More Bang For Your Buck
Presented By
Adam C. Pozek,
ERPA, QPA, QPFC
Partner
DWC ERISA
Consultants, LLC

Designs to Maximiz...
Obligatory Opening Disclaimer

THE

VIEWS EXPRESSED BY THE SPEAKER ARE HIS OWN AND DO NOT NECESSARILY
REPRESENT THE VIEWS ...
Agenda


Setting the stage



Defined contribution plans
◉ Non-elective contributions
◉ 401(k) Plans



Defined benefit...
Part 1

S ETTING
T HE S TAGE
Applicable Limits
Code
Section

2012

Compensation

401(a)(17)

$ 250,000

$245,000 $245,000

Elective Deferrals [401(k)]
...
HCEs & Nondiscrimination


Nondiscrimination testing to ensure Highly
Compensated Employee (“HCE”) benefits not
dispropor...
Five Percent Owner Test
 Any employee who owns more than 5% of the

employer or a related employer
◉

At any time during ...
Compensation Test
 An employee whose compensation…
◉ From the employer
◉ During the lookback year
◉ Exceeds the dollar li...
Key Employees & Top Heavy Plans
 Plan is top heavy when more than 60% of plan

assets belong to key employees
 Key emplo...
Part 2

D EFINED C ONTRIBUTION P LANS :
N ONELECTIVE C ONTRIBUTIONS
Defined Contribution Plans
 Provide contribution based on current compensation

 Contributions can be fixed or discretio...
Defined Contribution Plans
 Money Purchase Pension Plan
◉ Target Benefit Plan
 Profit Sharing Plan
◉ Simplified Employee...
Nonelective Contributions
 May be fixed or discretionary
 A/k/a profit sharing though not necessarily tied to

profits
...
Allocation Methods
 Design-based safe harbor allocation methods
◉ Per capita method
◉ Pro rata method
◉ Permitted dispari...
Per Capita Method
 Uniform dollar amount allocated to each eligible

participant
 NHCEs (almost) always receive larger p...
Per Capita Method
Age

Annual
Compensation

Per-Capita

Percentage of
Compensation

Owner #1

51

$245,000

$20,250

8.3%
...
Pro Rata Method
 Uniform percentage of pay allocated to each eligible

participant
 Compensation capped at IRS limit
 M...
Pro Rata Method
Age

Annual
Compensation

Pro Rata

Percentage of
Compensation

Owner #1

51

$245,000

$49,000

20%

Owne...
Permitted Disparity Method
 Considers that SS benefits are paid only on

compensation below the social security wage base...
Permitted Disparity Method
 Base contribution

percentage applies to all
comp
 Excess contribution
percentage applies to...
Permitted Disparity Method

Age

Annual
Compensation

Excess
Compensation

Base
Allocation
(16.8%)

Excess
Allocation
(5.7...
Using The Time Value of Money

$100,000

$2,875/year

Age
65

$100,000

Age
65

Age 30

$10,000/year

Age 55
Slide | 22
New Comparability Method
 Divide participants into groups and allocate pro-rata

within each group
◉
◉

Valid business cl...
New Comparability Method
Age

Annual
Compensation

Allocation

Percentage of
Compensation

Owner #1

51

$245,000

$49,000...
Comparison of Methods
Annual
Compensation

Per Capita

Pro Rata

Permitted
Disparity

New
Comparability

Owner #1

$245,00...
Changing Methods
 Requires plan amendment

 Change must occur before the first participant

accrues contribution for the...
Part 3

D EFINED C ONTRIBUTION P LANS :
401( K )
Elective Deferrals
 Made pursuant to a salary reduction election
 Types of elective deferrals
◉ Traditional
◉ Roth
 Dif...
Employer Match
 Can be either discretionary or fixed
 Expressed as a percentage of salary deferrals

Match formula of 50...
Employer Match

Annual Compensation = $60,000
($5,000 per month)

January February March

April

May

June

Salary Deferra...
Safe Harbor 401(k) Plans


Plan design that provides for automatic passage
of ADP test



Minimum employer contribution ...
Safe Harbor 401(k) Plans - Traditional


Matching contribution
◉ 100% of the first 3% of deferrals, plus
◉ 50% of the nex...
Safe Harbor 401(k) Plans – Auto Enrollment


Deferrals
◉ Minimum 3% during initial period

◉ Auto increase by 1% per year...
Safe Harbor Contributions


Last day rule/hours requirement not permitted



Split eligibility is permitted
◉ Immediate ...
Implementation


Existing 401(k) plans
◉ Must be added at the start of a plan year

◉ Amendment must be signed prior to t...
Safe Harbor & New Comparability
Annual
Compensation

401(k)
Deferrals

SH Base
(3%)

New Comp
(10.27%/1.5%)

Total ER
Allo...
Safe Harbor Match x 3
Annual
Comp

401(k)
Deferrals

Disc.
Match
(66.67% x
6%)

SH
Match

Fixed
Match
(87.8% x
6%)

