Life and Death Planning for Retirement Benefits

Chapter 8: Investment Issues; Plan Types

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The required annual contribution may be determined by an actuarial formula based on the promised benefits ( defined benefit pension plan or defined benefit plan; ¶ 8.3.04 ), or may be simply a percentage of employees’ compensation each year ( money purchas e pension plan or money purchase plan). A pension plan is contrasted with a profit-sharing plan, under which the employer’s contributions are discretionary or linked to profits. Pension plans have the following features of interest to estate planners:  Pension plans are generally not permitted to make “in-service distributions,” i.e., distributions prior to age 62 except upon the employee’s termination from employment. See § 401(a)(36) ).

 Pension plans are subject to the strictest federal spousal-rights rules. See ¶ 3.4.02 .

 All pension plans are considered “one plan” for purposes of determining whether there has been a distribution, within one calendar year of the recipient, of the employee’s entire balance in “the” plan under § 402(d) (lump sum distributions; ¶ 2.4.04 (B)), even if they are not the same type of pension plan.

Profit-sharing plan

A profit-sharing plan is a QRP ( ¶ 8.3.12 ). It is a Defined Contribution plan ( ¶ 8.3.05 ) under which the employer’s contributions are either entirely discretionary or are a fixed percentage of profits. Most 401(k) plans are profit-sharing plans. Profit-sharing plans qualify for a limited exemption from federal spousal-rights rules; see ¶ 3.4.03 .

Qualified Retirement Plan

In this book, a Qualified Retirement Plan (QRP) means a retirement plan that meets the requirements of § 401(a) , i.e., it is “qualified” under § 401(a) . (For a different definition sometimes used in the Code, see ¶ 9.1.02 .) Types of QRPS include the 401(k) plan, defined benefit plan, ESOP, Keogh plan, money purchase plan, and profit-sharing plan. Since § 401(a) has more than 30 separate requirements, some of which cross reference other lengthy Code sections, it is no mean feat to be qualified under § 401(a) . Most of the requirements are of little concern to the estate planner who is advising the individual participant or beneficiary. However, it is helpful to be aware of certain § 401(a) concepts that create the landscape in which all QRPs must function. For example:  A QRP is established and maintained by the “ sponsor ” of the plan. Normally, the sponsor of the plan is the employer of the employees who are covered by the plan, but it could also be a labor union or an association of employers. The employer could be a sole proprietor or partnership, in which case the plan is also a Keogh plan ( ¶ 8.3.09 ).

 The assets of the QRP generally must be kept in a separate trust for the “exclusive benefit” of the employees and their beneficiaries (the “ exclusive benefit rule ”). § 401(a)(2) .

 § 415 limits how much may be contributed to the plan (or accrued on behalf of a participant) each year. § 404 limits the employer’s tax deduction for contributions.