August 1999



By Sheldon M. Geller, Esq.,
Geller & Wind, Ltd.

The IRS has announced a one-year extension for employers to amend their qualified plans to reflect recent legislative and statutory changes. Thus, employers have until the end of the 2000 plan year to amend their pension plans, profit sharing plans, and 401(k) plans. The IRS originally advised that plan sponsors only had until the end of the 1999 plan year to adopt amendments to comply with changes made by the Uruguay Round Agreement Act, the Uniformed Services Employment and Re-employment Rights Act, the 1996 Small Business Job Protection Act, and the 1997 Taxpayer Relief Act.

The IRS extended the period for employers to amend their defined benefit plans to provide that benefits will be determined in accordance with the applicable interest rate rules and mortality table rules.

The IRS also extended by one year (to the end of the 2000 plan year) the period of extended reliance for certain plans that received favorable determination letters under the Tax Reform Act of 1986.

Plan sponsors need to adopt timely amendments retroactive to the appropriate statutory effective dates and conform with these statutory changes during the interim period.

I expect that the IRS will issue more guidance in anticipation of fully opening up its determination letter process. The issuance of a favorable determination letter does not exempt a plan or its trust from the obligations to comply with future changes in law or regulations, nor does it protect a plan from IRS review and action if it determines that plan operation is inconsistent with these statutory changes. However, the determination letter will state that, in the opinion of the IRS, the plan and its related trust, under the facts given, satisfy all the requirements for qualification and tax exemption under existing law. *


By Stephan R. Leimberg

The following brief descriptions of today's popular employee benefits plans are presented as a quick refresher and reminder.

Cash Balance Pension Plan. The business makes annual contributions at a specified rate to individual accounts set up for each plan participant. The business guarantees both a set level of annual contributions and a minimum rate of return on each participant's account. This plan is particularly appealing where the workforce is large and the bulk of employees are middle income. Administrative costs are spread over a relatively large group of plan participants. It is also popular where employees are concerned with security or retirement income.

Defined Benefit Pension Plan. The business guarantees a specific benefit level at retirement. This plan is particularly appealing to older, long-service, and key employees that want to maximize tax-deferred retirement savings. It is also useful where the design objective is to provide an adequate level of retirement income to employees regardless of age at plan entry.

Stock Bonus Plan/ESOP. The business invests a portion of its profits in its own stock on behalf of plan participants. An employee stock ownership plan (ESOP) is a stock bonus plan that can be used as a means for borrowing money from a bank or other financial institution. These plans are particularly appealing to owners that would like to create a market for corporate stock, broaden ownership (perhaps to prevent a takeover), and give employees a stake in the long-term success of the business.

HR-1 (Keogh) Plans. A self-employed individual (sole proprietor or partner) can accumulate a private retirement fund. This plan is particularly appealing where long-term capital accumulation is an important objective and the owner wishes to provide retirement benefits to employees as an incentive. It is beneficial where the owner has self-employment income in addition to regular income as an employee of another business and would like to defer significant taxes on the self-employment income.

Money Purchase Pension Plan. An individual account is established for each employee and annual contributions are made under a nondiscriminatory formula, typically a percentage of compensation. Plan benefits are the amount accumulated in the participant's account (i.e., the total of employer contributions, investment earnings, and capital gains on sales of plan assets). These plans are particularly appealing to owner-employers that are younger, seek to reward long-term relationships, and are willing to accept a degree of investment risk in return for potential investment results. It is also indicated where simplicity in plan administration and ease in explaining the plan to employees are desired.

Nonqualified Deferred Compensation. The employer can pick and choose who (among a select group of employees) will be included in the plan, terms of coverage, and benefit levels. This type of retirement plan is particularly appealing where it is desired to avoid the high cost of a qualified pension plan, to reward certain key employees, and to provide an additional incentive reward. It is also indicated where the employer wants to create an automatic and relatively painless investment program to enhance employees' financial security.

Profit Sharing Plan. Contributions to this type of plan can be either purely discretionary or based on some type of formula, usually relating to profits. Plan benefits are the amount accumulated in each participant's account at retirement or termination of employment (the sum of employer contributions, forfeitures from other employees' accounts, and interest, capital gains, or other investment return). This type of plan is particularly appealing where profits or the ability to contribute is uncertain or tends to fluctuate, where a direct link between profits and benefits is desired, and where employees are young and willing to accept a degree of investment risk in return for the potential benefits. It is also indicated where the employer wants to supplement an existing defined benefit pension plan.

