Qualified Plan Design presentation given at the 2012 Annual Conference of the American Society of Pension Professionals and Actuaries (ASPPA)

1. A Consultant’s View Of
Qualified Plan Design
William G. Karbon, COPA, MSPA, CPC
Vice President, Director of Compliance
CBIZ Benefits & Insurance Services, Inc.
Lawrenceville, NJ

2. What We Will Cover
• Getting to know your client
• Client priorities
• Plan types
• Obstacles to plan design
• Case studies
2

3. Getting To Know Your Client
3

4. Getting To Know Your Client
• Entity type
• Private sector
– For profit (C corp, S corp, LLC, LLP, sole prop)
– Not for profit
• Governmental
• Impacts
– Compensation
– Taxation
– Contribution Deadlines
– Plan Type
4

5. Getting To Know Your Client
• Controlled Group Issues
• Is client under common control with other entities
– How is data gathered?
– Who determines members of controlled group?
– Who is quarterbacking controlled group issues?
• Impacts
– HCE determination
– Top heavy / Key ee determination
– Minimum coverage
– Nondiscrimination testing
– Types of plan available
5

6. Getting To Know Your Client
• Type of business
– Manufacturing
– Professional firm
– Technology
– Etc.
– Impacts
• Plan type
• Plan design
• Participant expectations
6

7. Getting To Know Your Client
• Overview of their business
– How long have they been in business?
– Stability of revenue
– Stability of profits
– Need for cash
– Impacts
• Ability to commit to fixed contribution
• Contribution sources
7

8. Getting To Know Your Client
• Profile of employees
– Need to attract talent
– Need to retain certain employees
– Turnover
– Disposable income
– Impacts
• Plan type
• Benefit formula / contribution allocation
• Nondiscrimination testing
• Vesting
8

9. Getting To Know Your Client
• Reward system
– Cash
– Deferred income
– Impacts
• Contribution sources / allocation
• Nondiscrimination testing
• Threats to business
– i.e. sensitive to technology or law changes
– Impacts
• Plan type
9

10. Getting To Know Your Client
• Succession plan
– Time horizon
– Transition business to family or management
– Sell to unrelated entity
– Impacts
• Plan type
• Benefit formula / contribution allocation
• Minimum coverage
• Nondiscrimination testing
10

11. Client Priorities
11

12. Client Priorities
• Focus on owners / senior management
– Maximize retirement accumulations
– Different benefit structures by job classifications
– Impacts
• Plan type
• Benefit formula / contribution allocation
• Nondiscrimination testing
12

13. Client Priorities
• Flexibility
– Impacts
• Plan type
• Contribution sources / allocation
• Nondiscrimination testing
13

14. Client Priorities
• Benefit adequacy
– Impacts
• Plan type
• Benefit formula / contribution allocation
• Avoid testing
– Impacts
• Plan type
• Benefit formula / contribution allocations
• Contribution sources
14

15. Client Priorities
• Attract talent
– Senior talent
– Specialized talent
– Impacts
• Plan type
• Eligibility
• Benefit formula / contribution allocation
• Nondiscrimination testing
15

16. Client Priorities
• Paternalism
– Impacts
• Plan type
• Automatic enrollment
• Contribution sources / allocation
• Accounting issues
– Impacts
• Plan type
• Benefit formula
16

17. Client Priorities
• Tax efficiency
– Impacts
• Plan type
• Benefit formula
• Minimum coverage
• Nondiscrimination testing
17

18. Client Priorities
• Employee appreciation of retirement program
– Impacts
• Plan type
• Plan design
• Other rights & features
18

19. Plan Type
19

20. Plan Type
• DB sponsor should address some or all of:
– Maximize retirement accumulations
– Stable business (preferably mature)
– Adequate cash flow
– Willingness to accept plan’s investment risk
– If GAAP compliant, able to cope with volatile FASB
expense and liability results
20

21. Plan Type
• DC sponsor should address some or all of:
– Provide employees with deferral opportunity
• Nondiscrimination testing (SH or no SH)
• Auto enrollment and escalation
– Contribution flexibility
• Amount
• Allocation
21

