A 12B-1 plan is a plan structured by mutual fund companies for the distribution of funds through intermediaries. 12B-1 plans provide mapping for the partnerships between distributors and intermediaries who help to ensure the sale of a fund. Sales commission schedules and 12B-1 distribution expenses are the primary components driving a 12B-1 plan.
Understanding the 12B-1 Plan
12B-1 plans facilitate the partnerships between distributors and intermediaries offering mutual fund shares. 12B-1 plans are primarily focused on open-end mutual funds, which have multiple class structures for sales charges and distribution expenses. Mutual fund companies consider two types of 12B-1 charges in their 12B-1 plans, sales commissions, and 12B-1 expenses.
Sales Commissions
Sales commission schedules are structured to provide compensation to intermediaries for transacting mutual funds. These partnerships can help to increase demand for funds by being marketed from a full-service broker-dealer who facilitates the transaction for a sales load fee. These fees are paid to the broker and are not associated with annual fund operating expenses.
Sales loads are structured to vary across share classes. Share classes can include front-end, back-end, and level-load sales charges. These sales charges are associated with individual retail share classes which typically include Class A, B, and C shares.
12B-1 Expenses
12B-1 expenses paid from the mutual fund to distributors and intermediaries are also a key part of a 12B-1 plan. To market and distribute open-end mutual fund shares, mutual fund companies work with distributors to get their funds listed with discount brokerages and financial advisor platforms. Distributors help fund companies partner with the full-service brokers that transact their funds at the agreed-upon sales load schedule.
Mutual fund companies will pay 12B-1 fees from a mutual fund to compensate distributors. In some cases, funds may also be structured with a low-level load that is paid to financial advisors annually during the course of an investor’s holding period.
Financial industry legislation typically restricts 12B-1 fees to 1% of the current value of the investment on an annual basis, but fees generally fall somewhere between 0.25% and 1%. In most cases, fund companies will have higher 12B-1 fees on share classes paying a lower sales charge, and lower 12B-1 fees on share classes with higher sales charges. This helps to balance out the compensation paid to intermediary brokers while also providing for payment to distribution partners.
Disclosure
Mutual fund companies are required to provide full disclosure on their sales load schedules and 12B-1 annual fund expenses in the fund’s prospectus. The prospectus is one aspect of documentation required for the mutual fund’s registration and is also the key offering document providing information on the fund for investors. 12B-1 plans and any changes to their expense structuring must be approved by the fund’s board of directors and amended in its prospectus filed with the Securities and Exchange Commission.
A 401(a) plan is an employer-sponsored money-purchase retirement plan that allows dollar or percentage-based contributions from the employer, the employee, or both. The sponsoring employer establishes eligibility and the vesting schedule. The employee can withdraw funds from a 401(a) plan through a rollover to a different qualified retirement plan, a lump-sum payment, or an annuity.
Key Takeaways
A 401(a) plan is employer-sponsored, and both the employer and employee can contribute.
401(a) plans are usually used by government and non-profit organizations.
401(a) plans give the employer a larger share of control over how the plan is invested.
An employee can withdraw funds from a 401(a) plan through a rollover to a different qualified retirement plan, a lump-sum payment, or an annuity.
Investments in 401(a) plans are low risk and typically include government bonds and funds focused on value-based stocks.
Understanding a 401(a) Plan
There are a variety of retirement plans that employers can offer their employees. Each comes with different stipulations, restrictions, and some are better suited for certain types of employers.
A 401(a) plan is a type of retirement plan made available to those working in government agencies, educational institutions, and non-profit organizations. Eligible employees who participate in the plan include government employees, teachers, administrators, and support staff. A 401(a) plan’s features are similar to a 401(k) plan, which are more common in profit-based industries. 401(a) plans do not allow employees to contribute to 401(k) plans, however.
If an individual leaves an employer, they do have the option of transferring the funds in their 401(a) to a 401(k) plan or individual retirement account (IRA).
Employers can form multiple 401(a) plans, each with distinct eligibility criteria, contribution amounts, and vesting schedules. Employers use these plans to create incentive programs for employee retention. The employer controls the plan and determines the contribution limits.
To participate in a 401(a) plan, an individual must be 21 years of age and have been working in the job for a minimum of two years. These conditions are subject to vary.
