Qualified Plans Management

Many pension plans are available to you today. Which one is right for you?

Establishing a pension for your employees is a great way of showing them you are a responsible, caring employer. More practically, it can go a long way to encouraging your staff to stay loyal.

The first thing to decide is how much the firm can afford to contribute the plan. There is no point in setting up a plan so generous that it threatens the viability of the firm.

Employer contributions usually range from 3% to 25% of basic salary. And remember, these contributions are ALL TAX DEDUCTIBLE!

Most experts agree that communicating effectively with employees is essential to the success of any pension scheme. Financial advisers will also be able to give you a range of contribution options to suit your budget.

In practice, tax relief on pension contributions isn't usually enough to spur employees into action. They need to be educated and encouraged, and this is why most companies outsource the administration of their pension to specialists who can provide seminars, brochures and one-on-one advice if necessary.

So how do you find the best advice? Consult with us for assessment of your company and prepare you and your employees for the best pension plan.

Types of Retirement Plans
Among the different types of retirement plans, there are government-sponsored plans, personal plans, annuities, and employer-sponsored plans:

• Government-sponsored Plans: The largest government-sponsored retirement plan is the Social Security plan (see: Social Security).
• Personal Plans: The most popular example is the Individual Retirement Agreement or IRA, which can come in different types according to their tax treatment (see: Roth IRA and Traditional IRA).
• Annuities: These are contracts established with an insurance company; there are fixed and variable annuities (see: Annuities).
• Employer-sponsored Plans: The two types of employer-sponsored retirement plans are qualified and non-qualified retirement plans. Qualified retirement plans meet the Internal Revenue Code requirements and the Employee Retirement Income Security Act of 1974 (ERISA) requirements. These plans offer several tax benefits: they allow employers to deduct annual allowable contributions for each participant; contributions and earnings on those contributions are tax-deferred until withdrawn for each participant; and some of the taxes can be deferred even further through a transfer into a different type of IRA. Non-qualified retirement plans are those plans that either do not meet the IRS Code requirements or the ERISA requirements.

Qualified Plans Defined benefit plans are company retirement plans, such as pension plans, in which a retired employee receives a specific amount based on salary history and years of service, and in which the employer bears the investment risk. The employee, the employer, or both may make contributions. The maximum amount a participant can contribute each year is the smaller of $160,000 or the average compensations from the three highest consecutive calendar years. These plans are better for people who have 20 years until retirement or less, since the annual contributions can be larger.

Pensions are a type of retirement plan that guarantees a specific amount to be paid out to the employee during retirement. The amount is calculated based on an employee's salary, years of service and a fixed percentage rate. The Pension Benefit Guarantee Corporation (PBGC), a federal agency, covers employer-sponsored pension plans. The insurance covers a monthly maximum amount of about $3,000 for a worker retiring at age 65. Eligibility depends on a company's policy; some companies require service for a certain period of time before an employee can become eligible for a pension plan. If an employee leaves the job, the pension plan stays with the previous employer.

Annuities are defined benefit plans that have fixed monthly payments at the age of retirement. Note that annuities cannot be transferred into an IRA account, so the amount is taxed as regular income the year it is received. There are different options:
Joint and 50%: The annuity is paid for life and after death, with the spouse receiving half of the amount for the rest of his or her life.
Joint and 66 2/3%: The annuity is paid for life and after death, with the spouse receiving two thirds of that amount for the rest of his or her life.
Joint and 100%: The annuity is paid for life and after death, with the spouse receiving the full amount for the rest of his or her life.
10-year certain & life: The annuity is paid for life; if the participant dies in the first 10 years of retirement, the beneficiary collects the same amount until reaching the 10th year of retirement at which point all payments stop. If the participant dies 10 years or more after retirement, the payments stop at the time of the death.
Life Only: The annuity is paid for life, and after death all payments stop.
Lump sum: The participant can take the total cash value of the retirement plan.