22. Plan Type
• DB/DC sponsor should address some or all of:
– Maximize retirement accumulations
• Accumulations exceeding $50,000/year
– Cash Balance vs. Traditional DB
– Combo vs. Offset
– Nondiscrimination testing opportunities
22

23. Obstacles To Plan Design
23

24. Obstacles to Plan Design
• Statutory Issues
– Minimum Coverage
• Excludable employees
– Minimum Participation
• Meaningful benefits
– Nondiscrimination
• 401(k)
• 401(m)
• 401(a)(4)
• 414(s)
24

25. Obstacles to Plan Design
• Statutory Issues
– Top Heavy
– Gateway
25

26. Case Studies
26

27. Case Study 1
• High end business consultancy established in
2012
• Come to you in November of 2012 as follows:
– At 12/31/2012 – 4 employees
• 2 Owners (ages 40 and 48)
• 2 Managing Consultants (MCs)
– Will grow to 14 ees in next 12 – 18 months
– 2012 Profit - $1.2 million
– Anticipated 2013 Profit - $1.5 million
27

28. Case Study 1
• Reward system
– Owners (each own 50%) – share equally in all
forms of compensation
– MCs (compensation > $200,000)
• Cash compensation plus variable deferred income
– Analysts & Associates (compensation > $125,000)
• Cash compensation
– Administrative support (compensation = $50,000)
• Cash compensation and modest deferred income
28

29. Case Study 1 – 2012 Census
Employees Age Service @ Pay
12/31/12
Younger Owner 40 1 $300,000
Older Owner 48 1 $300,000
2 MCs 50 1 $200,000
Total $1,000,000
29

30. Case Study 1 – 2014 Census
Employees Age Service @ Pay
12/31/14
Younger Owner 42 3 $300,000
Older Owner 50 3 $300,000
3 MCs 50 3 $200,000
3 Analysts 40 2 $150,000
3 Associates 30 2 $125,000
3 Support 35 2 $50,000
Total $2,175,000
30

31. Case Study 1
• Plan sponsors goals
– Minimize tax impact of significant profits
– Maximize retirement accumulations for owners
– Provide for flexibility in annual retirement plan
obligation to MCs
– Minimize retirement plan obligations to Analysts,
Associates & Administrative support
31

32. Case Study 1
• Potential solution
– DB Plan
• As part of program will allow plan sponsor to address
need to minimize tax impact of significant profits and
maximize retirement accumulations for owners
– DC Plan
• As part of program will allow plan sponsor to address
need to provide for flexibility in annual retirement plan
obligation to MCs
32

33. Case Study 1
• Potential solution – Combine DB and DC Plan
– DB Plan
• Traditional vs. Cash Balance
– Cash balance allows for equal contributions to owners
– DC Plan
• 401(k)/Profit Sharing Plan
– Deferrals allow all employees to achieve significant retirement
accumulations
– Profit sharing feature provides needed flexibility
33

34. Case Study 1
• Potential solution – Combine DB and DC Plan
– Design Issues
• HCE definition
– AVOID top paid group election
– Only administrative support will be NHCEs
– PROBLEM – Year 1, only owners will be HCEs as there was no
2011 compensation
• Top Heavy
– Unless MCs act as officers, only key ees will be owners
– If designed efficiently, plan sponsor may be subject to top
heavy minimum contribution requirements
34

35. Case Study 1
• Potential solution – Combine DB and DC Plan
– Design Issues
• ADP testing
– If plan is top heavy, use nonelective safe harbor. Only NHCEs
(administrative support) will need to receive SH contribution.
– PROBLEM, plan effective after 10/1/12 cannot use SH
provisions. May need to use PY testing.
• ACP testing
– Employer matching contributions cannot be used in 401(a)(4)
general test, therefore, should not provide matching
contributions
35