Contributions for a 401(a) Plan
A 401(a) plan can have mandatory or voluntary contributions, and the employer decides if contributions are made on an after-tax or pre-tax basis. An employer contributes funds to the plan on an employee’s behalf. Employer contribution options include the employer paying a set amount into an employee’s plan, matching a fixed percentage of employee contributions, or matching employee contributions within a specific dollar range.
The majority of voluntary contributions to a 401(a) plan are capped at 25% of an employee’s annual pay.
Investments for a 401(a) Plan
The plan gives employers more control over their employees’ investment choices. Government employers with 401(a) plans often limit investment options to only the safest and most secure options to minimize risk. A 401(a) plan assures a certain level of retirement savings but requires due diligence by the employee to meet retirement goals.
Vesting and Withdrawals for a 401(a) Plan
Any 401(a) contributions an employee makes and any earnings on those contributions are immediately fully vested. Becoming fully vested in the employer contributions depends on the vesting schedule the employer sets up. Some employers, especially those who offer 401(k) plans, link vesting to years of service as an incentive for employees to stay with the company.
The Internal Revenue Service (IRS) subjects 401(a) withdrawals to income tax withholdings and a 10% early withdrawal penalty unless the employee is 59½, dies, is disabled, or rolls over the funds into a qualified IRA or retirement plan through a direct trustee-to-trustee transfer.
Qualifying for Tax Credits
Employees who contribute to a 401(a) plan may qualify for a tax credit. Employees can have both a 401(a) plan and an IRA at the same time. However, if an employee has a 401(a) plan, the tax benefits for traditional IRA contributions may be phased out depending on the employee’s adjusted gross income.
401(a) vs. 401(k) Plans
A 401(a) plan is similar to a 401(k), another type of employer-sponsored plan that provides a tax advantage for retirement investments. The main difference is who participates: while 401(k) plans are intended for private sector employees, 401(a) plans are directed towards employees of government bodies, educational institutions, and charitable organizations. These plans also tend to offer fewer, more conservative investment options than those found in a 401(k) plan.
If you work in the private sector, you can contribute to a 401(k) plan after one year. But if your employer offers a 401(a) plan, it takes two years.
There are also important rule differences between the two types of plans. With a 401(k) plan, participation is voluntary, and the employee can decide how much money to contribute towards the plan so long as it is below the legal limit. Employers may match a portion of the employee’s contribution, but many do not.
But in a 401(a) plan, employers can make it mandatory for their employees to participate. But employers are also required to contribute to their employees’ accounts. They can also decide whether the 401(a) plan is to be funded with pre-tax or after-tax dollars.
401(a) vs. 401(k) plans
401(k)
Offered by private sector employers
Employees become eligible after one year.
Employees elect to participate in the plan.
Employers may match a portion of employee contributions.
More investment options.
401(a)
Offered by government bodies, educational institutions, and charities.
Employees become eligible after two years.
Employers can make participation mandatory.
Employers must contribute to their employee’s plans.
Investment options tend to be fewer and more conservative than a 401(k)
Tips for a 401(a) Plan
As with other types of retirement plans, it is important to understand the rules and fees associated with a 401(a) before making a significant contribution. This caution can help reduce your costs and expenses further down the line.
Here are some ways to make the most out of a 401(a) or any other tax-advantaged retirement account:
Understand the Rules. As with other tax-advantaged retirement accounts, there are strict rules about what you can do with the money in a 401(a) account. If you take money out before you reach age 59½, you may face a 10% penalty, except for certain emergency expenses. It is important to understand the rules for holding and closing your account to avoid unexpected tax implications.
Understand the fees. In addition to taxes, there are also fees associated with a 401(a) account that are used to offset the administrative costs of maintaining your investment account. High plan fees can easily eat into your portfolio gains, so it is important to talk to your employer and understand how much the plan will actually cost you.
What Happens to My 401(a) Plan When I Quit?
The money in your 401(a) or other employer-sponsored retirement account belongs to you, even after you leave the employer. When you lose your job, that money can be taken as a distribution (with a possible early withdrawal penalty) or rolled into a different retirement account, such as an IRA.
What’s the Difference Between a 401(a) and 403(b)?