Savings (Thrift) Plan. This tax-qualified plan provides that employees contributing up to a certain percentage of earnings will have those after-tax employee contributions matched (dollar for dollar or a specified percentage) by employer contributions to the employee's account. This type of plan is often used as an "add on" to 401(k) plans (discussed below). It is particularly appealing where employees are relatively young and willing to accept a degree of investment risk in return for potential investment results, and where the employer wants to promote a balanced long-term retirement savings program.

Section 401(k) Program. Also called a "cash or deferred plan," this gives participants an option to defer a portion of their compensation by having the employer place the amount into the plan. Tax on the income is deferred until withdrawn. Although in most cases employers contribute to the plan, aside from installation and administration costs, the entire funding can come from employees. This type of plan is particularly appealing where an employer seeks a "savings-type" supplement to existing retirement plans.

SEP. A simplified employee pension plan (SEP) is a means of creating tax deferred security similar to a qualified profit sharing plan in which an employer contributes on a nondiscriminatory basis to IRAs maintained by employees. This type of plan is particularly appealing to small employers looking for a truly simple, low-cost, highly flexible alternative to a qualified plan. An SEP is also indicated when an employer (particularly a sole proprietor) wants a tax deferral on money set aside for personal retirement but it is too late to adopt a regular pension or profit sharing plan (SEPs can be established as late as the tax return filing date for the year in which they are to be effective).

Target Benefit Pension Plan. This hybrid determines the desired retirement income and then calculates the actuarial annual contribution necessary to achieve that goal. The participant is entitled to the annual contributions plus investment earnings, so the plan is a combination of defined benefit pension plan (to determine the contribution) and defined contribution pension plan (to determine the benefit). This type of plan is particularly appealing to an employer that is seeking simplicity and low administrative cost but has an employee group with a relatively short working lifetime. It can also replace a defined benefit pension plan because it provides approximately the same benefits to most employees yet is less expensive and burdensome to maintain.

Cafeteria Plan. Employees are given the right, within specified boundaries, to select the type of benefits they'd like from a "cafeteria" of plans, including the right to take cash in place of noncash benefits of equal value. This type of plan is particularly appealing where there is a large group of employees with widely ranging benefit needs and the employer is seeking to maximize employee and plan flexibility. A form of cafeteria plan, the flexible spending account (FSA) is financed through salary reductions, provides direct tax benefits, is less expensive than regular cafeteria plans, and is often used by smaller firms.

Death Benefit Only (DBO). As its name implies, this plan provides death benefits (in the form of salary continuation) to specified classes of employees. But unlike nonqualified deferred compensation plans, it provides no retirement or other lifetime benefits. This type of plan (also called a survivor's income benefit plan) is particularly appealing as a supplement to a qualified pension or profit sharing plan, and it provides significant estate tax­free financial security (in the case of common law and shareholder employees that own 50% or less of the business) on a pick and choose basis. It is also indicated as a recruitment and productivity incentive.

Dependent Care Assistance Plan. Employees are reimbursed for day-care and other dependent care expenses. Alternatively, an actual day care center is established. This type of plan is particularly effective when an employer wants to attract and retain employees that need both financial and physical help in caring for young children or other dependents during working hours.

Flexible Spending Account (FSA). This type of cafeteria plan is funded through salary reductions elected by employees on a year-by-year basis. It is particularly appealing when an employer wants to expand employee benefit choices with no significant out-of-pocket cost. It is also indicated where employees have spouses with duplicate medical coverage, where there is a need to provide benefits difficult to provide on a group basis (such as dependent care), and where employees contribute to health insurance costs.

Section 132 Plans. Certain "fringe benefits" can be provided at relatively minimal cost by employers and produce a high degree of employee satisfaction. Called Section 132 Plans after the IRC section that makes them nontaxable to employees if certain rules are met, these perquisites are to many employees more valuable than cash. They include--

* employee discounts

* nonadditional cost services

* company cafeterias and meal plans

* free parking

* gyms and athletic facilities

* "working condition" fringes such as limousines.

Golden Parachute Plans. This compensation arrangement provides special severance benefits to executives in the event the corporation changes ownership and the covered employees (typically executives) are terminated. These plans are particularly appealing to companies that need high-powered personnel who, as a matter of self-protection, insist on a parachute-type arrangement in case the company is acquired by another firm. *

Stephan R. Leimberg, Esq., is CEO of Leimberg and LeClair, Inc., an estate and financial planning software company, and president of Leimberg Associates, Inc., a publishing and software company in Bryn Mawr, Penn. For more information call (610) 527-5216 or visit

Reprinted with permission from Ed Slott's IRA Advisor, December 1998.

Sheldon M. Geller, Esq.
Geller & Wind, Ltd.

Michael D. Schulman, CPA
Schulman & Company

Contributing Editors:
Steven Pennacchio, CPA

Edward A. Slott, CPA
E. Slott & Company

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