Newsletter Articles

The benefits accumulated under qualified pension and profit sharing plans are often one of the largest assets a married couple owns. If the couple divorces, sometimes their retirement benefits must be divided. Since 1984, federal pension law has provided special procedures enabling family courts to divide pensions in a divorce or separation.

Regardless of the size of your business, or whether it is a sole proprietorship, partnership, LLC or a corporation, there are several types of retirement plans to choose from that can reduce your tax liability and increase the retirement savings of you and your employees.

A qualified retirement plan can provide many benefits to employees as well as the sponsoring employer. Employees are ultimately provided with income to help sustain their lifestyle in their post-retirement years. Employers are given a tax deduction for contributions made to the plan, which helps them provide a valuable fringe benefit and boost employee morale.

Ben, after many years of working for a contractor that did not sponsor a retirement plan, decided to start his own construction company. Due to his many contacts in the industry, his business grew very quickly. In order to attract and retain quality employees, Ben realized that he must offer a comprehensive benefits package that includes a 401(k) plan.

Despite the care taken by plan sponsors and their pension advisors, errors occur in qualified plan administration. It is to no one’s advantage to have such errors disqualify a plan or to create penalties so onerous that plan sponsors are discouraged from having plans altogether.

A qualified retirement plan incurs a variety of administrative expenses throughout its existence. These include fees for establishment, annual valuations, government reporting requirements, the processing of loans and benefit distributions, and plan termination.

Charlie Consultant is meeting with Vince to review the plan year end compliance testing and 5500 form for his computer company’s 401(k) plan. As they are saying their good-byes, Vince mentions that his vitamin company has been growing dramatically, and in a couple more years he may consider setting up a 401(k) plan for those employees. Charlie’s eyes get wide, his heart starts pounding and his mouth drops open in shock. “What vitamin company?” he asks.

Increased benefit and compensation limits included in the Economic Growth and Tax Relief Reconciliation Act (“EGTRRA”) as well as the downturn in investment markets have refocused attention on defined benefit plans as alternatives to defined contribution plans. The defined benefit plan design can offer larger accumulations at retirement for some small business owners with lower costs for younger, non-key employees. However, there can be negative consequences that must be explored before such a plan is adopted.

When William Shakespeare wrote “neither a borrower nor a lender be,” he probably never envisioned a world in which millions of people could be both borrower and lender of their own retirement funds. Nor could he have anticipated that such loans would be available at extremely reasonable interest rates and without even an ounce of flesh as collateral! With all due respect to the great playwright, even the most profound and well-accepted adages need to be reevaluated in our rapidly changing society.

Despite negative publicity stemming from stock market losses and the Enron fiasco, qualified plans remain an integral part of any business operation. Recent tax law changes have made qualified plans more attractive by increasing contribution and deduction limits and reducing red tape, making it easier than ever for employers to sponsor a retirement plan.