Retirement Plan Knowledgebase
Qualified Retirement Plan Design Information
Who is the Plan Administrator?
The employer/plan sponsor is typically by definition, the “Plan Administrator” and is therefore ultimately responsible for the selection of the plan and the requisite governmental compliance requirements. However, the employer/plan sponsor may engage a “Contract Plan Administrator” (commonly referred to as a third party administrator or TPA), to perform or assist the employer with certain ministerial functions that may include:
We suggest that you review the key factors in determining plan design and the available plan types, benefits and features to help you determine if you need a plan study?
If you determine that a SEP or SIMPLE plan is appropriate for your needs, you do not need a plan study. If you determine that you are a candidate for a qualified retirement plan and you do not want to incur the cost for professional services, we suggest that you search the web for low cost internet-based plan service providers. However…
Watch-out! Low cost service providers typically offer you a selection of investment products that carry comparatively higher asset-based fees and expenses. They also typically limit investment selections to those products sold by the service provider (e.g., you are prohibited form buying a CD from your local bank to fund your plan and if you do, your plan may be subject to disqualification).
Be mindful that you must “do it yourself” with these providers. This means that you alone are responsible for:
Plan Design The selection of the plan’s eligibility conditions and determination of which benefits and features are appropriate for your individual situation. These choices are memorialized in writing in your plan document.
Plan Operation The employer/plan sponsor (this means you as the employer even if you are an independent contractor, or a single owner or partner only business) must operate the plan in accordance with the law and the plan benefit and features memorialized in writing within the plan document. Failure to operate the plan in accordance with the selected plan provisions may subject the plan to disqualification (loss of tax benefits and penalties).
Plan Reporting and Disclosure The employer/plan sponsor (this means you as the employer even if you are an independent contractor, or a single owner or partner only business) must report information annually to the Department of Labor (file Form 5500) and disclose information to plan participants and beneficiaries. An exception to this filing requirement applies plans sponsored by owner-only businesses if plan assets do not exceed $250,000; however, not filing is typically not advantageous to the business owner. Failure to comply with these requirements may subject the employer/plan sponsor to severe penalties (as high as $100/day or occurrence).
Plan Updates The laws and regulations that impact your qualified retirement plans change constantly. The plan sponsor (this means you as the employer even if you are an independent contractor or a single owner or partner only business) must update the plan in writing to comply with these new requirements. Failure to update the plan in writing may subject the plan to disqualification (loss of tax benefits and penalties).
Bottom line You can accept these responsibilities on your own or with the assistance of a pension professional.
Key Factors in Determining Plan Design
Plan Objective Do you want a plan to provide tax shelter for the business owner(s) and employees, to provide an employer provided employee benefit, or to provide a means by which you can save for retirement?
Employer Profile Are you an independent contractor, a single owner or partner only business? A sole proprietor, partnership, corporation, LLC or LLP with employees? Are you a “C” or an “S” corporation? How many employees? Full-time or part-time? How much taxable income do you earn? What do you pay your employees? How old are you and your employees? Do you have a spouse that works for your business? Is your company related to or affiliated with another employer?
Budget for Funding the Plan How much do you, as the business owner, want to contribute to the plan? How much do you want to contribute for your employees? Do you want to contribute more for certain employees versus others?
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SEP (Simplified Employee Pension)
Qualified Retirement Plan (Profit Sharing, Profit Sharing/401(k), Defined Benefit Pension)
Advantages of a SEP or SIMPLE IRA vs. a Qualified Retirement Plan:
Disadvantages of a SEP or SIMPLE IRA vs. a Qualified Retirement Plan:
The SEP and SIMPLE are typically both IRS model plans (Form 5305-SEP and Form 5305-SIMPLE). This means that they do not require formal plan documents or compliance services since the benefits and features are predetermined by the IRS within the model plan. They are also both forms of IRAs whose investments are typically held by an IRA custodian.
Be mindful that the indirect costs associated with the chosen plan vendor can be significant. Typical costs include a yearly per account fee ($25-$100) and the applicable asset-based charges of the plan custodian and investment vendor (.25 to 5% of initial, ongoing contributions and total plan assets).
Advantages of a Qualified Retirement Plan vs. a SEP or SIMPLE IRA:
Disadvantages of a Qualified Retirement Plan vs. a SEP or SIMPLE IRA:
If you determine that a SEP or SIMPLE is the appropriate plan, be mindful that they are not simple to operate and that per account fees and asset-based charges can be significant.
If you determine that a qualified retirement plan is the appropriate plan, be mindful that these plans are extremely complex in nature (whether or not you have employees). Also keep in mind that using a low cost or “free” plan provider means that:
You alone are responsible for selecting the appropriate plan provisions ("the plan design"), the operation of the plan in accordance with the selected plan provisions, compliance with reporting and disclosure requirements and plan updates as required by changes in the law or regulations;
Lastly, be sure to consider the value of your time involved in this process.
A competent pension professional can justify the cost for professional services by assisting you with this complex determination, resulting in a plan that provides:
The Importance of Optimal Plan Design
The rules and regulations governing qualified retirement plans are extremely complex and ever changing. They also require that the employer/plan sponsor is ultimately responsible for the selection of the plan, and the requisite governmental reporting and disclosure.
It is therefore necessary and prudent for the employer to understand the different plan types and features available, the governmental reporting and disclosure requirements and fiduciary responsibility associated with the selection, establishment and operation of an employer sponsored qualified retirement plan. Therefore, choosing the appropriate plan type and features (the “plan design”) are crucial decisions in the establishment and compliant operation of a qualified retirement plan.
For example, each type of plan available to small employers has different eligibility requirements and conditions for the required inclusion of employees. Selection of the plan type and eligibility requirements and conditions can save thousands of dollars on unintended employee benefits. Penalties also apply for the exclusion of eligible employees or the inclusion of ineligible employees.
Bottom line Optimal plan design provides higher tax deductible contributions/benefits for the business owner and selected key employees while reducing the cost to fund benefits for eligible employees.
What a Plan Study Provides
Milberg Consulting conducts comprehensive feasibility and analysis studies to determine the appropriate plan design for each individual client situation. Instead of simply selling you a plan, our plan study process helps you focus your needs and objectives for establishing and maintaining a plan. The completed study is a comprehensive report that includes:
The Plan Study Process
Questionnaire The study process begins by completing a comprehensive plan questionnaire to provide information on the structure of your organization, your employees, your motivation for establishing the plan, who you want the plan to favor and your budget to fund the plan benefits.
Information Review We review the information provided to determine if you are a viable candidate for a qualified plan and contact you to clarify information provided or to address any questions.
Fee Agreement If you are a viable candidate for a qualified plan, we send you a plan study fee agreement outlining the cost for the study, what the study provides and when we expect to deliver the completed study. The fee is due at the time of engagement to complete the study.
If you are not a viable candidate, we send you an explanation, and when appropriate, suggest a conventional plan (SEP or SIMPLE IRA) suitable to your needs.
Plan Study The plan is formulated based on your individual needs and objectives, and sent to you for review. A representative from our office contacts you to review the study and answer any questions you may have concerning the suggested plan design.
Plan Study Pricing
Fees for Plan Studies typically range between $250 and $3,500. Cost variables include but may not be limited to:
We provide the actual study cost after review of the requested information.
To request a study, click here to send us an e-mail with your contact information