Q  What plan offers the most advantages to an independent business owner or sole proprietorship?

       

The BSI-One(k) plan is the most cost effective solution and allow business owners higher contributions than previously allowed through profit sharing plans, SEPs, and SIMPLE plans.  Other advantages include participant loans and catch-up contributions.

       

Another excellent choice is an Owner-Only Defined Benefit Plan, where a business owner is allowed much larger contributions with a higher limit to the cumulative asset allocation at retirement.

       

Q  Explain the advantages of an Owner-Only Defined Benefit Plan?

       

An Owner-Only Defined Benefit Plan is easy to set up and maintain and offers higher contributions than a 401(k) plan.  Employers may contribute up to $150,000 annually.  Asset accumulation may exceed $2 million at retirement.

       

Q  Explain the advantages of 401(k) Plans.

       

401(k) Plans can be custom designed with features such as eligibility, vesting, participant loans, and a variety of distribution options.  The flexibility of programs enable both employers and employees to realize tax benefits and establish secure retirement savings. 

       

Q  How are 401(k) plans regulated?

       

401(k) plans can become top heavy, requiring employers to increase participation among make contributions to non-key employees.  401(k) plans are required to pass annual ADP and ACP tests.  These nondiscrimination tests ensure that there is a balanced participation from non-highly compensated employees and highly compensated employees.  Employers are also required to comply with controlled group rules.

       

The IRS also requires 401(k) Plans and other tax-qualified retirement plans to comply with many important filing deadlines throughout the year.

       

Q  What is a Safe Harbor401(k) Plan?

       

Safe Harbor 401(k) is similar to a traditional 401(k), with special advantages for companies who may be at risk of failing the nondiscrimination ADP or ACP tests.  Plan designs are slightly less flexible than traditional 401(k)s, with a required contribution by employers on the behalf of employees that are fully vested safe harbor contributions.

       

Q  Are there other advantages to a Safe Harbor 401(k) Plan?

       

Safe Harbor 401(k) plan that ensures mandatory employer contributions on behalf of employees is a great benefit to promote when recruiting new employees, helps with employee retention and boosts overall moral and productivity.

       

Employers realize tax savings for making contributions to both employer and employee plans and employee salary deferrals are made before federal income taxes are withheld, reducing an employee’s taxable income.

       

Q  What is a Maybe Notice?

       

Safe Harbor 401(k) may be designed to give employers flexibility in the plan’s status each year.  For instance, if an employer anticipates the need to change the status of a traditional 401(k) plan to a Safe Harbor 401(k) plan, the employer needs to issue a “Maybe Notice” to employees annually.  Safe Harbor 401(k) plans with these flexible features are often referred to as “Maybe” or “Wait and See” plans.

       

Q  Explain the difference between Profit Sharing Plans and 401(k) Plans?

       

Profit Sharing Plans are funded by the employer.  They are often designed as an employee benefit and can be customized to allocate different amounts to each participant in the plan.  Profit Sharing Plans may be designed to benefit key employees or business owners.  Employers may contribute up to 25% of the participant’s eligible salary and receive tax deductions for contributions.

       

Q  What are the advantages of a Profit Sharing Plan?

       

Contributions to Profit Sharing Plans are discretionary.  Since contributions are made just one time each year, the plans are easy to administer.

       

Q  What is the New Comparability Plan?

       

New Comparability Plans allow employers to designate different employee groups and make separate contributions for the different groups.  They offer employers the flexibility of offering discretionary contributions that may increase or decrease each year.

       

Q  Why choose a Defined Benefit Plan?

       

Defined Benefit Plans are easy to set up and enable employers and employees to accumulate higher retirement savings and realize greater tax savings.  Employers may contribute up to $150,000 annually and asset accumulation may exceed $2 million at retirement.

  

Q  How are Defined Benefit Plans different from other retirement plans?

       

When establishing a Defined Benefit Plan, an employer assures employees of their retirement income by defining the benefit at retirement age.  Employers make all contributions to Defined Benefit Plans and employees are not allowed to make deferred salary contributions.  Once a Defined Benefit Plan is established, contributions are mandatory and calculated annually by an actuary.  The contributions are calculated by actuarial factors that change each year, such as interest rates, current plan assets and projected benefits.

       

Q  What is an ESOP?

       

Employee Stock Ownership Plans (ESOPs) are retirement plans that are similar to profit sharing plans, except they allow employers to share or transfer company ownership to employees.  ESOPs enable employers to build moral and motivation among employees by sharing ownership of the company.

       

An employer may make ESOP contributions to a 401(k) plan on behalf of an employee.  ESOP contributions may be subject to a vesting schedule where an employee is required to work up to 5 years before those funds are fully vested.  A cash disbursement is typically made when an employee retires or is terminated and the company stock is repurchased by the ESOP at fair market value.

       

Q  How can ESOPs be leveraged by employers?

       

In some cases, a company may leverage the ESOP by borrowing money to purchase shares of stock.  Loans may be structured in various ways, but are typically secured by the company or majority shareholders.  Employers then repay the load through tax deductible contributions to the ESOP.  Traditional profit sharing plans do not offer provisions for loans. 

       

Q  What is a § 125 Cafeteria Plan?

       

A Cafeteria Plan is a welfare plan specifically authorized by Section 125 of the Internal Revenue Code.  It enables employers to provide employees with valuable benefits – where both the employer and employees save significant amounts on taxes. Allowable benefits include dependent care assistance programs (day care), uninsured medical expenses not covered by the typical group medical plan, group life and disability premiums otherwise paid by the employee, and contributions to 401(k) plans.

       

Q  How does a Cafeteria Plan work?

 

Each employee has the option to select benefits from the cafeteria plan menu.  The employee redirects an amount sufficient to pay for each benefit from his salary.  Most importantly, the income is redirected from the employee’s salary before Federal income taxes or Social Security taxes (FICA) are deducted.

The redirected funds are placed into a separate spending account for each benefit elected by the employee.  Then as each employee incurs a qualifying expense (e.g., a day care bill), he submits a claim to Benefit Systems.  The claim is processed and the employee is reimbursed from the funds in the cafeteria plan.

 

Q  What type of benefits are eligible?

       

Insured Benefits	Non-Insured Benefits
Accident and Health Insurance	Dependent Care Assistance (Day Care)
Group Term Life Insurance	Medical Reimbursement (for non-insured medical expenses)
Disability Insurance
Dental Insurance
Vision Insurance

         

Q  How do § 125 Cafeteria Plans stay in compliance?

 

A cafeteria plan will be afforded special tax treatment as long as it maintains a qualified status.  In order to remain qualified, your plan must meet a host of requirements set by the Internal Revenue Service and the Department of Labor.  The stipulations cover the areas of minimum coverage and minimum participation, eligible expenses, non-discrimination, top-heavy status, contribution limits, and taxation.

BSI takes pride in our expertise and constantly keep abreast of current legislation.  We keep you informed of the changes in the laws affecting cafeteria plans to ensure your plan maintains its qualified status.

Our services satisfy annual reporting requirements, participant disclosure requirements, document and amendment essentials, annual non-discrimination and coverage testing, as well as additional qualification fundamentals.