36. Case Study 1
• Potential solution – Combine DB and DC Plan
– Design Issues
• Minimum Participation Testing
– Minimum participation test under Code §401(a)(26) requires
40% of group to participate in CB Plan. Ultimately, must cover
at least 6 employees in plan. As plan sponsor’s goal is to
maximize cash compensation to Analysts and Associates, they
can be excluded from CB Plan.
36

37. Case Study 1
• Potential solution – Combine DB and DC Plan
– Design Issues
• 401(a)(4) General Test
– PROBLEM, 1st year the MCs will be NHCEs and are older than
the owners who are the only HCEs. Testing may limit use of
Cash Balance Plan.
– After 1st year, the PS contributions to the owners can be
adjusted based on testing results and cash flow.
37

38. Case Study 1 – 2012 1st Pass
Cash Profit
Employees Comp Deferral Total
Balance Sharing
Younger $300,000 $82,073 $0 $12,500 $94,573
Owner
Older Owner $300,000 $82,073 $0 $12,500 $94,573
2 MCs $200,000 $76,500 $45,000 $5,000 $126,500
Total $317,146 $90,000 $35,000 $442,146
38

39. Case Study 1 – 2012 2nd Pass
Cash Profit
Employees Comp Deferral Total
Balance Sharing
Younger $300,000 $0 $37,500 $12,500 $50,000
Owner
Older Owner $300,000 $0 $37,500 $12,500 $50,000
2 MCs $200,000 $0 $28,745 $5,000 $33,745
Total $0 $132,490 $35,000 $167,490
39

40. Case Study 1 - Results
ER Contribution ER Contribution
% to Owners % to MCs
56.6% 43.4%
40

41. Case Study 1 – 2014 if TH
Cash Profit
Employees Comp Deferral Total
Balance Sharing
Younger $300,000 $82,073 $33,000 $17,000 $132,073
Owner
Older Owner $300,000 $82,073 $33,000 $22,500 $137,573
3 Principals $200,000 $6,500 $15,000 $22,500 $44,000
3 Analysts $150,000 $0 $4,500 $15,000 $19,500
3 Associates $125,000 $0 $3,750 $7,500 $11,250
3 Support $50,000 $1,500 $9,625 $1,000 $12,125
Total $188,146 $164,625 $177,500 $530,271
41

42. Case Study 1
• PS Contribution Includes
– TH Minimum of $10,000 for MCs
– TH Minimum of $4,500 for Analysts
– TH Minimum of $3,750 for Associates
– SH Contribution of $1,500 for Support
– TH Minimum of $1,000 for Support
42

43. Case Study 1 - Results
ER Contribution
ER Contribution
% to Non-
% to Owners
owners
65.2% 34.8%
43

44. Case Study 1 – 2014 if NOT TH
Cash Profit
Name Comp Deferral Total
Balance Sharing
Younger $300,000 $82,073 $33,000 $17,000 $132,073
Owner
Older $300,000 $82,073 $33,000 $22,500 $132,073
Owner
3 Principals $200,000 $6,500 $15,000 $22,500 $44,000
3 Analysts $150,000 $0 $0 $15,000 $15,000
3 Associates $125,000 $0 $0 $7,500 $7,500
3 Support $50,000 $1,500 $9,625 $1,000 $12,125
Total $188,146 $139,875 $177,500 $500,021
44

45. Case Study 1 - Results
ER Contribution ER Contribution
% to Owners % to Principals
70.2% 29.8%
45

46. Case Study 2
• Small manufacturing company
– Business started in 1990
– Revenues/profits are cyclical
• Single owner
• Two key members of management
• Remainder of employees earn modest
incomes
– Limited discretionary income
– High turnover
46

47. Case Study 2
• Client priorities
– Cash flow is cyclical, avoid long-term fixed costs
– Reward owner and management with employer
contributions
– Concerned about retirement readiness of non-
management employees
– Address ADP testing problems
47