Total
...
Part 4

D EFINED B ENEFIT P LANS :
T RADITIONAL
Defined Benefit Plans
 Defines benefit at Normal Retirement Age
 Benefit based on…
◉ Compensation,
◉ Service, and/or
◉ P...
Funding Defined Benefit Plans

Future
Investment
Earnings

Current
Assets

Future
Additions
Future
Contributions

Slide | ...
Single Participant Plans
 Tax planning tool for higher income self-employed

individuals
◉
◉

◉
◉
◉

Attorneys
Real estat...
Single Participant Plans
W-2 Income
Age
40
45
50
55
60
65

$50,000

Earned Income**
Age
40
45
50
55
60
65

$50,000

$
$
$
...
Part 5

D EFINED B ENEFIT P LANS :
C ASH B ALANCE P LANS
Cash Balance Plans
 Look like a money purchase pension plan but subject

to DB contribution and deduction limits
 Contri...
Cash Balance Plans
 Contributions are credited to “hypothetical account”






for each participant each year
Partici...
Maximum Contributions

$250

Thousands

$200
$200

$150

$209

$143
$103

$100
$38

$52

$75

$50
$Age 35
Deferrals

40

4...
Deduction Limits
 PBGC-covered plans
◉ DC plan



◉

Employee deferrals, plus
Employer contributions up to 25% of eligi...
Interest Crediting Rate
 According to Pension Protection Act of 2006
◉ Not less than 0%, and
◉ Not more than a “market ra...
Putting It Together

First Year
Contribution
$75,000

Interest
Credit at
3.11%
$2,332

$77,332

Slide | 49
Determining Funded Status
Target

Actual ROR (%)

3.11%

Contribution

$75,000

$75,000

$75,000

$75,000

$75,000

$75,00...
Dealing With Shortfalls
 Amortize over 1 to 7 years

 Subsequent earnings in excess of crediting rate

reduce shortfall
...
Case Study #1 – Succession Planning
 Medical Practice
◉ 1 physician/owner – Age 60
◉ 2 non-owner physicians – Early 40s
◉...
Case Study #1 – Succession Planning

Group

#

Current
(7.5%)

Owner

1

$54,500

Non-Owner Doctors

2

$98,000

Employees...
Case Study #1 – Succession Planning

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Current
Employees

CBP
Non-Owner Doctors
...
Case Study #2 – Succession Planning
 Architectural Firm
◉ 2 owners  Age 55+
◉ 7 principals  Early 40s
◉ 16 other employ...
Case Study #2 – Succession Planning

Group

#

Current
(7.5%)

Cash Balance
(1.75%)
$230,000

Total
$330,000

Over 10
Year...
Case Study #2 – Succession Planning

100%
80%
60%
40%
20%
0%
Current
Employees

CBP
Principals

Total
Owner
Slide | 57
Case Study #3 – Enhanced Retirement Savings
 Accounting Firm
◉ 4 senior partners earning $500k+ each
◉ 9 other partners
◉...
Case Study #3 – Enhanced Retirement Savings

Current Plan
Group

#

Per Participant

Total

Top-paid Partners

4

$54,500
...
Case Study #3 – Enhanced Retirement Savings

$50,000 Cash Balance Plan
Cash
Balance Total

Combined –
Per
Participant

Gro...
Case Study #3 – Enhanced Retirement Savings

$75,000 Cash Balance Plan
Group

#

Cash Balance
- Per
Participant

Cash
Bala...
Case Study #3 – Enhanced Retirement Savings

$100,000 Cash Balance Plan
Cash Balance
- Total

Combined –
Per
Participant

...
Case Study #3 – Enhanced Retirement Savings

Comparison
Group

#

Current
(4.5%)

$50k CB
(6.1%)

$75k CB
(8.15%)

100k CB...
Thousands

Case Study #3 – Enhanced Retirement Savings

$1,800
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
$-

518

61...
Case Study #4 – Enhanced Retirement Savings
 Salvage yard
◉ 3 owners earning $450,000+ each
◉ 4 spouses and children
◉ 32...
Case Study #4 – Enhanced Retirement Savings

Current Plan
Group

#

Per Participant

Total

Owners

3

$50,000

$150,000

...
Case Study #4 – Enhanced Retirement Savings

Cash Balance Plan
#

Cash Balance
- Per
Participant

Owners

3

$100,000

Fam...
Case Study #4 – Enhanced Retirement Savings

Group

#

Current
(4.5%)

Cash Balance
(6%)

Owners

3

$150,000

$450,000

F...
Case Study #4 – Enhanced Retirement Savings

100%
80%
60%
40%
20%
0%
Current
Employees

CBP
Family

Total
Owners
Slide | 6...
Questions
Page
| 70

Adam C. Pozek, ERPA, QPA, QPFC
Partner
DWC ERISA Consultants, LLC
651.204.2600 ext. 107

www.linkedin...
Caveats & Disclaimers

THE

CONTENT OF THIS PRESENTATION GENERAL IN NATURE AND IS FOR

INFORMATIONAL PURPOSES ONLY.

