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From the Desk of:

John D. Pivirotto
Calif. Insurance License #0699308

Financial Concepts

Burlingame, CA 
(650) 348-1880
(650)348-0255 Fax


Helping Build & Protect Your Future

Investment Advisor Representative
Securities and Advisory Services
offered through
Lincoln Financial Securities Corporation
Member SIPC

How to Correct Defects in Qualified Plans 
Setting up a qualified retirement plan always requires thought and analysis. In addition to tax deductions, business owners and executives must focus on many administrative aspects and procedures if they wish to sponsor a qualified retirement plan and keep it from becoming “defective.” 

Qualified retirement plans can unintentionally include defects from inception, or they may develop defects over time. Defects may be discovered when an employee believes he or she is entitled to recover specific benefits. 

Correct It Yourself 
In the past, it was difficult for business executives to take appropriate corrective measures because the Internal Revenue Service (IRS) did not always clarify the necessary requirements. Today, the IRS has implemented specific, technical guidelines to make it possible— and easier—for business executives to “self-correct” defects on a voluntary basis. 

By making certain that plan defects are corrected promptly and accurately through the use of a Safe Harbor provision, business owners and executives may avoid receiving potential adverse actions and penalties from the IRS. 

There are several parts of a qualified plan that can either begin with, or develop, significant defects. Once discovered, many defects may be “self-corrected” according to the IRS Safe Harbor provisions. Here are some of the corrective measures that must be followed under the scope of the Safe Harbor rules:

 • Exclusion of Eligible Employees. The business owners must make the contribution for the excluded employee, or reallocate a nonelective contribution (for a defined benefit pension plan) for the employee.
 • Vesting Failures. The business owners must make a contribution equal to the forfeited amount, or reallocate amounts among all plan participants.
 • Section 415(b) Failures, Including Overpayment. The business owners must return the overpayment to the employee, while additionally providing the employee with the information that the overpayment does not qualify as a tax-free rollover. Other adjustments must be made if overpayments are created on a periodic basis. Consideration must also be taken not to reduce a spouse’s survivor benefit. 
• Hardship Distributions. The business owners and executives must be certain plan participants can easily receive money when hardship conditions exist. The IRS requires that the plan is amended in order to correct this defect. 
• Failure to Make Minimum Contributions. This situation will require a business to fund either the top-heavy minimum allocation (in a defined contribution plan), or the minimum benefit accrual (in a defined benefit plan).
 • Failure to Make Minimum Distributions. The business owners must distribute a payment based on a formula disclosed under the Safe Harbor rules (defined contribution plan) or distribute the minimum payment to retirees plus interest (defined benefit plan).
 • Failure to Obtain Spousal Consent. Plan sponsors have a choice for retirees. They must provide a qualified joint and survivor annuity, or the spouse must be informed and consent to the non-joint and survivor payout.

 Correct It Promptly 
While retirement plans are essential for employees, it is essential for businesses to be mindful of the regulations that make it possible for them to maintain the tax benefits of their retirement plans. Since the IRS has made it easier to “self-correct” many types of plan deficiencies, now is the time to take a closer look at whether current plans meet the requirements and guidelines prescribed by law. $

Salary Continuation Plans for Key Employees  
Salary continuation plans have gained great acceptance among corporations of all sizes. These plans are essentially deferred compensation arrangements between employee and employer, stipulating that extra benefits will be provided after retirement, disability, and/or death, assuming the employee complies with the terms of the agreement.  

The agreement may require the employee to work for a stated period of time, or it may contain a “noncompete” clause obligating the employee not to compete directly with the employer over a period of time in a specific geographic location.  

Benefits are often expressed as a percentage of salary starting at retirement (e.g., retirement benefits of 30% of salary for ten years), and are based on length of service. This type of plan can supplement, or even replace, other retirement plans.  

Salary continuation plans can be constructed as nonqualified (nontax-deductible) benefit arrangements, thereby avoiding the restrictions and administrative burden of qualified (tax-deductible) plans. This method allows the company freedom to choose participants and benefit levels. To avoid many of the restrictions of the Employee Retirement Income Security Act of 1974 (ERISA), however, a nonqualified plan must be restricted to a select group of management or highly paid employees.  

 In contrast to a qualified plan, benefits under a salary continuation plan depend solely on the financial strength of the corporation, without guaranteed funding as a key requirement. Thus, in the event of bankruptcy, the employee would have the same rights as a general creditor in collecting benefits. Among the advantages of salary continuation plans are:  

• Provision for a retirement plan for key employees. This feature is especially important for companies that cannot afford a tax-qualified plan for all eligible employees. 

 • Retention of key employees. Using salary continuation as “golden handcuffs” may be more cost-effective than offering current higher salaries. 

 • Allowance for a more competitive compensation package. When recruiting a mature executive, a salary continuation plan can be an alternative to a higher salary or increased retirement benefits. 

• Provision for a necessary or desirable early retirement. It’s often the case that part of the appeal of a salary continuation plan is based on the premise that a key employee might want to retire earlier than expected.

 • Protection of some benefits in a merger situation. With so many mergers and acquisitions taking place, having a salary continuation plan in place may provide more secure retirement funding for key executives. 

The cost of a salary continuation plan is directly related to the benefits provided. Employer contributions to the plan are deductible in the year in which the payments are included in the employee’s gross income. A fund reserve can also be created to help meet these obligations. However, the employee cannot have a specific claim on any fund or reserve. 

