The following questions and answers have been designed to provide the information that our site visitors need in order to make a decision concerning the adoption of an ezActuary® plan.  However, it is important for all visitors to understand that the discussion below is not a legal opinion.  For a legal opinion with respect to the merits or legal requirements concerning the adoption and maintenance of a tax-qualified pension plan, we urge our visitors to consult with outside legal counsel.

(1)        What is an ezActuary® plan? 

            The ezActuary® plan is a prototype, defined benefit pension plan. 

            All pension plans fall into one of two categories:  defined contribution plans and defined benefit plans.  The difference between these two categories is in the type of benefit provided by the plan. 

            A defined contribution plan provides for a periodic contribution from the employer and/or a periodic contribution from the employees.  This contribution is put into one or more individual accounts on behalf of each employee and, over time, the individual accounts grow with additional contributions, interest, dividends, and investment gains.  Investment losses and administrative expenses are also deducted from the individual accounts.  Upon retirement or sometimes upon other termination of employment, each employee receives the accumulated balance in his individual account, usually payable as a single lump sum distribution.  Defined contribution plans do not provide a guaranteed minimum benefit or minimum account balance.  These plans are called “defined contribution” plans because it is the contribution to the plan that is “defined” rather than a specific benefit.  Examples of defined contribution plans include 401(k) plans, profit-sharing plans, money purchase plans, simplified employee pensions (SEPs), target benefit plans, employee stock ownership plans (ESOPs), and individual retirement accounts (IRAs). 

            A defined benefit plan provides for a specific monthly benefit payable upon retirement.  This benefit is usually based on a mathematical formula, which takes into account the employee’s service with the employer and, in many cases, his compensation from the employer.  Sometimes, the formula is based on an average of the employee’s highest three or five years of compensation.  For example, a typical defined benefit plan might provide 1½% of the average of the employee’s compensation for his highest five consecutive years of employment multiplied by his years of service.  In this case, if an employee had worked for the employer for 10 years and had averaged $35,000 in compensation during his highest five consecutive years of employment, he would be entitled to receive an annual pension equal to $5,250 (or $437.50 per month) upon retirement.  In addition to describing the retirement benefit formula, defined benefit plans include rules concerning when the retirement benefit is payable and how the retirement benefit is payable.  A typical defined benefit plan might pay a life annuity beginning at age 65.  If this were the case with our example, then the employee described above would be entitled to receive $437.50 per month beginning at age 65 and payable for the remainder of his lifetime.  Of course, many defined benefit plans also provide early retirement benefits, as well as death and disability benefits.  In addition, most defined benefit plans offer the employee a choice of benefit payment options upon retirement and some plans offer a single lump sum distribution in lieu of a monthly annuity.  “Defined benefit” plans are called such because the retirement benefit is “defined” by a formula.  Examples of defined benefit plans include traditional retirement plans, cash balance plans, and social security. 

            Under federal law, there are many rules and regulations that govern both defined contribution and defined benefit pension plans.  In addition, some rules apply only to defined contribution plans and other rules apply only to defined benefit plans.  In both cases, the plan must have a legal document that sets forth the rules and regulations that apply to that specific plan.  Some employers hire an attorney to draft a customized legal document for their pension plan.  Because this process can cost several thousand dollars, many small employers use what is known as a prototype plan.  With a prototype plan, there is a “master” plan legal document that sets forth the basic rules and regulations for the pension plan.  In addition, each employer who uses the prototype plan must sign an “adoption agreement.”  The adoption agreement indicates the employer’s intention to adopt the master plan and describes the features of the master plan that are unique to that employer.  For example, the adoption agreement might define the retirement age and the retirement benefit formula that will apply. 

            Many banks, insurance companies, and investment firms offer prototype, defined contribution plans to small employers.  However, it can be difficult to find an institution that offers a prototype, defined benefit plan.  The ezActuary® site was established to provide small employers with an affordable prototype, defined benefit plan. 