IT

S...
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More Bank For Your Buck: Plan Designs to Maximize Retirement, Estate & Succession Planning

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More Bank For Your Buck: Plan Designs to Maximize Retirement, Estate & Succession Planning

  1. 1. More Bang For Your Buck Presented By Adam C. Pozek, ERPA, QPA, QPFC Partner DWC ERISA Consultants, LLC Designs to Maximize Retirement, Estate and Succession Planning
  2. 2. Obligatory Opening Disclaimer THE VIEWS EXPRESSED BY THE SPEAKER ARE HIS OWN AND DO NOT NECESSARILY REPRESENT THE VIEWS OF ANY PERSON, LIVING OR DEAD, REAL OR FICTITIOUS, SHORT OR TALL, MALE OR FEMALE, RELIGIOUS OR ATHEIST, WITH A FULL HEAD OF HAIR OR…WELL, YOU GET THE POINT. NO PEOPLE OR ANIMALS WERE HARMED IN THE MAKING OF THIS PRESENTATION.
  3. 3. Agenda  Setting the stage  Defined contribution plans ◉ Non-elective contributions ◉ 401(k) Plans  Defined benefit plans ◉ Traditional ◉ Cash balance  Miscellaneous  Appendix Slide | 3
  4. 4. Part 1 S ETTING T HE S TAGE
  5. 5. Applicable Limits Code Section 2012 Compensation 401(a)(17) $ 250,000 $245,000 $245,000 Elective Deferrals [401(k)] 402(g)(1) $ 17,000 $ 16,500 $ 16,500 414(v)(2)(B)(i) $ 5,500 $ 5,500 $ 5,500 408(p)(2)(E) $ 11,500 $ 11,500 $ 11,500 414(v)(2)(B)(ii) $ 2,500 $ 2,500 $ 2,500 Limit Catch-Up Contributions [401(k)] Elective Deferrals [SIMPLE] Catch-Up Contributions [SIMPLE] 2010 2010 Annual Additions – DC Plan 415(c)(1)(A) $ 50,000 $ 49,000 $ 49,000 Annual Additions – DB Plan 415(b)(1)(A) $200,000 $195,000 $195,000 HCE – Compensation Test 414(q)(1)(B) $ 115,000 $110,000 $110,000 Key Employee – Officer Comp 416(i)(1)(A)(i) $ 165,000 $160,000 $160,000 Key Employee – 1% Owner Comp 416(i)(1)(A)(iii) $ 150,000 $150,000 $150,000 N/A $ 110,100 $106,800 $106,800 Social Security Wage Base Slide | 5
  6. 6. HCEs & Nondiscrimination  Nondiscrimination testing to ensure Highly Compensated Employee (“HCE”) benefits not disproportionate to Non-HCE (“NHCE”) benefits  Must meet one of two tests to be HCE ◉ 5% owner test ◉ Compensation test  Employees not meeting one of these tests are NHCE Slide | 6
  7. 7. Five Percent Owner Test  Any employee who owns more than 5% of the employer or a related employer ◉ At any time during the   Current plan year (determination year) or Immediately preceding plan year (lookback year)  Compensation not a factor in 5% owner test  Attribution of ownership to/from certain family members Slide | 7
  8. 8. Compensation Test  An employee whose compensation… ◉ From the employer ◉ During the lookback year ◉ Exceeds the dollar limit  Gross compensation ◉ Includes pre-tax deferrals to 401(k) and 125 plans ◉ Full year even if employee enters plan mid-year Slide | 8
  9. 9. Key Employees & Top Heavy Plans  Plan is top heavy when more than 60% of plan assets belong to key employees  Key employees are generally the owners and officers  Minimum required contribution to non-key employees equal to the lesser of… ◉ ◉ 3% of compensation, or The highest percentage allocated to any key employee Slide | 9
  10. 10. Part 2 D EFINED C ONTRIBUTION P LANS : N ONELECTIVE C ONTRIBUTIONS
  11. 11. Defined Contribution Plans  Provide contribution based on current compensation  Contributions can be fixed or discretionary  Grow to an unspecified retirement benefit  Employees bear investment risk  May include the following types of contributions ◉ Nonelective contributions ◉ Elective deferrals ◉ Employer match ◉ Rollover contributions Slide | 11
  12. 12. Defined Contribution Plans  Money Purchase Pension Plan ◉ Target Benefit Plan  Profit Sharing Plan ◉ Simplified Employee Pension (“SEP”)  401(k) Plan ◉ SIMPLE 401(k) ◉ SIMPLE IRA  Employee Stock Ownership Plan Slide | 12
  13. 13. Nonelective Contributions  May be fixed or discretionary  A/k/a profit sharing though not necessarily tied to profits  Contributions must be substantial and recurring  Allocation conditions ◉ ◉ ◉ Employment on the last day of the plan year Completion of a set number of hours Not based on elective deferrals Slide | 13