A 401(a) plan and a 403(b) are both types of tax-advantaged retirement plans available to certain public-sector employees. Unlike a 401(a), a 403(b) plan is aimed at employees of public schools and tax-exempt organizations, and their investment options are limited to annuities or mutual funds. The main difference is that an employer can make participation in a 401(a) plan mandatory, while it remains voluntary for employees to participate in a 403(b).
How Much Can I Invest in a 401(a) Plan?
A 401(a) plan does not have the same investment limits as a 401(k) plan. Most plans cap voluntary contributions to 25% of the employee’s take-home pay.
The Bottom Line
A 401(a) plan is a type of tax-advantaged account that allows public-sector employees to save for retirement. These plans typically offer fewer investment options than other types of plans, and they are also relatively low-risk. Although employers can make participation mandatory, there are may also be a tax credit for those who contribute to a 401(a).
A 412(i) plan was a defined-benefit pension plan that was designed for small business owners in the U.S. It was classified as a tax-qualified pension plan, so any amount that the owner contributed to it could immediately be taken as a tax deduction by the company. Guaranteed annuities or a combination of annuities and life insurance were the only things that could fund a 412(i) plan. The 412(i) plan was replaced by the 412(e)(3) plan after Dec. 31, 2007.
Key Takeaways
A 412(i) plan was a defined-benefit pension plan that was designed for small business owners in the U.S.
A 412(i) was a tax-qualified benefit plan, meaning the owner’s contributions to the plan became a tax deduction for the company.
Guaranteed annuities or a combination of annuities and life insurance were the only things that could fund the plan.
Due to tax avoidance schemes that were occurring under 412(i), the Internal Revenue Service (IRS) replaced it with 412(e)(3).
Understanding a 412(i) Plan
Notably, 412(i) plans were developed for small business owners who often found it difficult to invest in their company while trying to save for employees’ retirement. The 412(i) plan was unique in that it provided fully guaranteed retirement benefits.
An insurance company had to sponsor the 412(i) plan, and only insurance products like annuities and life insurance policies could fund it. Contributions to it provide the largest tax deduction possible.
An annuity is a financial product that an individual can purchase via a lump-sum payment or installments. The insurance company, in turn, pays the owner a fixed stream of payments at some point in the future. Annuities are primarily used as an income stream for retirees.
Due to the large premiums that had to be paid into the plan each year, a 412(i) plan was not ideal for all small business owners. The plan tended to benefit small businesses that were more established and profitable.
For example, a startup that had gone through several rounds of funding would have been in a better position to create a 412(i) plan than one that was bootstrapped and/or had angel or seed funding.
These companies also often don’t generate enough free cash flow (FCF) to put away consistently for employees’ retirement. Instead, the founding team members often re-invest any profits or outside funding back into their product or service to generate new sales and make updates to their core offerings.
412(i) Plans and Compliance Issues
In August 2017, the Internal Revenue Service (IRS) identified 412(i) plans as being involved in various types of non-compliance. These also included abusive tax avoidance transaction issues. To help organizations with 412(i) plans come into compliance, the IRS developed the following survey. They asked:
Do you have a 412(i) plan?
If so, how do you fund this plan? (i.e., annuities, insurance contracts, or a combination?)
What is the amount of the death benefit relative to the amount of retirement benefit for each plan participant?
Have you had a listed transaction under Revenue Ruling 2004-20? If so, have you filed Form 8886, Reportable Transaction Disclosure Statement?
Finally, who sold the annuities and/or insurance contracts to the sponsor?
A survey of 329 plans yielded the following:
185 plans referred for examination
139 plans deemed to be “compliance sufficient”
Three plans under “current examination”
One plan noted as “compliance verified” (meaning no further contact was necessary)
One plan labeled as not a 412(i) plan
412(e)(3)
Due to the abuses of the 412(i) plan resulting in tax avoidance schemes, the Internal Revenue Service (IRS) moved the 412(i) provisions to 412(e)(3), effective for plans beginning after Dec. 31, 2007. 412(e)(3) functions similarly to 412(i), except that it is exempt from the minimum funding rule. According to the IRS, the requirements for 412(e)(3) are as follows:
Plans must be funded exclusively by the purchase of a combination of annuities and life insurance contracts or individual annuities,
Plan contracts must provide for level annual premium payments to be paid extending not later than the retirement age for each individual participating in the plan, and commencing with the date the individual became a participant in the plan (or, in the case of an increase in benefits, commencing at the time such increase becomes effective),
Benefits provided by the plan are equal to the benefits provided under each contract at normal retirement age under the plan and are guaranteed by an insurance carrier (licensed under the laws of a state to do business with the plan) to the extent premiums have been paid,
Premiums payable under such contracts for the plan year, and all prior plan years, have been paid before lapse or there is a reinstatement of the policy,
No rights under such contracts have been subject to a security interest at any time during the plan year, and
No policy loans are outstanding at any time during the plan year
Articles of incorporation are a set of formal documents filed with a government body to legally document the creation of a corporation. Articles of incorporation generally contain pertinent information such as the firm’s name, street address, agent for service of process, and the amount and type of stock to be issued. The articles of incorporation are used to legally form the corporation.