Defined contribution plans allow the employer and/or employee to make contributions, so that the final benefits depend on how much was in the account and the rate earned by the account's investments. An individual account must be set up for each participant in the plan. The federal government does not guarantee a participant's pension benefits; instead, the plan is "participant-directed", meaning that the employee makes the investment decisions based on the employer's options. Contributions have a limit of roughly $40,000 or 25% of the participant's total compensation. The different defined contribution plans are:

1. Profit sharing: An employer alone makes contributions based on an employee's current-year compensation.
   Contributions: Employers can decide what amount and whether to contribute to the plan each year. The maximum that the employer can contribute is 15% whichever is less. In addition, contributions can only be made on the first $170,000.
   Eligibility: Employees can be eligible to participate in the plan immediately or after one or two years of employment; the vesting schedule is up to six years.
2. Stock bonus plan: A type of profit sharing plan, where contributions are made in the form of company stock.
3. Money purchase pension plan: A retirement plan with fixed-percentage compensations by the employers. Unlike profit sharing plans, these contributions are mandatory every year, regardless of profits.
   Contributions: The maximum that the employer can contribute is 25% of the participant's compensation or $40,000, whichever is less. In addition, contributions can only be made on the first $200,000. Unless the plan is integrated with Social Security, all employees' contribution must be the same percentage and must be made every year.
   Eligibility: Employees can be eligible to participate in the plan immediately or after one or two years of employment; as with profit sharing plans, employees must be 100% vested in the plan.
4. Combination plans: The profit sharing and money purchase plans are often combined by companies that have varied earnings from one year to the next. Through the establishment of proper contribution percentage rates in both plans, the employer can make the maximum contribution in good years and not during more difficult years.
   Contributions: The total percentage for contributions in a combined plan cannot be more than the lesser of 100% of compensation or $40,000, and no more than 25% can be contributed to the profit sharing plan.
   Eligibility: Employees can be eligible to participate in the combination plan immediately, or after one or two years of employment; if employees are not allowed to enroll immediately, those participants must be 100% vested at all times.
5. Thrift or savings plan: Contributions are made by both the employer and the employee where the employer can match all or a percentage of the employee's contributions.
6. Employee stock ownership plan (ESOP): The employer contributes shares of the company's stock to employees in return for special tax benefits (see: ESOP). The shares of the company stock have to vest before a participant receives them. As an example, he vesting period can be 20% a year for 5 years. Employees are eligible to participate in this plan if they work at least 1000 hours in a year.
7. 401(k): A variation of the profit-sharing and thrift plan (see: 401(k)). Employees make regular tax deferred contributions and the employers can match a portion or all of the employee's contributions.
8. 403(b): Another variation of the profit sharing and thrift plan for non-profit organizations (see: 403 (b)).
9. SIMPLE: To learn about the SEP & SIMPLE, please visit the page (see: SEP and SIMPLE Plans).
10. Target Benefit Plan: Employers set a target benefit for participants; contributions depend on assumptions of the projection to reach that benefit. Contributions and earnings are tax deferred until withdrawal.
11. Cash Balance Plans: Cash-balance plans are a type of defined contribution retirement plan where employers make annual contributions for each employee; the contributions earn interest at rates similar to Treasury bonds. These plans are recommended for younger employees because the retirement benefit starts building early.

Non-qualified Retirement Plans are plans that do not meet the IRC or ERISA requirements. These plans are funded by employers and are more flexible but they do not have the tax benefits qualified plans do. Benefits are paid at the retirement age in the form of annuities, which are taxed as ordinary income tax, or in lump sum payments, which can be transferred into an IRA to defer taxes. An example is the 457 plan:

• 457 plans are aimed at state and local government employees of tax-exempt organizations. In 2003, participants can defer up to $12,000 of their annual income, and contributions and earnings are tax-deferred until withdrawal. Distributions start at retirement age but participants can also take distributions if they change jobs or if they have an emergency, including death. Participants can choose to take distributions as a lump sum, annual installments or as an annuity. Distributions are subject to ordinary income taxes and the amounts cannot be transferred into an IRA.

We are available to advise you on which retirement plan is best for you, as well as to assist in the selection of investement options of your current plans.

We also offer to our clients an annual summary of their plans along with specific recommendations personalized to their needs and financial goals. Below is our sample summary (John Doe is the Client).

Michael J. Porro & Company, LLC.
180 Old Tappan Rd. Bldg 5
Old Tappan, NJ 07675
Tel: 201.768.0218
Fax: 201.768.6467
Email: mikep@porrofinancial.com