  14. 14. Allocation Methods  Design-based safe harbor allocation methods ◉ Per capita method ◉ Pro rata method ◉ Permitted disparity method (a/k/a Social Security integration)  General-tested allocation methods ◉ Age-weighted method ◉ New comparability method (a/k/a cross-testing) Slide | 14
  15. 15. Per Capita Method  Uniform dollar amount allocated to each eligible participant  NHCEs (almost) always receive larger percentage of pay than HCEs Slide | 15
  16. 16. Per Capita Method Age Annual Compensation Per-Capita Percentage of Compensation Owner #1 51 $245,000 $20,250 8.3% Owner #2 49 $245,000 $20,250 8.3% Manager #1 55 $ 80,000 $20,250 25.3% Manager #2 48 $ 50,000 $20,250 40.5% Manager #3 42 $ 45,000 $20,250 45.0% Staff #1 38 $ 40,000 $20,250 50.6% Staff #2 46 $ 30,000 $20,250 67.5% Staff #3 32 $ 30,000 $20,250 67.5% Staff #4 42 $ 23,000 $20,250 88.0% Staff #5 25 $ 22,000 $20,250 92.0% Total $810,000 $202,500 Owners’ % of Total 60.5% 20.0% Slide | 16
  17. 17. Pro Rata Method  Uniform percentage of pay allocated to each eligible participant  Compensation capped at IRS limit  May be expressed as… ◉ A set percentage, e.g. 5% of pay to all plan participants  ◉ Participant comp x 5% = Allocation A total dollar amount, e.g. $100,000  Participant comp/Total comp x $100,000 = Allocation Slide | 17
  18. 18. Pro Rata Method Age Annual Compensation Pro Rata Percentage of Compensation Owner #1 51 $245,000 $49,000 20% Owner #2 49 $245,000 $49,000 20% Manager #1 55 $ 80,000 $16,000 20% Manager #2 48 $ 50,000 $10,000 20% Manager #3 42 $ 45,000 $9,000 20% Staff #1 38 $ 40,000 $8,000 20% Staff #2 46 $ 30,000 $6,000 20% Staff #3 32 $ 30,000 $6,000 20% Staff #4 42 $ 23,000 $4,600 20% Staff #5 25 $ 22,000 $4,400 20% Total $810,000 $162,000 Owners’ % of Total 60.5% 60.5% Slide | 18
  19. 19. Permitted Disparity Method  Considers that SS benefits are paid only on compensation below the social security wage base  Allows additional contributions on pay exceeding a set level ◉ ◉ ◉ ◉ Usually the wage base May be a percentage of the wage base May be a fixed dollar amount Must be specified in plan document Slide | 19
  20. 20. Permitted Disparity Method  Base contribution percentage applies to all comp  Excess contribution percentage applies to comp>wage base ◉ $250 Excess $139.9k Base Usually capped at   5.7%, or Base percentage $110.1k $Slide | 20
  21. 21. Permitted Disparity Method Age Annual Compensation Excess Compensation Base Allocation (16.8%) Excess Allocation (5.7%) Total Allocation Percentage of Comp Owner #1 51 $245,000 $138,200 $41,123 $7,877 $49,000 20.0% Owner #2 49 $245,000 $138,200 $41,123 $7,877 $49,000 20.0% Manager #1 55 $ 80,000 $ 0 $13,428 $ 0 $13,428 16.8% Manager #2 48 $ 50,000 $ 0 $8,392 $ 0 $8,392 16.8% Manager #3 42 $ 45,000 $ 0 $7,553 $ 0 $7,553 16.8% Staff #1 38 $ 40,000 $ 0 $6,714 $ 0 $6,714 16.8% Staff #2 46 $ 30,000 $ 0 $5,035 $ 0 $5,035 16.8% Staff #3 32 $ 30,000 $ 0 $5,035 $ 0 $5,035 16.8% Staff #4 42 $ 23,000 $ 0 $3,861 $ 0 $3,861 16.8% Staff #5 25 $ 22,000 $ 0 $3,693 $ 0 $3,693 16.8% Total $810,000 276,400 $135,957 $14,754 $151,711 Owners’ % of Total 60.5% 100% 60.5% 100% 64.6% Slide | 21
  22. 22. Using The Time Value of Money $100,000 $2,875/year Age 65 $100,000 Age 65 Age 30 $10,000/year Age 55 Slide | 22
  23. 23. New Comparability Method  Divide participants into groups and allocate pro-rata within each group ◉ ◉ Valid business classifications Each participant in his/her own group  Groups must be defined in the plan document ◉ Be careful with definitions  Minimum NHCE “gateway” contribution equal to the lesser of… ◉ ◉ 5% of compensation 1/3 the highest percentage allocated to any HCE Slide | 23
