Individual is Deemed to Own Stock Owned by Spouse* and Children Under Age of 21 Children Under Age 21 are Deemed to Own Stock Owned by Parent *Also True for Parent-Subsidiary Controlled Group

46 Brother-Sister Controlled Group Family Attribution Individual Owning Over 50% of a Company s Stock is Deemed to Own Stock Owned by Children over Age 20 Grandchildren Parents (if Individual is Over Age 20) Grandparents

47 Brother Sister Controlled Group Family Attribution Rule Individual Assumed to Own Stock Owned by Spouse No Spousal Attribution Applies if No Ownership in Spouse s Company Not Employee, Director, or Manager in Spouse s Company No More than 50% of Gross Income from Royalties, Rent, Dividends, Interest, Annuities, etc. There Are No Stock Restrictions on Disposal

48 Controlled Group Example #3 Nancy Owns a Medical Practice 6 Employees Her Spouse Steve Is a Tax Accountant Owns 100% of His Business No Employees, They Live in NJ & Have No Children Can Steve Have a Plan for his Firm Which Covers Just Him?

49 Controlled Group Example #3 Not a Controlled Group Due to the Spousal Exception - Steve Can Have a Retirement Plan Just for his Firm He Doesn t Need to Include the Employees from Nancy s Practice in his Plan Tests

50 Controlled Group Example #4 What if Steve & Nancy Lived in California? Could Steve Still Have a Plan Just for Himself?

51 Controlled Group Example #4 Controlled Group California is a community property state Steve is considered to own 50% of Nancy s business Employees from Both Companies May Have To Be Included in the Plan Tests Spousal exception may not apply

52 Controlled Group Example #5 Nancy has Medical Practice 6 Employees Steve His Spouse is a Tax Accountant Owns 100% of His Business No Employees They Adopt 3 Year Old Child, Lillian Can Steve Have a Plan for his Firm Which Covers Just Him?

53 Controlled Group Example #5 Family Attribution Lillian is Considered to Own 100% of Nancy s Medical Practice & 100% of Steve s Business Their Businesses are in a Controlled Group Steve Must Include the Employees in Nancy s Practice in His Plan Tests

54 Controlled Group Example #6 Steve & Nancy adopt the three year old child Steve & Nancy get a divorce Can Steve Have a Plan Just for Himself?

55 Controlled Group Example #6 Controlled Group No, the Child Still Owns 100% of Both Businesses Employees from Both Companies Must Be Included in the Plan Tests

56 Controlled Group Example #7 Steve & Nancy don t adopt a child Nancy Has a 13 year old daughter, Adele, from previous marriage Adele Lives with Steve & Nancy Steve Has Not Adopted Adele Adele s Father Is a Bookkeeper for a Toy Co. Can Steve Still Have a Plan Just for Himself?

57 Controlled Group Example #7 Step Children - No Attribution Adele Owns 100% of Nancy s Company 0% of Steve s Company Steve Can Have a Plan Just for Himself

58 Controlled Group Example #8 Steve & Nancy don t adopt a child Steve has a 14 year old daughter, Lydia, with a previous girlfriend Lydia Lives with her Mother, Judy Judy Owns a Cleaning Business with 12 Employees Co. Can Steve Still Have a Plan Just for Himself?

59 Controlled Group Example #8 Steve s Business & Judy s Business Are Lydia Owns: in a Controlled Group 0% Nancy s Company 100% Steve s Company 100% Judy s Company Employees from Both Steve s and Judy s Companies Must Be Included in the Plan Tests

60 Affiliated Service Group Even if Businesses Pass Controlled Group Test May Be Affiliated Service Group

61 Affiliated Service Group Company F First Service Organization Company B 10% Owned by Highly Comp. Employees of Companies A or F Large Part of Company B s Work is Performing Services for Company A or F (or for both) Services Historically Done by Employees Of Companies A or F Company A Shareholder or Partner of Company F and Performs Services for Company F or Performs Services with Company F for 3rd Party

62 Affiliated Service Group What Is the IRS Looking For? One Company Split Into Two or More Companies Goal = Exclude Some Employees from Benefits Some Cross Ownership One Company is a Service Organization

63 Affiliated Service Group Company F First Service Organization Company B 10% Owned by Highly Comp. Employees of Companies A or F Large Part of Company B s Work is Performing Services for Company A or F (or both) Services Historically Done by Employees Of Companies A or F Company A Shareholder or Partner of Company F and Performs Services for Company F or Performs Services with Company F for 3rd Party

64 Affiliated Service Group Example Fat Cat Veterinary Practice Owned 10% by Doctor Tom 20 Non Highly Compensated Employees Bite-Rite Veterinary Dental Practice Owned 100% by Doctor Tom Only Employees Doctor Tom & Vet Tech Can Bite-Rite Have a Retirement Plan Without Including Any of Fat Cat s Employees?