Many companies find it advantageous to recover the costs of the plan by including a death benefit. To accomplish this goal, an employer purchases cash value life insurance on the employee. The company is both the owner and beneficiary of the policy. The size of the policy is determined by the value of money (the interest rate), the benefits, and mortality considerations. 

Assuming actual mortality rates are consistent with those anticipated, the company can potentially recover all premiums and benefit costs, plus interest, on the money expended. Premium costs are not deductible, but policy proceeds are generally received tax free by the corporation. Policy proceeds may, however, be subject to the alternative minimum tax (AMT). Benefits paid to the employee’s heirs are tax deductible to the corporation. 

It is important to note that the Internal Revenue Service (IRS) often has regulatory changes in the offing that could affect salary continuation plans. As a result, it’s always best to check that you’re in step with the latest tax treatment. When properly used, salary continuation plans can be valuable tools to attract, reward, and retain key employees. Their flexibility may make them cost-effective for any size company. $

Estate Planning: What’s Your Strategy? 
From Main Street to Wall Street, business owners and executives can become so engrossed in their work, they may have little time and energy left to develop a sound estate plan. However, without a strategy in place, you could expose your hardearned assets to unnecessary estate taxation. This can be extremely troublesome to you as a business owner, since your family may be forced to sell your business and other assets to meet your estate tax obligations. 

Many people lack a thorough understanding or are intimidated by the estate planning process and, thus, tend to put off developing a strategy. But, procrastinating when it comes to planning may make the problem worse. The complex issues involved in developing an effective estate plan make seeking out a competent advisory team extremely important. By having your financial, insurance, legal, and tax professionals working in accord, your wishes can be accurately executed. 

Laying the Groundwork 
The amount of planning necessary is often dictated by the size of your assets. However, every situation is different and requires varying degrees of planning and participation. For instance, if you are married, a properly drafted and executed will and living trust for you and your spouse will not alone ensure that you will maximize each of your respective $1,000,000 (for 2003) estate tax applicable exclusion amounts. Proper balancing of assets between you and your spouse will be necessary to help ensure you make the best use of each applicable exclusion amount. 

Assets owned jointly by you and your spouse qualify for the unlimited marital deduction between spouses (transfer of asset ownership among spouses is unlimited and does not incur a transfer tax liability). Thus, in order to take advantage of each spouse’s applicable exclusion amount, it may be necessary to retitle certain assets. It is common for some individuals to be a bit leery of retitling assets solely to their spouse or some other entity, such as a trust, because they fear the loss of control over assets. For this reason, it is important to determine the most tax-effective asset ownership arrangement that is consistent with your concerns about asset control. 

Additional planning concerns may revolve around the possibility that your heirs will be left with a substantial estate tax bill, even after you have maximized your estate tax exclusion amount. If this is the case, your advisors may suggest an irrevocable life insurance trust (ILIT) to help fund the payment of estate taxes and to help ensure your assets are passed to your family in full. 

When properly drafted and executed, the proceeds of an ILIT will be payable to ILIT beneficiaries (generally, children and grandchildren). The proceeds will be excluded from your estate and will not incur any estate tax liability. An ILIT can purchase a life insurance policy on your (the donor’s) life, with policy premiums funded by annual gifts you make to the ILIT. Your annual gift exclusion ($11,000 annually per donee and $22,000 for gifts made by husband and wife in 2002, but indexed annually for inflation) can be used to help minimize your gift tax exposure. This planning technique is a straightforward mechanism for funding future estate tax liabilities and creating the potential for leveraged gifts to family or charity. However, there are a number of technical requirements your legal professional will need to address to successfully implement this strategy. 

It’s Your Plan 
It is important to understand that estate planning is an ongoing process that requires a personal commitment. Your estate planning team’s coordinated efforts can help ensure your goals and wishes are carried out, but your estate plan will only produce maximum results if you are a direct participant in planning decisions. $
Current tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the particular set of facts and circumstances. The information contained in this newsletter is not intended as tax, legal, or financial advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek such advice from your professional advisors. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Written and published by Liberty Publishing, Inc. Copyright © 2009 Liberty Publishing, Inc.
Copyright 2009 Liberty Publish- ing, Inc., Beverly, MA. The opinions and recommendations expressed herein are solely those of Liberty Publishing, Inc., and in no way represent advice, opin ions, or recommendations of the Financial Planning Association, its affiliates or members. CFPTM and CERTIFIED FINANCIAL PLANNERTMare federally registered service marks of the Cer- tified Financial PlannerBoard of Standards (CFP Board). This summary does not constitute legal and/or tax advice and should only be relied upon when coordinated with a qualified legal and/or tax advisor. Febuary, 2009.
Planning Strategies
*Disclosure – Securities and Advisory services offered through representatives of Lincoln Financial Securities Corporation, member FINRA & SIPC. FINRA Branch Office: 233 Bloomfield Road, Burlingame, CA 94010. 
This is not an offer to sell securities, which may be done only after proper delivery of a prospectus and client suitability is reviewed and determined. Information relating to securities is intended for use by individuals residing in California, Oregon and Colorado only. Advisory Services are offered to residents of the state of California only. Lincoln Financial Securities Corporation is not affiliated with Financial Concepts. Financial Concepts offer insurance & financial services to residents in California and Oregon. Variable & Group insurance products offered through LFS Marketing and Insurance Sales Corporation; fixed insurance products offered through Financial Concepts Insurance & Financial Services.
John Pivirotto’s California Insurance License #: 0699308
Financial Concepts’ California Insurance License #: 0786047