Key Takeaways
Articles of incorporation is the documents filed with a government body (usually the state) that signifies the creation of a corporation.
In the U.S., articles of incorporation are filed with the Office of the Secretary of State where the business chooses to incorporate.
Broadly speaking, articles of incorporation include the company’s name, type of corporate structure, and number and type of authorized shares.
While the articles of incorporation are used almost exclusively outside of the company, other documents such as bylaws, operating agreements, or business plans are more useful internally.
By filing articles of incorporation, corporations may gain favorable tax advantages, the ability to issue stock and raise capital, or shield owners from liability.
Understanding Articles of Incorporation
Many businesses in the U.S. and Canada are formed as a corporation, which is a type of business operation that is formed in the state where the company carries out its operations. To be recognized legally as a corporation, a business must incorporate by taking certain steps and making certain decisions required under corporate law. One such step is filing a document known as articles of incorporation.
Articles of incorporation are in the document necessary to register a corporation with a state and acts as a charter to recognize the establishment of a corporation. The document outlines the basic information needed to form a corporation, the governance of a corporation, and the corporate statutes in the state where the articles of incorporation are filed.
Articles of incorporation are also referred to as the “corporate charter,” “articles of association,” or “certificate of incorporation.”
Where to File Articles of Incorporation
In the U.S., articles of incorporation are filed with the Office of the Secretary of State in the state where the business chooses to incorporate. Some states offer more favorable regulatory and tax environments and, as a result, attract a greater proportion of firms seeking incorporation.
For example, Delaware and Nevada attract about half of the public corporations in the U.S., in part because of the state laws that protect their corporations. Once established, the articles become a public record and provide important information about the corporation.
Many states charge filing fees for a business that incorporates in the state, whether the business operates there or not. A business that is incorporated in one state and is physically located or doing business in another state must register in the other state as well, which involves paying that state’s filing fees and taxes.
Depending on the state of incorporation, a company may pay filing fees ranging from $50 (as in Iowa, Arkansas, and Michigan) to $275 (as in Massachusetts) as of 2020. The fees can vary depending on whether the articles of incorporation were filed online or by mail.
Articles of Incorporation Document Requirements
The articles in the document vary by state, but the following items (i.e. “articles” are typically included:
Name of corporation
Name and address of the registered agent
Type of corporate structure (e.g., profit corporation, nonprofit corporation, non-stock corporation, professional corporation, etc.)
Names and addresses of the initial board of directors
Number and type of authorized shares
Duration of the corporation, if it wasn’t established to exist perpetually
Name, signature, and address of the incorporator, who is the person in charge of setting up a corporation
Most states also require the articles to state the firm’s purpose, though the corporation may define its purpose very broadly to maintain flexibility in its operations. Amazon’s certificate of incorporation, for example, states that the corporation’s purpose is “to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.”
Other provisions outlined in a company’s articles of incorporation may include the limitation of the directors’ liability, actions by stockholders without a meeting, and the authority to call special meetings of stockholders. Each state has certain mandatory provisions that must be contained in the articles of incorporation and other optional provisions that the company can decide whether to include.
While domestic companies will submit an article of incorporation, foreign corporate entities must file a certificate of registration to operate in a given state.
Articles of Incorporation vs. Other Documents
Articles of Incorporation vs. Bylaws
While the articles of incorporation are externally-filed formation documents, bylaws are more of use to a company when used internally. Bylaws set the internal processes and organization of how the company should be run. Bylaws outline the rules and procedures for the management of a company. Not all states require a company to maintain bylaws, though many require a company to formally memorialize the bylaws.
