The purpose of any retirement plan is to provide financial benefits to the owners of a company.These benefits consist of tax savings for the owners, the attraction and retention of valuable employees or a combination of the two.
For companies with only owner-employees, the sole purpose of a retirement plan is tax savings. For companies with only nonowner-employees, the sole purpose is to have more productive employees. In most companies neither of these situations exist and the purpose is a combination of both of these factors.
A retirement plan can accomplish its purpose by producing those benefits for each employee that would result in the greatest financial benefits for the owners. By choosing the correct type of plan, the appropriate contribution or benefit formula and other design mechanisms (e.g., an appropriate vesting schedule), a retirement plan can be designed to accomplish its objective. However, since a retirement plan provides tax benefits, it must conform to requirements of the Internal Revenue Code and other regulations. When designing a retirement plan the following areas should be considered:
A. Participation. This area establishes who is eligible to participate in the plan. Employees of controlled or affiliated companies of the owners must be taken into account. The plan must not discriminate in favor of the "highly-compensated employees".
B. Contributions. The amount employers want to contribute and how it is to be allocated among employees is of primary importance. Maximum contribution requirements for both the company and each employee must be satisfied. Minimum contribution requirements may apply for plans that primarily benefit "key employees". Contributions by employees should also be considered.
C. Distributions. This area establishes when, how and to whom distributions may be made. In addition, a participant only receives that part of his account he is "vested" in.
D. Investments. Since the Plan must be for the exclusive benefit of the participants, it must ensure that they are protected. The Trustees must follow the "prudent expert" rule when investing on behalf of the participants. Employers and other "interested parties" are "prohibited" from engaging in any transactions that involve "self-dealing".
E. Reporting Requirements. The Plan must following certain reporting requirements with governmental organizations (IRS, Department of Labor, etc.) as well as with its own participants.
F. Other Administrative Requirements. The Plan must be administered in accordance with the Internal Revenue Code and all other applicable laws.
A Plans should be monitored to ensure they are accomplishing their purpose. In this regard, the following questions should be asked:
A. Is the employer satisfied with the amount of annual contribution being made and tts allocation among employees? If not, it may be possible to redesign or replace the Plan to achieve these objectives.
B. Is the Plan appreciated by the employees? It is important that the objectives of the Plan are effectively communicated to them.
C. Is the Plan administered properly? If administration is becoming a burden to the employer, plan simplification, additional outside administrative support or outsourcing the retirement function should be considered.
In some cases termination may be the only sensible course of action. For example, if the owner is the only participant and has already accumulated the maximum permissible amount that may be distributed to him (without a penalty) from the plan, the plan would normally be terminated. In most cases, however, other options, such as "freezing" the benefits, should be considered before terminating the plan. Termination of plans may make it difficult to attract and retain valuable employees in the future.