            The ezActuary® plan is a regional prototype plan maintained by Southern Actuarial Services Company, Inc.  The ezActuary® plan has been approved by the Internal Revenue Service (IRS) for sponsoring employers.  A copy of the IRS approval letter is available upon request.   All services provided in connection with the ezActuary site are provided by ezActuary®, Inc. which is a Georgia corporation located in Atlanta, Georgia and whose mailing address is 7355 Twin Branch Road NE, Atlanta, Georgia  30328. 

(2)        What advantages does a defined benefit plan offer? 

            All tax-qualified pension plans offer employers the ability to eliminate taxes on a portion of current income.  In addition, tax-qualified pension plans offer employees the ability to defer income taxes on both the contributions made to the plan as well as the investment earnings that accumulate in the plan. 

            Until recent federal legislation was enacted, federal tax laws generally did not provide much incentive for a small employer to adopt a defined benefit plan instead of a defined contribution plan.  For this reason, most small employers historically have chosen to adopt a SEP or profit-sharing plan to provide retirement benefits to the business owner and his employees.  Under current tax laws, such defined contribution plans generally offer an employer a tax deduction of up to 25% of compensation for contributions made to the plan.  In the case of a SEP, the employer must contribute the same percentage of pay for each employee and cannot provide a larger contribution for the business owner than is provided for the other employees of the business.  In the case of a profit-sharing plan, it can be difficult, if not impossible, for the business owner to provide himself with a larger contribution than is provided to his employees. 

            Under recent federal legislation, federal tax laws have been changed to make traditional, defined benefit pension plans a much more advantageous choice for certain employers.  In many cases, the business owner can benefit from a larger contribution than his employees, both as a percentage of compensation and as a dollar amount.  These plans are not the best choice for ALL employers.  However, if an employer falls into one of the following categories, then it is likely that a defined benefit pension plan will provide a larger (and, in some cases, a much larger) deductible contribution than is offered by a SEP or profit-sharing plan: 

The business owner and his family members are the only employees of the business and the business owner is over age 40;-OR-
The business owner is substantially older than the average age of his employees and is over age 40;-OR-
The business owner wishes to provide a larger pension to his employees than can be provided by a SEP or profit-sharing plan and the average age of his employees is over age 40. 

            The ezActuary® site makes it a snap to determine whether a defined benefit plan is a more advantageous choice for a particular employer.  Furthermore, this service is provided at no charge to our visitors.  Click here to get an estimate of the maximum deductible contribution and maximum benefit that can be provided by a defined benefit plan.

(3)        What are the disadvantages of a defined benefit plan? 

            While they can be very advantageous for certain employers, defined benefit plans do have a few disadvantages that should be recognized: 

Defined benefit plans require a minimum employer contribution each year.  Therefore, contributions to a defined benefit plan are not as flexible as those to profit-sharing and SEP plans.  If the employer cannot afford to make the required contribution during a particular year, then the benefit formula or other plan provisions must be adjusted and, in some cases, the employer may be required to make a minimum contribution to the plan even if the employer cannot afford to make the contribution that year.

Defined benefit plans can be difficult for rank-and-file employees (especially younger employees) to understand and appreciate.  Therefore, some employers do not get much “mileage” from these plans as an employee recruiting or retention tool.

Non-professional employers with non-owner employees and all employers with more than 24 employees must pay an annual insurance premium to the federal government’s pension insurance program which is administered by the Pension Benefit Guaranty Corporation (PBGC).  The PBGC guarantees a portion of the benefits payable from defined benefit plans when such plans become insolvent.  (This insurance coverage can also be viewed as an advantage to the employees, since a portion of their benefits are backed by the federal government.)  The premium is not significant for most plans, but obviously it adds to the cost of maintaining the plan.

Defined benefit plans must have an actuary determine the minimum required and maximum tax-deductible contribution each year.  The ezActuary® fee for this determination starts at $750 per year and may be higher for employers with more than five employees. 

(4)        How do I adopt an ezActuary® plan?

            We have designed this site to make it easy and convenient for small employers to adopt a defined benefit plan.  Simply click here to establish a Membership and then use the Adopt A Plan option to enter information about each of your employees, select the plan’s target retirement age and retirement benefit formula, and then answer a few questions about the plan’s sponsoring employer.  Based on your choices, you will receive one copy of the master legal document and two adoption agreements.  You must have the employer sign both adoption agreements and return one copy to us in order for the plan to be activated.