  24. 24. New Comparability Method Age Annual Compensation Allocation Percentage of Compensation Owner #1 51 $245,000 $49,000 20.0% Owner #2 49 $245,000 $49,000 20.0% Manager #1 55 $ 80,000 $ 5,200 6.5% Manager #2 48 $ 50,000 $ 3,250 6.5% Manager #3 42 $ 45,000 $ 2,925 6.5% Staff #1 38 $ 40,000 $ 2,600 6.5% Staff #2 46 $ 30,000 $ 1,950 6.5% Staff #3 32 $ 30,000 $ 1,950 6.5% Staff #4 42 $ 23,000 $ 1,495 6.5% Staff #5 25 $ 22,000 $ 1,430 6.5% Total $810,000 $118,800 Owners’ % of Total 60.5% 82.5% Slide | 24
  25. 25. Comparison of Methods Annual Compensation Per Capita Pro Rata Permitted Disparity New Comparability Owner #1 $245,000 $20,250 $49,000 $49,000 $49,000 Owner #2 $245,000 $20,250 $49,000 $49,000 $49,000 Manager #1 $ 80,000 $20,250 $16,000 $13,428 $ 5,200 Manager #2 $ 50,000 $20,250 $10,000 $8,392 $ 3,250 Manager #3 $ 45,000 $20,250 $9,000 $7,553 $ 2,925 Staff #1 $ 40,000 $20,250 $8,000 $6,714 $ 2,600 Staff #2 $ 30,000 $20,250 $6,000 $5,035 $ 1,950 Staff #3 $ 30,000 $20,250 $6,000 $5,035 $ 1,950 Staff #4 $ 23,000 $20,250 $4,600 $3,861 $ 1,495 Staff #5 $ 22,000 $20,250 $4,400 $3,693 $ 1,430 $810,000 $202,500 $162,000 $151,711 $118,800 60.5% 20.0% 60.5% 64.6% 82.5% Slide | 25
  26. 26. Changing Methods  Requires plan amendment  Change must occur before the first participant accrues contribution for the year ◉ If plan has LDR, last day of the year for which contribution is made  ◉ If YOS requirement, before first participant completes 1,000 hours  ◉ ◉ December 31st for calendar year plan Approximately May 21st (5.75 months at full time) If no LDR or hours, last day of preceding plan year See IRS Technical Advice Memorandum 9735001 Slide | 26
  27. 27. Part 3 D EFINED C ONTRIBUTION P LANS : 401( K )
  28. 28. Elective Deferrals  Made pursuant to a salary reduction election  Types of elective deferrals ◉ Traditional ◉ Roth  Different treatment for federal and state income tax purposes  Both are included in taxable income for FICA purposes  Catch-up contributions for those age 50+ by end of year Slide | 28
  29. 29. Employer Match  Can be either discretionary or fixed  Expressed as a percentage of salary deferrals Match formula of 50% of salary deferrals up to 6% of pay. Example #1 Example #2 Pay = $100,000 Pay = $100,000 Deferrals = $11,000 (11%) Deferrals = $5,000 (5%) Match = $100,000 x 6% x 50% = $3,000 Match = $5,000 x 50% = $2,500 Slide | 29
  30. 30. Employer Match Annual Compensation = $60,000 ($5,000 per month) January February March April May June Salary Deferrals = 8% of Comp July August Sept October Nov Dec Salary Deferrals = 0% of Comp ($5,000 x 8% = $400 per month) Match formula of 50% of salary deferrals up to 6% of pay. Plan Year Pay Period $2,400/$60,000 = 4% $5,000 x 6% = $300 x 50% = $150 $2,400 x 50% = $1,200 $150 x 6 pay periods = $900 Slide | 30
  31. 31. Safe Harbor 401(k) Plans  Plan design that provides for automatic passage of ADP test  Minimum employer contribution required  Participant notice required 30 – 90 days prior to start of each plan year  Two “traditional” options  Two automatic enrollment options Slide | 31
  32. 32. Safe Harbor 401(k) Plans - Traditional  Matching contribution ◉ 100% of the first 3% of deferrals, plus ◉ 50% of the next 2% of deferrals  Base contribution ◉ 3% of compensation  Immediate vesting required Slide | 32
  33. 33. Safe Harbor 401(k) Plans – Auto Enrollment  Deferrals ◉ Minimum 3% during initial period ◉ Auto increase by 1% per year up to 6% ◉ Maximum is 10%  Matching contribution ◉ 100% of the first 1% of deferrals, plus ◉ 50% of the next 5% of deferrals  Base contribution ◉ 3% of compensation  Maximum vesting = 2 year cliff Slide | 33
  34. 34. Safe Harbor Contributions  Last day rule/hours requirement not permitted  Split eligibility is permitted ◉ Immediate for deferrals ◉ 1 year of service for employer contributions  Deemed pass of ACP if additional matching contributions… ◉ Are not based on deferrals exceeding 6% of pay ◉ Do not exceed 4% of pay Slide | 34
