Plan Design focus

Plan Design focus
Specifically use the abridged adoption agreement (that is distributed with this package)
All the data required for you to prepare the plans Adoption Agreement is given. In arriving at your conclusion, if you find it necessary to make assumptions of the facts that are not presented, be sure to be consistent with the facts given, and state what assumptions you are making.
John and Bill Ames are brothers whose primary goal is to have a qualified plan that provides them with the largest share of benefits possible. Because of the tax inefficiencies involved they do not want to use a non-qualified plan.
Abridged 401(k) Adoption Agreement
Ames Brothers Case Study:
Instructions:
1. Very important!–Answer on a separate sheet using the numbers of each section of the adoption agreement to identify the box checked and/or the information requested provide!!
Do not answer on the adoption agreement. After each choice on the separate sheet briefly explain your answer (in some cases multiple choices are combined because they are interrelated).
2. Explanations should be short and to the point. Points will be deducted for explanations that exceed one paragraph.
3. Remember to tie your explanations to the client’s wishes from the case study and fact finder.

EATax 619 Take Home Case StudiesSummer 2010.doc

A. Eligibility for Salary Deferral, Matching, and/or Profit-Sharing Contributions
1. Age and years of eligibility service
Age requirement: An employee will be eligible to become a Participant in the Plan after attaining age (no more than 21).
Years of Eligibility Service Requirement: An Employee will be eligible to become a Participant in the Plan after completing (enter 0, 1, 2 or any fraction less than 2)
Years of Eligibility Service.
2. Entry Dates
The entry dates for purposes of employer profit sharing contributions shall be (select one)
Option 1: ? The first day of the Plan Year and the first day of the 7th month of the Plan Year
Option 2: ? The first day of the Plan Year and the first day of the fourth, seventh and tenth months of the Plan Year.
Option 3: ? The first day of the Plan Year.Option 3: ? The first day of the Plan Year.
Option 4: ? Other (specify)
Note: Option 3 or 4 can be selected only if the Eligibility requirements and Entry dates are coordinated such that each Employee will become a Participant in the Plan no later than the earlier of (1) the first day of the Plan Year beginning after the date the Employee satisfies the age and service requirements of Section 410(a) of the Code; or (2) six months after the date the Employee satisfies such requirement.
Note for students: Some terms are capitalized (examples in bold for emphasis) because they are subject to a specific definition given in the plan. We inadvertently omitted capitalization in some of the document below, but it is important to note that defined terms are going to be either bold face, italics, capitalized, or otherwise identified.
( Answers 1. and 2.) Explanation for choices in A-1 and A-2.
Use separate sheet for all answers including blanks ( ) , checked boxes ?, and
explanations.

B. Employer Profit-Sharing Contributions
1. Contribution formula (select one)
Option 1: ? Discretionary formula. For each plan year the employer will contribute an amount to be determined from year to year.

Option 2: ? Fixed formula. percent of the compensation of all qualifying participants
under the plan for the plan year.

Option 3: ? Fixed percent for profits formula. _____ percent of the employer’s profits that are
in excess of $

Option 4: ?No profit-sharing contribution

Option 5: ? Other: Please specify
(Answer 3) Explanation for choice in B-1.
Use separate sheet for all answers including blanks ( ) , checked boxes ?, and
explanations.

C. Elective Deferrals
1. Limits on elective deferrals
A contributing participant may elect under a salary reduction agreement to have his or her compensation reduced by an amount as described below (select one):
Option 1: ? An amount equal to a percentage of the Contributing Participant’s Compensation from percent to percent in increments of percent.
Option 2: ?An amount of Contributing Participant’s Compensation not less than $
and not more than $
Option 3: ? An amount equal to a percentage of the Contributing Participant’s Compensation not to exceed the limits imposed by Sections 401(k), 402(g), 404, and 415 of the Code.
The amount of such reduction shall be contributed to the Plan by the Employer on behalf of the Contributing Participant. For any taxable year, a Contributing Participant’s Elective Deferrals shall not exceed the limit contained in Section 402(g) of the Code in effect at the beginning of such taxable year.
(Answer 4) Explanation of choice in C-1..
Use separate sheet for all answers including blanks ( ) , checked boxes ??, and
explanations.

C-2. Changing Elective Deferral Amounts
A Contributing Participant may modify a salary reduction agreement to prospectively increase or decrease the amount of his or her Elective Deferrals (select one):
Option 1: ? As of the first day of the Plan Year and the first day of the seventh month of the Plan Year.
Option 2: ? As of the first day of any quarter.
Option 3: ?As of the first day of any month.
Option 4: ?As of any Entry Date.
Option 5: ?As of such times established by the Plan Administrator in a uniform and nondiscriminatory manner.
Option 6: ? Other (Specify one or more dates established by the Plan Administrator in a uniform and nondiscriminatory manner.)
(Answer 5) Explanation choice in (C-2).
Use separate sheet for all answers including blanks ( ___) , checked boxes ?, and
explanations.