(5)        How do I maintain an ezActuary plan? 

            We have designed this site to make it easy and convenient for small employers to maintain a defined benefit plan.  You or another representative of the plan should visit this site at least once each year to determine the minimum required and maximum deductible contribution for the plan.  We will notify you, via email, that it's time for the annual information update that is required to maintain your plan. When you visit, you will be reminded of any steps that you must take for that year to administer the plan.  You will then receive the required reports and tax schedules for this purpose on an annual basis.  You can also order other related services through this site, such as individual retirement benefit calculations, other plan-related tax forms, and summary plan description booklets for your employees.  Some of these services may require you to provide additional information, such as proof of the employer’s contribution to the plan.  It is the employer’s responsibility to ensure that a plan representative visits the site at least once per year and that the necessary actuarial services are ordered. 

            Although the ezActuary® site can provide most of the administrative services needed by your plan, the ezActuary® site does not provide asset custodian or trustee services and cannot provide any advice on how or where to invest the plan’s assets.  For this purpose, you must establish a “trust account” with a bank, insurance company, or other investment firm to receive, hold, and invest the plan’s contributions and assets.  In other words, you or another plan representative must separately determine where and how to invest the money contributed to the pension plan and must establish a separate trust account for this purpose.  It is important for you to understand that the contributions made to the pension plan, as well as the assets held by the plan, do not belong to the employer and must be managed for the benefit of the plan’s participants.  Federal law provides strict rules governing trust accounts like these and also provides penalties (both criminal and civil) for the mismanagement of a pension plan trust account.  In addition to contacting a bank, insurance company, or investment firm, you may wish to contact your attorney, accountant, or tax advisor for information and assistance on setting up and maintaining a trust account for a tax-qualified pension plan. 

(6)        What if I’m not comfortable using the ezActuary® site or I decide not to use the ezActuary® site in the future after I've already adopted an ezActuary® plan?

            You do not have to use the ezActuary® site to obtain the actuarial services necessary to maintaining your ezActuary® plan.  However, if you decide not to obtain actuarial services through this site after an ezActuary® plan has been adopted, then you must find another actuary to provide these services and the actuary’s fees may be more than those charged by ezActuary®, Inc.  There is an annual plan maintenance fee that will is required each year when the ezActuary® plan is updated. If you do not wish to pay the annual maintenance fee, then you must adopt a different defined benefit plan legal document to replace the ezActuary® plan. 

(7)        What happens if the employer no longer wishes to sponsor a defined benefit plan? 

            If the employer no longer wishes to sponsor a defined benefit pension plan because the employer is going out of business or can no longer afford to maintain the plan, then the plan must be “terminated.”  When a defined benefit pension plan is “terminated,” each participant’s accrued retirement benefit must be determined and the appropriate benefit must be distributed to each participant or an insurance contract must be purchased to provide the participant with such a benefit.  The ezActuary® site offers many of the services required in order to terminate a plan.  It is important to note that the Internal Revenue Service (IRS) requires all tax-qualified pension plans to be established with the intent of being permanent.  If a tax-qualified plan is terminated within a few years of establishment or is terminated without a valid business reason for doing so, the IRS can retroactively disqualify the plan and can subject the sponsoring employer and/or participating employees to income taxes and penalties on the contributions made to the plan and on the benefits and trust earnings that have accrued under the plan.  We urge you to consult with outside legal counsel if you have any questions concerning the termination of a pension plan, especially if the plan is being terminated within the first five years of establishment. 

(8)        What if my situation does not “fit” the ezActuary® plan?

            We have designed the ezActuary® plan to provide the optimum benefit formula and deductible contribution for most small employers.  However, you should recognize that you may be able to realize a larger retirement benefit or higher deductible contribution by having a “customized” plan or plans designed to cover your situation.  Because each situation is different, we do not provide an automated, customized approach through the ezActuary® site.  However, you can contact us for more information on designing a customized pension plan to meet the needs of your particular situation.