48. Case Study 2 - Census
Employee Age Service Pay Deferral
Owner 62 22 $170,000 $22,500
Manager 1 45 15 $100,000 $10,000
Manager 2 35 10 $80,000 $4,800
Assemblers 1 - 3 35 5 $40,000 $1,600
Operators 1 & 2 30 3 $30,000 $1,200
Laborers 1 & 2 25 1 $25,000 $0
Clerical 30 2 $30,000 $600
Total $610,000 $45,100
48

49. Case Study 2
• ADP Results
– HCE ADP % = 10.0%
– NHCE ADP % = 3.8%
– Need to increase NHCE ADP % by 4.2%
49

50. Case Study 2
• Possible solutions
– Employees communications
• Typically has marginal success
– Automatic enrollment
• Limited success
• May partially address retirement readiness concern
– Safe harbor / QACA
• Need to determine employer contribution budget
• Will deferrals increase if SH match is implemented
• Opportunity for stacking of match
• Nonelective with new comparability
50

51. Case Study 2
• Goals
– Provide employer contribution of 9% of pay to
Owner and Managers
– Minimize overall employer contribution
– Encourage all participants to save for retirement
51

52. Case Study 2
• QACA / Stacked Match
– Pros
• Encourages employees savings
• Two year vesting on employer contributions
– Cons
• Cost is unpredictable
• Likely more expensive if employees understand that
there is a substantial match on the first 6% they defer
52

53. Case Study 2
• New Comparability with Nonelective SH
– Pros
• Cost is predictable
• More effectively leverages SH contribution in favor of
owner and managers
– Cons
• Immediate vesting
• Rewards participants that do not save for their
retirement
53

54. Case Study 2 – Stacked Match
Employee Comp Deferral QACA Discretion Fixed
Owner $170,000 $22,500 $5,950 $6,800 $2,550
Manager 1 $100,000 $10,000 $3,500 $4,000 $1,500
Manager 2 $80,000 $4,800 $2,800 $3,200 $1,200
Assemblers 1 - 3 $40,000 $1,600 $1,000 $1,067 $400
Operators 1 & 2 $30,000 $1,200 $750 $800 $300
Laborers 1 & 2 $25,000 $0 $0 $0 $0
Clerical $30,000 $600 $450 $400 $150
Total $45,100 $17,200 $19,201 $7,200
54

55. Case Study 2 – Stacked Match Results
ER
ER Contribution %
ER Contribution
Contribution % to All Others
% to Owner
to Managers
35.1% 37.2% 27.7%
55

56. Case Study 2 – New Comparability
Nonelective
Employee Comp Deferral PS
SH
Owner $170,000 $22,500 $5,100 $10,200
Manager 1 $100,000 $10,000 $3,000 $6,000
Manager 2 $80,000 $4,800 $2,400 $4,800
Assemblers 1 - 3 $40,000 $1,600 $1,200 $0
Operators 1 & 2 $30,000 $1,200 $900 $0
Laborers 1 & 2 $25,000 $0 $750 $0
Clerical $30,000 $600 $900 $0
Total $45,100 $18,300 $21,000
56

57. Case Study 2 – New Comp Results
ER
ER Contribution %
ER Contribution
Contribution % to All Others
% to Owner
to Managers
38.9% 41.2% 19.9%
57

58. Case Study 3
• Small business owner
– Business started in 2010
– Revenues/profits are substantial and growing
– Plans to sell company in 5 – 10 years
• Single owner without significant retirement
savings
• Spouse and son works for business as well
• Employees are attracted and retained by cash
compensation
– Retirement program is not a priority
58

59. Case Study 3
• Goals
– Maximize retirement accumulation for owner
– Minimize fixed liabilities
– Minimize cost for employees
59

60. Case Study 3 - Census
Employee Age Service Pay Deferral
Owner 52 10 $250,000 $22,500
Owner’s Spouse 50 5 $60,000 $0
Owner’s Son 30 5 $70,000 $2,000
NHCEs 1-2 30 3 $35,000 $1,000
NHCEs 3-5 45 5 $50,000 $3,000
Total $600,000 $35,500
60

