Requirements for Setting up a New Retirement Plan

The employer (Plan Sponsor) is accountable for 4 basic steps when setting up a retirement plan. These steps include:

  1. Implementing a written plan
  2. Investing the assets of the plan
  3. Creating a system for recordkeeping
  4. Ensuring plan information is given to the participants

Adopting a Written Plan

In order for plan contributions to be deductible for a tax year, it is imperative that the plan is set up before the last day of that plan year. This means that the plan document must be drafted and signed before the end of the plan year. The documents may be individually designed, or pre-approved by the IRS (volume submitter or prototype).

Investing the Plan Assets

Assets in a qualified plan must be invested according to the “prudent person” rule. Such assets must earn a reasonable rate of return within suitable parameters for the preservation of capital, be invested in a diversified manner, be suitable for the participant population, and be liquid enough to pay benefits. Assets cannot be used for anything other than the benefit of employees and their beneficiaries. Assets are not allowed to be diverted or allocated to the Sponsors. Assets in a 401(k), 403(b) or other Participant deferral plan are usually set up with an administrative system that permits Participant choice within the framework of the “menu” selected by the Plan Sponsor or other fiduciaries. These responsibilities require continual monitoring of the investment options in order to ensure that the selections are appropriately priced and provide competitive returns and continue in the best interests of the plan and its participants.

Developing a Recordkeeping System

The recordkeeping system needs to accurately and attribute contributions, “money types” (deferrals, Roth, matching, profit sharing), gains and losses, expenses, and benefit distributions to participants’ accounts. A contract administrator or financial institution (insurance company or mutual fund company), if the employer selects one, assists in plan management, and typically will also aid with keeping the required records. Importantly, a recordkeeping system helps the TPA or whoever is selected for this responsibility prepare the plan’s annual return/report (5500) that gets filed with the federal government as well as other annual required reports.

Providing plan Information to Participants

Plan benefits and requirements must be reported to employees who are eligible to participate in the plan. A Summary Plan Description, or SPD, is the required document which informs participants and beneficiaries about the plan and its operations. To ensure compliance, it is suggested that the SPD be distributed to all employees irrespective of their eligibility to participate. Anytime information contained in the SPD changes, notification must be given to the participants. A record should be made and kept of the manner and timing of the distribution of the SPD. This is a favorite question asked during IRS and DOL audits of qualified plans.

Setting up an employee retirement plan can be a smart way to provide for your employees, yourself and your business. Contact QBI for Assistance.