D. Matching Contributions
1. Will the Employer be making Matching Contributions? Option 1: ? Yes
Option 2: ?No
(Answer 6) Explanation choice in D-1.
Use separate sheet for all answers including blanks ( ) , checked boxes ?, and
explanations.
2. Matching Contribution Formula
If the Employer will make Matching Contributions, then the amount of such Matching Contributions made on behalf of a Qualifying Contributing Participant each Plan Year shall be (select one):
Option 1: ? An amount equal to percent of such Contributing Participant’s Elective
Deferral which does not exceed percent of the Contributing
Participant’s Compensation.
Option 2: ? An amount equal to the sum of percent of the portion of such
Contributing Participant’s Elective Deferral which does not exceed
percent of the Contributing Participant’s Compensation plus percent of
the portion of such Contributing Participant’s Elective Deferral which exceeds
percent but does not exceed percent of the Contributing
Participant’s Compensation.
(Answer 7) Explanation choice in D-2.
(Note to students: Please answer even if you chose no matching contributions above).
Use separate sheet for all answers including blanks ( ) , checked boxes ?, and
explanations.

E. Vesting Schedule for Employer Profit Sharing Contributions and Matching Contributions
1. A Participant shall become Vested in his or her Individual Account derived from Employer Profit Sharing Contributions and Matching Contributions, if applicable, made pursuant to Section B and D of the Adoption Agreement as follows.
Option 1: ? 2-6 Year Graded..
Option 2: ? 3 Year Cliff.
Option 3: ?Full and immediate vesting (for use with the safe harbor choice) Option 4: ? Other
Note: If a safe harbor election is made the matching and/or nonelective Profit-Sharing Contributions must be adjusted accordingly.
(Answer 8) Explanation choice in E-1.
Use separate sheet for all answers including blanks ( ) , checked boxes n, and
explanations.
2. Fully Vested Under Certain Circumstances
Will a Participant be fully Vested under the following circumstances (answer “Yes” or “No” to each of the following items by selecting the appropriate box)?
1. The Participant dies ? Yes q No
2. The Participant incurs a Disability. q Yes ? No
3. The Participant satisfies the conditions for Early
Retirement Age (if applicable). ? Yes q No
(Answer 9) Explanation choice in E-2.

Use separate sheet for all answers including blanks ( ) , checked boxes ? and
explanations.

3. Allocation of Forfeitures (choose one)
Option 1: ? Forfeitures will be reallocated proportionally to remaining Participant accounts. Option 2: ? Forfeitures will be used to reduce future Employer Contributions.
(Answer 10) Explanation choice in E-3..
Use separate sheet for all answers including blanks ( ) , checked boxes ?and
explanations.

F. Withdrawals and Loans (In-Service)
1. Withdrawals for Profit-Sharing or Matching Contributions
Option 1: ? Will not be allowed.
Option 2: ? Will be allowed using the 2 Year rule.
Option 3: ? Will be allowed using the hardship per se rule.
2. Hardship Withdrawals of Elective Deferrals
May a Participant request a distribution of his or her Elective Deferrals on account of hardship pursuant to the hardship per se rules?
Option 1: ? Yes Option 2: ? No
3. Loans
May a Participant request a loan pursuant to the legal requirements for plan loans?
Option 1: ? Yes Option 2: ? No
(Answers 11-13) Explanation of choice in F-1, F-2, and F-3,
Use separate sheet for all answers including blanks ( ) , checked boxes ?, and
explanations.
E:\Tax 619 Take Home Case StudiesSummer 2010.doc

G. Retirement Ages
1. Normal Retirement Age
The Normal Retirement Age under the Plan shall be (select and complete one):
Option 1: ? Age (not to exceed 65 or such later age as may be allowed under
Section 411(a) (8)).
Option 2: ? The later of age (not to exceed 65 or such later age as may be allowed
under Section 411(a) (8)) or the (not to exceed fifth) anniversary of the
first day of the first Plan Year in which the Participant commenced participation in the Plan.
2. Early Retirement Age
The Early Retirement Age under the Plan Shall be (select one)
Option 1: ? An Early Retirement Age is not applicable under the Plan
Option 2: ? A Participant satisfies the Plan’s Early Retirement Age conditions by attaining the age and completing Years of Vesting Service.
(Answers 14 and 15) Explanation of choice in G-1, and G-2.
Use separate sheet for all answers including blanks ( ) , checked boxes ?, and
explanations.

H. Investments
1. Accounts Subject to Participant Direction
A Participant shall be responsible for directing the following portions of his or her individual Account (select one):
Option 1: ? Those accounts that the Plan Administrator may designate from time to time in a uniform and nondiscriminatory manner
Option 2: ? The entire Individual Account.
Option 3: ? The following accounts (select any that apply)
q Elective Deferral account.
q Matching Contributions account.
q Employer Profit-Sharing account.
q Rollover contribution account.
2. Frequency of Investment Changes
A Participant may make changes to the investments within his or her Individual Account with the following frequency (select one):
Option 1: ? In accordance with uniform and nondiscriminatory rules established by the Plan Administrator or other Fiduciary.
Option 2: ? Daily.
Option 3: ? Monthly.
Option 4: ? Quarterly.
Option 5: ? Other (Specify one or more of the accounts that may, in part, comprise a Participant’s Individual Account under this Plan)
(Answers 16 and 17) Explanation of choice in H-1, and H-2.
Use separate sheet for all answers including blanks ( ) , checked boxes? and
explanations.