61. Case Study 3
• Potential Solution
– DB Plan for Owner, Owner’s Son & NHCEs 1&2
– DC Plan for Owner’s Spouse & NHCEs 3-5
• Issue
– DB Plan fails 410(b) ratio test
61

62. Case Study 3
• Solution
– Combine DB and DC plans for minimum coverage
purposes
• Concerns
– Must provide multiple plan gateway
– Subjects the multiple plans to the general test
– DB Plan must pass Code §401(a)(26) testing
62

63. Case Study 3 – DB Plan
Employee Age Pay DB Benefit DB Cost
Owner 52 $250,000 $200,000 $139,000
Owner’s Son 30 $70,000 $56,000 $9,400
NHCEs 1-2 30 $35,000 $28,000 $4,700
Total $390,000 $153,100
63

64. Case Study 3 – PS Plan
Employee Age Pay PS
Contribution
Owner’s Spouse 50 $60,000 $6,000
NHCEs 3-5 45 $50,000 $3,500
Total $210,000 $16,500
64

65. Case Study 3 – New Comparability
ER Contribution ER
% to Owner & Contribution %
Spouse to NHCEs
85.5% 14.5%
65

66. Case Study 3
• Concerns
– One participant terminating employment may
create substantial testing issues
– If a NHCE terminates, problem if they are replaced
by older employee
66

67. Case Study 4
• Small business owner
– Business started in 2000
– Volatile revenues/profits
– 25 year old child hired 2nd half of 2010
• Young workforce not motivated by retirement
program
67

68. Case Study 4
• Goals
– Flexibility in employer contribution requirement
– Provide opportunity for child to receive
substantial retirement plan accumulations
– Motivate employees to contribute to plan
68

69. Case Study 4
• Plan Design for 2011
– Non-Safe Harbor 401(k) Plan
– PS feature with each participant in their own rate
group
69

70. Case Study 4 – 2011 Results
Employee Age Service Pay Deferral PS
Owner 47 9 $300,000 $5,500 $49,000
Sheldon 25 3 $40,000 $0 $2,000
Leonard 26 3 $40,000 $0 $2,000
Howard 30 2 $50,000 $1,000 $2,500
Rajesh 31 2 $50,000 $1,000 $2,500
Total $480,000 $7,500 $58,000
70

71. Case Study 4 -2012
• 25 year old son of owner making $100,000
enters plan
• Add nonelective SH 401(k) feature
– Will allow owner’s child to maximize
accumulations in plan
• Add automatic enrollment
71

72. Case Study 4–2012 1st Pass (Cross Test)
Employee Age Service Pay Deferral PS
Owner 48 10 $300,000 $17,000 $33,000
Owner’s Son 25 2 $100,000 $17,000 $33,000
Sheldon 26 4 $40,000 $0 $2,000
Leonard 27 4 $40,000 $0 $2,000
Howard 31 3 $50,000 $1,000 $2,500
Rajesh 32 3 $50,000 $1,000 $2,500
Total $580,000 $36,000 $75,000
72

73. Case Study 4 -2012
• Cross testing blows up because of 25 year old
HCE
• Solution
– Allocate using permitted disparity
– Cannot use SH contribution to comply with Code
§401(l)
– No need to amend plan
73

74. Case Study 4–2012 2nd Pass (401(l))
Employee Age Service Pay Deferral PS
Owner 48 10 $300,000 $17,000 $33,000
Owner’s Son 25 2 $100,000 $17,000 $9,726
Sheldon 26 4 $40,000 $0 $3,891
Leonard 27 4 $40,000 $0 $3,891
Howard 31 3 $50,000 $1,000 $4,863
Rajesh 32 3 $50,000 $1,000 $4,863
Total $580,000 $36,000 $60,234
74

75. Case Study 4 -2012
ER
Contribution ER
ER
% to Contribution
Contribution
Owner’s Son % to all
% to Owner
others
54.8% 16.1% 29.1%
75

76. Case Study 4 -2012
• Maximizes allocation to owner
• Significant allocations to owner’s son
• Tax efficient
• Flexible
76