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Setting Up a Qualified Plan

If you're self-employed, you may set up a qualified plan even if you're the only person working in you business; you have to have employees.

You must adopt a written plan.

You can design your own qualified plan to meet certain needs or use an IRS-approved master or prototype plan offered by a sponsoring organization.

Master or Prototype Plans

Most qualified plans follow a standard form of plan (a master or prototype plan) approved by the IRS.

Master and prototype plans are made available by plan providers for adoption by employers (including self-employed persons).

Master plan:

Under a master plan, a single trust or custodial account is established as part of the plan for the joint trust of all adopting employers.

Prototype plan:

Under a prototype plan, a separate trust or custodial account is established for each employer.

The following organizations generally can provide IRS-approved master or prototype plans:

  • Banks:
    • Savings and loan associations
    • Federally insured credit unions
  • Trade or professional organizations
  • Insurance companies
  • Mutual funds

Individually Designed Qualified Plan

You can set up and design a plan to meet specific needs if you want.

Advance IRS approval is not required, however, you can apply for approval by paying a fee and requesting a determination letter.

Tip: If you design your own plan it is advisable to get IRS approval.

Revenue Procedure 2007-6 in Internal Revenue Bulletin 2007-1 may help you decide whether to apply for approval.

User Fee:

The user fee, referred to above, for requesting a determination letter does not apply to certain requests made in 2006 and later years, by employers who have:

  • 100 or fewer employees who received at least $5,000 of compensation from the employer for the preceding year.

At least one employee must be a non-highly compensated employee participating in the plan.

There are two basic steps in setting up a qualified plan:

  • Adopt a written plan
  • Invest the plan assets

STEP 1: Adopt a written plan

  • To qualify, the plan you set up must be in writing and must be communicated to your employees.
  • The plan can be an IRS-approved master or prototype plan offered by a sponsoring organization.
  • The plan may also be an individually designed plan.
  • The plan's provisions must be stated in the plan.
  • It is not sufficient for the plan to merely refer to a requirement of the Internal Revenue Code.

Mater or Prototype Plans:

Most qualified plans follow a standard form of plan (a master or prototype plan) approved by the IRS.

Mater and prototype plans are plans made available by plan providers for adoption by employers (including self-employed individuals).

  • Master plan:
    • Under a master plan, a single trust or custodial account is established, as part of the plan, for the joint use of ALL adopting employers.
  • Prototype plan:
    • Under a prototype plan, a separate trust or custodial account is established for EACH EMPLOYER.

Plan providers include:

  • Banks, including:
    • Federally insured credit unions
    • Savings and loan associations
  • Trade or professional organizations
  • Insurance companies
  • Mutual finds

STEP 2: Invest the plan assets

In setting up a qualified plan, you arrange how the plan's funds will be used to build its assets.

  • You can establish a trust or custodial account to invest the funds.
  • You, the trust, or the custodial account can buy an annuity contract from an insurance company. Life insurance can be included only if it is incidental to the retirement benefits.
  • You, the trust, or the custodial account can buy face-amount certificates from an insurance company. These certificates are treated like annuity contracts.

You set up a trust by a legal instrument ( a written document). Professional help may be needed for this.

You can set up a custodial account with a bank, savings and loan association, credit union, or other person who can act as the plan trustee.

You do not need a trust or custodial account, although you can have one to invest the plan's funds in annuity contracts or face-amount certificates.

If anyone other than a trustee hold theses items, the contracts or certificates must state they are not transferable.

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