  35. 35. Implementation  Existing 401(k) plans ◉ Must be added at the start of a plan year ◉ Amendment must be signed prior to the start of the plan year  Startups and non-401(k) plans ◉ Initial year must include safe harbor for at least 3 months ◉ Implementation no later than October 1st for a calendar year plan ◉ Amendment must be signed prior to implementation Slide | 35
  36. 36. Safe Harbor & New Comparability Annual Compensation 401(k) Deferrals SH Base (3%) New Comp (10.27%/1.5%) Total ER Alloc. Total Allocation Owner #1 $245,000 $16,500 $7,350 $25,150 $32,500 $49,000 Owner #2 $245,000 $16,500 $7,350 $25,150 $32,500 $49,000 Manager #1 $ 80,000 $ 4,000 $2,400 $ 1,200 $ 3,600 $ 7,600 Manager #2 $ 50,000 $ 1,000 $1,500 $ 750 $ 2,250 $ 3,250 Manager #3 $ 45,000 $ 0 $1,350 $ 675 $ 2,025 $ 2,025 Staff #1 $ 40,000 $ 0 $1,200 $ 600 $ 1,800 $ 1,800 Staff #2 $ 30,000 $ 0 $ 900 $ 450 $ 1,350 $ 1,350 Staff #3 $ 30,000 $ 0 $ 900 $ 450 $ 1,350 $ 1,350 Staff #4 $ 23,000 $ 0 $ 690 $ 345 $ 1,035 $ 1,035 Staff #5 $ 22,000 $ 1,000 $ 660 $ 330 $ 990 $ 1,990 $810,000 $39,000 $24,300 $55,100 $79,400 $118,400 60.5% 84.6% 60.5% 91.3% 81.9% 82.8% Slide | 36
  37. 37. Safe Harbor Match x 3 Annual Comp 401(k) Deferrals Disc. Match (66.67% x 6%) SH Match Fixed Match (87.8% x 6%) Total Match Total Allocation Owner #1 $245,000 $16,500 $9,800 $9,800 $12,900 $32,50 0 $49,000 Owner #2 $245,000 $16,500 $9,800 $9,800 $12,900 $32,50 0 $49,000 Manager #1 $ 80,000 $ 4,000 $3,200 $2,667 $ 3,510 $ 9,377 $13,377 Manager #2 $ 50,000 $ 1,000 $1,000 $ 667 $ 878 $ 2,545 $ 3,545 Manager #3 $ 45,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Staff #1 $ 40,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Staff #2 $ 30,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Staff #3 $ 30,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Staff #4 $ 23,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Staff #5 $ 22,000 $ 1,000 $ 830 $ 667 $ 878 $ 2,375 $ 3,375 $810,000 $39,000 $24,630 $23,601 $31,066 $79,297 $118,297 60.5% 84.6% 79.6% 83.0% 83.0% 82.0% 82.8% Slide | 37
  38. 38. Part 4 D EFINED B ENEFIT P LANS : T RADITIONAL
  39. 39. Defined Benefit Plans  Defines benefit at Normal Retirement Age  Benefit based on… ◉ Compensation, ◉ Service, and/or ◉ Participation  Benefit expressed as monthly or annual annuity  Participant earns a portion of the benefit each year  Employer bears the investment risk Slide | 39
  40. 40. Funding Defined Benefit Plans Future Investment Earnings Current Assets Future Additions Future Contributions Slide | 40
  41. 41. Single Participant Plans  Tax planning tool for higher income self-employed individuals ◉ ◉ ◉ ◉ ◉ Attorneys Real estate agents Board members Retired executives turned consultant Manufacturers’ reps Slide | 41
  42. 42. Single Participant Plans W-2 Income Age 40 45 50 55 60 65 $50,000 Earned Income** Age 40 45 50 55 60 65 $50,000 $ $ $ $ $ $ $ $ $ $ $ $ 7,000 13,000 25,000 41,000 44,000 38,000 10,000 13,000 16,000 20,000 24,000 28,000 $100,000 $150,000 $200,000 Annual Contribution* $ 14,000 $ 21,000 $ 27,000 $ 26,000 $ 39,000 $ 51,000 $ 50,000 $ 76,000 $ 99,000 $ 83,000 $ 124,000 $ 162,000 $ 88,000 $ 132,000 $ 171,000 $ 77,000 $ 115,000 $ 154,000 $300,000 $100,000 $150,000 $200,000 Annual Contribution* $ 21,000 $ 31,000 $ 42,000 $ 26,000 $ 39,000 $ 53,000 $ 33,000 $ 49,000 $ 66,000 $ 40,000 $ 60,000 $ 81,000 $ 48,000 $ 72,000 $ 96,000 $ 56,000 $ 84,000 $ 112,000 $300,000 $ 27,000 $ 51,000 $ 99,000 $ 162,000 $ 171,000 $ 188,000 $ 48,000 $ 65,000 $ 89,000 $ 121,000 $ 144,000 $ 168,000 *Rounded down to the nearest $1,000 **Earned income after expenses but before retirement deduction Slide | 42
  43. 43. Part 5 D EFINED B ENEFIT P LANS : C ASH B ALANCE P LANS
  44. 44. Cash Balance Plans  Look like a money purchase pension plan but subject to DB contribution and deduction limits  Contribution is specified in plan and is mandatory  Can provide different contributions for different groups, e.g. new comparability Slide | 44