I. Definitions
1. Hours of Service Equivalencies
Service will be determined on the bases of (select one)
Actual hours for which an Employee is paid or entitled to payment.

Days worked. An Employee will be credited with 10 hours of Service if under the definition of Hours of Service such Employee would be credited with at least one Hour of Service during the day.

Weeks worked. An Employee will be credited with 45 hours of Service if under the definition of Hours of Service such Employee would be credited with at least one Hour of Service during the week.

Semi-Monthly payroll periods worked. An Employee will be credited with 95 Hours of Service if under the definition of Hours of Service such Employee would be credited with at least one Hour of Service during the semi-monthly payroll period.

Option 5: ? Months worked. An Employee will be credited with 190 hours of Service if under the definition of Hours of Service such Employee would be credited with at least one Hour of Service during the month.

Option 6: ? Elapsed Time Method.
(Answer 18) Explanation choice in I-1.
Use separate sheet for all answers including blanks (___) , checked boxes ?, and
explanations.

1-2. General Definition of Compensation
Compensation will mean all of each Participant’s (select one)
Option 1: ? W-2 wages.
Option 2: ? Section 3401(a) wages.
Option 3: ? 415 safe-harbor compensation.
Option 4: ? Other
(Answer 19) Explanation choice in 1-2..
Use separate sheet for all answers including blanks (_____ ) , checked boxes ?, and
explanations.
(Answer 20) List any additional design features you might consider.
Use separate sheet for all answers including blanks ( ) , checked boxes ? , and
explanations.

CASE STUDY DATA FOLLOWS

SECTION I – RETIREMENT PLAN DATA
PART A – CLIENT PROFILE
A-1 Legal Name Ames, Inc
Address 100 Bullrun Drive
Your City, Your State Zip

Telephone
Contact John Ames
A-2 Employer (Taxpayer) Identification Number 500-60023
A-3 Nature of Enterprise (Check Appropriate Line)
3.1 Sole proprietorship 3.6 Municipal corp. or government agency
3.2_______ Partnership 3.7 Professional corporation
3.3 X Business corporation 3.8 Business or real estate trust
3.4 S corporation 3.9 Other specify
3.5 • Exempt org. (sec. ))
A-4 Nature of Business (Principal Business Activity) Management consultants
IRS business code number
A-5 Accounting Method (Check One)
X Cash- Accrual
A-6 Fiscal Year Ends March 31
(Month) (Day)
A-7 Date of Incorporation or Establishment
. (Month and Year)
A-8 State of Incorporation or Domicile Your State
A-9 Related Corporation or Unicorporated Entities, including Affiliated Service Groups
(Names, Nature of Enterprises, Ownership Percentages of Related Enterprises) None

A-10 Predecessor Entities
10.1 Name N/A
10.2 Nature of Entity
10.3 Date of Establishment
10.4 Date of Transfer
A-11 What is the Approximate Rate of Employer Turnover as a Percent of the Active Group for the Past Five Years?
Last year 10 %
2 years ago 10 %
3 years ago 10 %
4 years ago 0 %
5 years ago 0 %

A-12 Client Motives (For a New Benefit Program)
Provide a retirement benefit for all full-time employees after completing a maximum permitted waiting period. Client is interested in a retirement plan that affords the possibility of increased benefits due to a favorable investment results for all participants
A-13 Employee Groups under Consideration (For a New Benefit Program) 13.1 X Salaried employees
13.2 Hourly employees
13.3 Collective-Bargaining Unit employees
13.4 Leased employees
1 3 . 5 Other

Part B — Financial Data
B-1 Balance Sheets (Last Two or Three Years) and Summarize
Assets consist of cash –$140,000; office equipment 428,000; accounts receivable– $100 000. Liabilities consist of short-term loans– $40,000; accounts payable –$20,000.
B-2 Profit and Loss Statements and Summarize
Earnings average $800,000 per year before salaries and expenses
B-3 Summarize Earnings Projections
Steady growth in earnings of 20% yearly
B-4 what type of Cost commitment Can Be Considered for a Pension or a Profit-Sharing Plan or Both?
4.1 2 0 % of payroll plan participants, i.e., of each participant’ salary
4.2 % of profit
4.3 % of profit in excess of $
4.4 $ Flat dollar amount
Part C is not applicable. It deals with other Benefit Programs

Step 1: Listed below are some typical concerns that organizations have when instituting a retirement program. Grade each of these concerns by scoring 1 for very valuable, 2 for valuable, 3 for moderately valuable, and 4 for least valuable.

Step 1 Continued:
14. To what extent is it important to [x] [2] [3] [4]
motivate the work force?
15. To what extent is it important to deal with su- [1] [x] [3] [4]
perannuated employees?
Step 2: Discuss with the client the interplay between various factors in step 1. For example:

YES NO

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