Articles of Incorporation vs. LLC Operating Agreement
Articles of incorporation are required state filings to form a corporation, while LLC operating agreements are used exclusively for LLCs. In addition, the articles of incorporation outline the information structure of the company. Meanwhile, operating agreements often outline how internal disputes will be resolved between members or owners. An LLC operating agreement acts more of a personal protection document than the articles of incorporation.
Articles of Incorporation vs. Business License
A business license often permits a company to operate within a specific jurisdiction or industry. It gives the holder the right to start and run a business in the designed geographical location that issues the license. The rights granted by a business license are often more specific and niche than the articles of incorporation; though similar information may be required for both, the articles of incorporation simply legally form an organization and is the highest governing document for a corporation.
Articles of Incorporation vs. Business Plan
A business plan is an internal document that may be shared with major customers, investors, or lending institutions that communicates the formal operating plan of a company. Often a strategic document, a business plan is mainly used by internal management as a roadmap for decision-making. This is in stark contrast of the articles of incorporation which are information-only, non-strategic requirements for legal reasons.
A company should internally maintain a copy of its articles of incorporation request.
Importance of Articles of Incorporation
A corporation should take care when filings its articles of incorporation as these formation documents carry great significance. For starters, they are legally required to structure a new business or company. The corporation can not form and be recognized by the state as a legal business entity until the forms are registered.
Once a business is incorporated, it often has a greater ability to raise capital via stock issuances. A corporation cannot sell stock until is incorporated via the filing of its articles of incorporation. Corporations may also receive more favorable tax treatment compared to individual or personal tax rates.
In addition, there are personal liability considerations for companies being formed. Individuals are often held liable for a company’s obligations until it is incorporated. By forming a legal corporation, business owners may be shielded from some personal liability for the company’s debts. This liability protection cannot occur until the articles of incorporation have been filed.
Example of Articles of Incorporation
The image below captures the first few requirements from the Secretary of State form required by the state of Washington. This form is to be completed and returned to the government agency for review.
Articles of Incorporation, Sample (WA State).
Some sections simply require a check mark for applicability or a ‘yes/no’ mutually exclusive selection. Other areas (such as the purpose of the corporation) require written response. As designated by the top of the form, this specific article of incorporation document template is for specific use for the formation of non-profit corporations.
The Washington State Articles of Incorporation form ends with the certification section in which an incorporator must certify the information given is correct to the best of their knowledge. The incorporator is also required to provide some personal information along with their signature.
Articles of Incorporation, Certification Section (WA State).
The form above had been filed by Parrot Foundation, a Washington nonprofit organization. A snipped of Parrot Foundation’s articles of incorporation has been provided below as an example of the dates, structure, and business purpose a company may request when filing its articles of incorporation.
Parrot Foundation, Articles of Incorporation.
What Is the Purpose of the Articles of Incorporation?
The purpose of the articles of incorporation is to legally form a corporation. The filing submits information to a state agency, and the state agency officially determines whether the corporation can be recognized as a formal company. Once incorporated, the business may receive a number of different benefits (mentioned below) via its status as a corporation.
What Are the Benefits of Filing Articles of Incorporation?
By filing articles of incorporation, a company can officially become incorporated. Once incorporated, the company may receive favorable tax benefits and have the ability to raise capital by issuing stock. In addition, the owners of the corporation have different liability over company debts once a corporation is formed.
How Do You Write Articles of Incorporation?
Articles of incorporation are filed with your state’s Secretary of State office. That department provides a form that requests a variety of information about your newly forming corporation. Upon completing the required fields, the form is submit back to the Secretary of State for review. The state agency that reviews the form will contact you should they have any clarifying questions regarding your information.
Can One Person Submit Articles of Incorporation?
Yes, it is possible to incorporate a business with just one employee. That single owner will be responsible for all aspects of the company. In addition, that sole individual will be the only shareholder. However, they may be listed as the only member on the articles of incorporation.
The Bottom Line
If a company wants to become a corporation, it must file articles of incorporation with its appropriate state agency. This formation document is required as part of the incorporation process, and the articles provide the state a variety of information about the company and its incorporators. Different from other legal documents that outline how a company will operate internally, the article of incorporation is intended to help external parties evaluate and form a corporation.