  45. 45. Cash Balance Plans  Contributions are credited to “hypothetical account”     for each participant each year Participants can view hypothetical account balances like a DC plan Contributions must be fully vested after 3 years Plan assets are pooled and invested together Guaranteed interest rate is credited at set interval, i.e. quarterly, annually, etc. Slide | 45
  46. 46. Maximum Contributions $250 Thousands $200 $200 $150 $209 $143 $103 $100 $38 $52 $75 $50 $Age 35 Deferrals 40 45 Catch-Up 50 Profit Sharing 55 60 65 Cash Balance Slide | 46
  47. 47. Deduction Limits  PBGC-covered plans ◉ DC plan   ◉ Employee deferrals, plus Employer contributions up to 25% of eligible compensation DB plan = 150% of funding requirement  Non-PBGC-covered plans ◉ DC plan   ◉ Employee deferrals, plus Employer contributions up to 6% of eligible compensation DB plan = 150% of funding requirement Slide | 47
  48. 48. Interest Crediting Rate  According to Pension Protection Act of 2006 ◉ Not less than 0%, and ◉ Not more than a “market rate”  Common choices* ◉ 7-Year Treasury Rate + .25% = 1.52% ◉ 30-Year Treasury Rate = 3.11% ◉ Third segment rate = 5.19% *Rates as of February 2012 Slide | 48
  49. 49. Putting It Together First Year Contribution $75,000 Interest Credit at 3.11% $2,332 $77,332 Slide | 49
  50. 50. Determining Funded Status Target Actual ROR (%) 3.11% Contribution $75,000 $75,000 $75,000 $75,000 $75,000 $75,000 Actual ROR ($) $ 2,332 $ 3,750 $ 1,500 $ 0 $(1,500) $(3,750) EOY Assets $ 77,332 $78,750 $76,500 $75,000 $ 73,500 $ 71,250 Target Funding $ 77,332 $ 77,332 $ 77,332 $ 77,332 $ 77,332 $ 77,332 $ 1,418 $ (832) $(2,332) $(3,832) $(6,082) Over/(Under) Funding $ 5.00% 0 2.00% 0.00% -2.00% -5.00% Slide | 50
  51. 51. Dealing With Shortfalls  Amortize over 1 to 7 years  Subsequent earnings in excess of crediting rate reduce shortfall  Subsequent earnings below crediting rate increase shortfall Slide | 51
  52. 52. Case Study #1 – Succession Planning  Medical Practice ◉ 1 physician/owner – Age 60 ◉ 2 non-owner physicians – Early 40s ◉ 9 other employees  Non-owner physicians to buy out owner over 5 to 10 years  Current plan is Safe Harbor 401(k) with New Comparability Profit Sharing Slide | 52
  53. 53. Case Study #1 – Succession Planning Group # Current (7.5%) Owner 1 $54,500 Non-Owner Doctors 2 $98,000 Employees 9 Totals 12 Cash Balance (1.75%) $125,000 $ Total $179,500 Over 10 Years $1,250,000 0 $ 98,000 $ 0 $23,131 $ 5,586 $ 28,717 $ $175,631 $130,586 $306,217 $1,305,860 55,860 Slide | 53
  54. 54. Case Study #1 – Succession Planning 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Current Employees CBP Non-Owner Doctors Total Owner Slide | 54
  55. 55. Case Study #2 – Succession Planning  Architectural Firm ◉ 2 owners  Age 55+ ◉ 7 principals  Early 40s ◉ 16 other employees  Principals to buy out owners over 10 years  Current plan is safe harbor 401(k) with new comparability Slide | 55
  56. 56. Case Study #2 – Succession Planning Group # Current (7.5%) Cash Balance (1.75%) $230,000 Total $330,000 Over 10 Years Owners 2 $100,000 $2,300,000 Principals 7 $157,911 $ 0 $157,911 Employees 16 $ 63,781 $ 14,884 $ 78,665 $ 148,840 Totals 25 $221,792 $244,884 $566,576 $2,448,840 $ 0 Slide | 56
  57. 57. Case Study #2 – Succession Planning 100% 80% 60% 40% 20% 0% Current Employees CBP Principals Total Owner Slide | 57
  58. 58. Case Study #3 – Enhanced Retirement Savings  Accounting Firm ◉ 4 senior partners earning $500k+ each ◉ 9 other partners ◉ 65 non-partners  Current plan is SH401(k) with New Comp Slide | 58
  59. 59. Case Study #3 – Enhanced Retirement Savings Current Plan Group # Per Participant Total Top-paid Partners 4 $54,500 $218,000 Other Partners 9 $49,000 $441,000 Employees 65 4.5% of Pay $222,700 Totals 78 $881,700 Slide | 59