65 Affiliated Service Group Affiliated Service Group Because 10% of Bite-Rite Owned by HCE of Fat Cat Bite-Rite s Only Work Doing Dental Work for Fat Cat Dentistry Historically Done by General Veterinary Practice Fat Cat s Employees Must Be Included in Tests for Bite-Rite s Retirement Plan

66 Teddy Bear Manufacturer Objective: Suzette Wants to Set Up a Plan for Herself Owns 25% of Fluff & Stuff Owns 100% of Bear-o-tronics Company

67 Teddy Bear Manufacturer - Functions Fluff & Stuff Company Sews & Sells the Stuffed Bears Bear-o-tronics Company Manufactures the Sound Box with the Cute Sayings for the Bear Works Exclusively for Fluff & Stuff

68 Teddy Bear Manufacturer - Employees Fluff & Stuff Company 15 Employees Ages 25-47, Salaries $25,000 - $60,000 Bear-o-tronics Company One Employee, Suzette Suzette Wants a Plan for Just Herself

69 Teddy Bear Manufacturer Ownership Fluff & Stuff Company Bob 25% Tom 25% Tim 25% Suzette 25% Bear-o-tronics Company Suzette 100% Not a Controlled Group

70 Teddy Bear Manufacturer Not an Affiliated Service Group Fluff & Stuff & Bear-o-tronics Companies do not comprise an Affiliated Service Group Fluff & Stuff Is not a service organization Suzette Can Have a Plan Just for Herself

71 Affiliated Service Groups Service Organizations FSO Must Be a Service Organization Principal Business is Performance of Services on a Regular & Continuing Basis Capital is Not a Material Income-Producing Factor

72 Affiliated Service Group Lawn Flamingo Manufacturer Objective: Annette Wants to set up a plan for herself Owns 33 1/3 of Flamingorama Owns 100% of Long Legs Management, Inc.

73 Lawn Flamingo Manufacturer - Functions Flamingorama, Inc. Manufactures Lawn Flamingos Long Legs Management, Inc. Manages Flamingorama, Inc. Works Exclusively for Flamingorama, Inc.

74 Lawn Flamingo Manufacturer - Employees Flamingorama, Inc. 20 Employees Ages 22 50, Salaries $20,000 - $40,000 Long Legs Management, Inc. One Employee Annette Annette Wants A Plan Just for Herself

75 Lawn Flamingo Manufacturer - Ownership Flamingorama, Inc. Alice 33 1/3% Annette 33 1/3% Elise 33 1/3% Long Legs Management, Inc. Annette 100% Not a Controlled Group

76 Lawn Flamingo Manufacturer Affiliated Service Group The Flamingo Firms are not service organizations, but they are still an affiliated service group Annette CANNOT have a plan just for herself WHY?

77 Affiliated Service Group Management Company An affiliated service group results if one company principally performs management services for another

78 Common Sense Rule Complex Rule Who Directs the Work? Does the Individual Work for Other Organizations? Do They Work Full-Time? Are They Permanent or Temporary? Are the Individual s Services Available to General Public? Who Provides the Tools & Equipment? Where Do They Work?

79 Common Sense Rule Employee Coverage If It Looks Like a Duck and It Walks Like a Duck and It Quacks Like a Duck, It Is a Duck!

80 Walks Like A Duck Example Architect Bob Wants Fully Insured Plan for Himself Claims He Has No Employees Mary Does His Secretarial Work

81 Walks Like A Duck Example Architect s View Mary is an Independent Contractor Paid 1099 Income She Is Not His Employee Need Not Be Included in His Retirement Plan

82 Walks Like A Duck Example IRS s View Mary Works Full-Time for Architect Architect Supplies All Equipment & Work Space Does Not Work for Anyone Else Considered Employee of Architect Must Be Included in Plan Tests

83 Key to a Satisfied Client Know Your Employees Right Plan for His Goals Client Happy Both at Set-Up & at Retirement Refer Additional Clients Protect Client from Problems

84 Local Contacts LANNY D. LEVIN AGENCY, Inc. Lanny Levin Case Consultation Jerry Fox Illustrations Bryna Lee Jacobson Illustrations NATIONAL BENEFIT SERVICES, Inc. Jerry Kalish Case Consultation x3