Episode A is the ABCs of qualified retirement plans, or retirement plan basics. What's a qualified plan? Why would a business owner have one? Why wouldn't they have one? We break it down for you, to give you the gist without being overwhelmed.
Episode A is the ABCs of qualified retirement plans, or retirement plan basics. What's a qualified plan? Why would a business owner have one? Why wouldn't they have one? We break it down for you, to give you the gist without being overwhelmed.
Welcome to Retirement Plans A to Z, I’m Sue Burnett w Monarch Financial Advisors, and this series focuses on qualified retirement plans. There are a lot of moving pieces with these plans, and the rules are complicated and complex, so we’re going to break them down into smaller pieces – 26 pieces, to be exact, from A to Z, with maybe a few extras thrown in for good measure. This is Episode A.
For Episode A: ABCs of qualified retirement plans, or “ret plan basics”. I hear “what do you do again?” a lot, and the answer is that I design, invest, administer, and shut down qualified plans. So, I figured I should start at the very beginning, which, according to Mary Poppins, is a very good place to start. What’s a Qualified plan? Why would someone have them? Why WOULDN”T someone have them? Let’s talk it through.
· A qualified plan is an Employer sponsored Plan governed by Employee Retirement Income Security Act (ERISA) 12k of pension rules signed into law in early 70s. If that wasn’t enough, also governed by 401(a) in IRC. I got bored just saying that.
· Trouble sleeping, or an actuary – read this
· In a nutshell, these regulations lays out the rules we have to follow. Most of them have to do w discriminating against the rank and file employees - You can’t give the owners too much, or the employees too little. You can’t provide just the owners with a benefit, you need to include a certain number of employees. Things like that. No ees? awesome – then we don’t have to worry about that! Some of the other rules include dollar limits – how much you can put in, how much pay we can use, things like that
· FUN FACT: Plans around forever - Around a LOOOOONG time. Augustus Caesar introduced one to try and stop a rebellion. It did help, but allegedly this was one of the main reasons for collapse, because he promised too much and they didn't have the $
· Lots of rules. So why have one? Good things happen.
o Contribs are a top line ded for co’s. that’s right. Top line.
o Save for ret on a pretax basis. Think you could put away $1k per month? That’s actually 1200 to 1400 pretax. Need to squish 20-30y into 10? Can do that too
o Attract and retain talent, bankrupcy protection – IF one EE. Not kid, spouse. Tackle these in Episode H – high paid and key ees – and Episode P – protection.
o Guaranteed insurance – if 5 or more in the plan – insurability challenges, this could help. Touch on that in Episode “L” – Life Ins ….
o If you by the rules, stay in the lines …good things happen. PLUS – big plus – I’m focused on the business owner only. Yes, the ees will get something, of course they will because those are our rules. But we can have diff ben formulas for the owners and ees – and hopefully we can get 80-90%, if not more, of the total contribution going to the owner. Right – good things all around.
· There’s only 7 different plans in all. That’s right – 65M hits if you google qual plan, and there’s only 7.
o Some have high contributions
o Some have flexible contributions – zero one year, 20% of pay next
o Employee deferrals (401k)
o Life insurance
o Required contributions
o Need an actuary
o Pros and cons to each – more in Episode T, Types of plans
o Point: plan is designed for you, the owner. Need flexibility, deductions, catch up ret savings – we can do it.
· FUN FACT: Pension plans in the UK are called Pension Schemes. That sounded pretty devious to me – and when I looked up the word ‘scheme’, if it’s used as a verb, it’s just that – making plans to do something devious or illegal. But as a NOUN, it’s a plan for putting a particular idea into effect. So a Pension Scheme is ok…. Scheming with your pension is not.
· Why don’t owners have these great plans? Top 3 reasons I’ve seen:
o first – 65M hits on google. Overwhelming even for a pension geek like me. 4Qs-boil it down to 1 plan design.
o 2nd-owners don’t have the time or people to keep the plan going – remember all those rules and regulations? Don’t worry, a solid administrator can help you out.
o 3rd – low employee demand, want OT, pay, etc. *psst* …. This is for the owner. Employer sponsored plan. Consult ees on health care? Group life? No? same thing.
· FINAL FUN FACT: Almost named this series Retirement A to Z w Susie B - actually was called Susie through high school, and at my 1st job (already a Sue and a Susan)…still called Susie by a few people.
· Wrapping it all up – qual plans have a lot of rules, you don’t need to know them that’s what we’re here for. If you’re owner looking for those good things to happen – need ded, save for ret, looking to bring in and keep top talent, worried about creditors (and you have an employee) … any of these things – a qualified plan may be right for you.
· Want to hear more? Tune in to the other A to Z podcasts where we continue to break down these wonderful and complex plans into bite size pieces. Remember – how do you eat an elephant? One bite at a time!
· Have any questions? Shoot me an email at MonarchFinancialAdvisors@gmail.com. Thanks for listening in – and have a great rest of your day.