  60. 60. Case Study #3 – Enhanced Retirement Savings $50,000 Cash Balance Plan Cash Balance Total Combined – Per Participant Group # Cash Balance - Per Participant Top-paid Partners 4 $50,000 $200,000 $104,500 $418,000 Other Partners 9 $10,000 $90,000 $59,000 $531,000 Employees 65 1.6% of Pay $79,200 6.1% of Pay $301,900 Totals 78 $369,200 Combined Total $1,250,900 Slide | 60
  61. 61. Case Study #3 – Enhanced Retirement Savings $75,000 Cash Balance Plan Group # Cash Balance - Per Participant Cash Balance Total Top-paid Partners 4 $75,000 $300,000 $129,500 $518,000 Other Partners 9 $30,000 $270,000 $79,000 $711,000 Employees 65 3.65% of Pay $180,600 8.15% of Pay $403,300 Totals 78 $750,600 Combined Per Participant Combined Total $1,632,300 Slide | 61
  62. 62. Case Study #3 – Enhanced Retirement Savings $100,000 Cash Balance Plan Cash Balance - Total Combined – Per Participant Combined Total Group # Cash Balance - Per Participant Top-paid Partners 4 $100,000 $400,000 $154,500 $618,000 Other Partners 9 $30,000 $270,000 $79,000 $711,000 Employees 65 4.15% of Pay $205,400 8.65% of Pay $428,100 Totals 78 $875,400 $1,757,100 Slide | 62
  63. 63. Case Study #3 – Enhanced Retirement Savings Comparison Group # Current (4.5%) $50k CB (6.1%) $75k CB (8.15%) 100k CB (8.65%) Top-paid Partners 4 $218,000 $418,000 $518,000 $618,000 Other Partners 9 $441,000 $531,000 $711,000 $711,000 Employees 65 $222,700 $301,900 $403,300 $428,100 Totals 78 $881,700 $1,250,900 $1,632,300 $1,757,100 Increase ($) 369,200 750,600 875,400 Increase to Partners ($) 290,000 570,000 670,000 Increase to Partners (%) 79% 76% 77% Slide | 63
  64. 64. Thousands Case Study #3 – Enhanced Retirement Savings $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $- 518 618 418 711 711 301.9 403.3 428.1 $50k CBP $75k CBP $100k CBP 218 441 222.7 Current Employees 531 Other Partners Top-Paid Partners Slide | 64
  65. 65. Case Study #4 – Enhanced Retirement Savings  Salvage yard ◉ 3 owners earning $450,000+ each ◉ 4 spouses and children ◉ 32 other employees  Current plan is safe harbor 401(k) with new comparability Slide | 65
  66. 66. Case Study #4 – Enhanced Retirement Savings Current Plan Group # Per Participant Total Owners 3 $50,000 $150,000 Family 4 $ 5,000 $ 20,000 Employees 32 4.5% of Pay $ 55,262 Totals 39 $225,262 Slide | 66
  67. 67. Case Study #4 – Enhanced Retirement Savings Cash Balance Plan # Cash Balance - Per Participant Owners 3 $100,000 Family 4 Employees 32 Totals 39 Group Owner & Family Percent of Total $ 0 1.5% of Pay Combined – Per Participant Cash Balance Total $300,000 Combined Total $150,000 $450,000 0 $5,000 $ 20,000 $ 18,421 6% of Pay $ 73,683 $ $318,421 $543,683 94.2% 86.4% Slide | 67
  68. 68. Case Study #4 – Enhanced Retirement Savings Group # Current (4.5%) Cash Balance (6%) Owners 3 $150,000 $450,000 Family 4 $ 20,000 $ 20,000 Employees 32 $ 55,262 $73,683 Totals 39 $225,262 $543,683 Increase ($) Increase to Owners ($) Increase to Partners (%) $318,421 $300,000 94.2% Slide | 68
  69. 69. Case Study #4 – Enhanced Retirement Savings 100% 80% 60% 40% 20% 0% Current Employees CBP Family Total Owners Slide | 69
  70. 70. Questions Page | 70 Adam C. Pozek, ERPA, QPA, QPFC Partner DWC ERISA Consultants, LLC 651.204.2600 ext. 107 www.linkedin.com/in/adampozek Adam.Pozek@DWCConsultants.com Twitter.com/PozekOnPension www.DWCConsultants.com www.PozekOnPension.com DWCAdamPozek AdamCPozek
  71. 71. Caveats & Disclaimers THE CONTENT OF THIS PRESENTATION GENERAL IN NATURE AND IS FOR INFORMATIONAL PURPOSES ONLY. IT SHOULD NOT BE USED AS A SUBSTITUTE FOR SPECIFIC TAX, LEGAL AND/OR FINANCIAL ADVICE THAT CONSIDERS ALL RELEVANT FACTS AND CIRCUMSTANCES. TO ENSURE COMPLIANCE WITH THE REQUIREMENTS IMPOSED ON US BY IRS CIRCULAR 230, WE INFORM YOU THAT ANY TAX ADVICE CONTAINED IN THIS COMMUNICATION (INCLUDING ANY ATTACHMENTS) IS NOT INTENDED AND CANNOT BE USED FOR THE PURPOSE OF: (I) AVOIDING TAX-RELATED PENALTIES UNDER THE INTERNAL REVENUE CODE, OR (II) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY TAX-RELATED MATTER(S) ADDRESSED HEREIN.

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