Blue Ridge ESOP Associates
(Charlottesville VA / Telecommute)
Retirement Plan Consultant
Cetera Retirement Plan Specialists
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Perhaps you received the direct mail solicitation for Japan's Pension Market to 2005, as we did. Looking through the table of contents (TOC), we noticed two interesting section headings in Chapter 2;
Tax-advantaged corporate pension plans
Pension plans which are not tax-advantaged
From the sub-headings, it is pretty clear that TQPP ("Tax Qualified Pension Plans") are included in the section dealing with tax-advantaged plans and plans following the Book Reserve System are included in the section on "not tax-advantaged."
Which, if any, of the following do you feel are tax advantages?
We hope you answered "NO," "NO," "YES," and "YES," since that is how we would answer.
Well, the surprise to many foreign retirement plan specialists is that the TQPP is described by (i)(1), (ii) and (iv) - despite the name, it is taxable. The Book Reserve System Plan is described by (iii) and (iv) - it is tax-advantaged.
Now there is a process going on right now that will reduce the tax deduction of a Book Reserve System Plan to only the amounts paid to employees when they retire. The company still gets full use of the funds in the meantime and there is still no tax on the accumulated company reserve. On a purely financial basis, the Book Reserve System plan will continue to out-perform the otherwise identical TQPP.
Time To Do It Over.
Murphy, according to one story, ran an acting group and was concerned with fire and other life-threatening unpredictable events. He constantly reminded his troupe that "Anything that can happen, will." This became the famous "Murphy's Law" which is now restated as "If anything can go wrong, it will."
One of the many corollaries is "There is never time to do it right, but there is always time to do it over." This reflects the oft-repeated argument for overlooking little problems in order to complete the assignment on time.
We believe that, in a crunch, processes deteriorate. Take a look a getting an extension to your visa; as the civil servants fall further behind, more and more people start demanding civil servant time to find out what's wrong and to ask for special consideration, further slowing the process. One can imagine the engineer who knew about the early Pentium defect saying "It's only minor and we need to get this out."
Another example is found in today's software market where we are seeing "upgrades" that miss corrections and features found in the immediately prior version.
We recommend that you take the time to design your retirement plan right, from the start! We recommend that you start annual valuations immediately. Retirement plans are costly and society has a special interest in them. In Japan, there are many errors that you can make in the beginning that cannot legally be corrected later on, at least not without a significant bite from earnings.
Valuations require high quality data. Doing them right from the beginning ensures that your staff become experts at the data collection process and they minimize consulting costs related to inspecting and cleaning the data. The costs saved in deferring valuations until the plan is bigger will be spent in confusion and wasted time later. The information provided in annual gain & loss analysis provides the documentation that particular events and changes are, in fact, not material to your earnings. Without a valuation, any conclusion regarding materiality is nothing more than (hopefully) an educated guess.
So, we remind our readers of one more corollary to Murphy's law; "Pay me now, or pay me later."
1. Certain small plans, for a cost, are permitted to avoid this tax.
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