© 2009, Kravitz Inc. All rights reserved. Greater Tax Deferral using Cash Balance Plans.
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Transcript of © 2009, Kravitz Inc. All rights reserved. Greater Tax Deferral using Cash Balance Plans.
© 2009, Kravitz Inc. All rights reserved.
Greater Tax Deferral usingCash Balance Plans
© 2009, Kravitz Inc. All rights reserved.
Qualified Retirement Plans-2 Types
Defined Contribution Plans 401(k) Plans Profit Sharing Plans
Defined Benefit Plans Traditional Defined Benefit Plans Cash Balance Plans (“hybrid plans”)
© 2009, Kravitz Inc. All rights reserved.
The Hybrid for the 21st Century
DefinedBenefit
DefinedContribution
CashBalance
An ERISA-governed, tax-qualified plan Tax deduction, tax deferral Creditor protection
© 2009, Kravitz Inc. All rights reserved.
Current Trend
Traditional defined benefit plans 1985: 112,208 2005: 29,000
Cash Balance Plans 2000: 4% 2005: 10%
Source: Employee Benefit Research Institute, 2005
© 2009, Kravitz Inc. All rights reserved.
2009 Contribution Limits
401(k) with
Age 401(k) only Profit Sharing Cash Balance TOTAL
60 - 65 $22,000 $54,500 $219,000 $273,500
55 - 59 $22,000 $54,500 $162,000 $216,500
50 - 54 $22,000 $54,500 $117,000 $171,500
45 - 49 $16,500 $54,500 $85,000 $139,500
40 - 44 $16,500 $49,000 $60,000 $109,000
35 - 39 $16,500 $49,000 $43,000 $92,000
30 - 34 $16,500 $49,000 $31,000 $80,000
2009 Contribution Limits
401(k) Profit Sharing & Cash Balance Plans
© 2009, Kravitz Inc. All rights reserved.
DB Versus CB Comparison
• Formula
Defined Benefit Plans Cash Balance Plans
• Account balance
(direct tracking)
• Archaic • Looks like 401(k) Profit Sharing
• Age-sensitive • Age-neutral (relatively)
© 2009, Kravitz Inc. All rights reserved.
Background: three key dates
1985 1990 2000
Introduced byBankAmerica
2006
Pension Protection Act
•Safe Harbors•Clarification
Conversions: Defined Benefit to Cash Balance
© 2009, Kravitz Inc. All rights reserved.
How Do Cash Balance Plans Work?
401(k) Cash Balance
Guaranteed interest
credit (≈5%)ContributionContribution Earnings
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Plan Investments
Earnings …next year’s contribution
Earnings …next year’s contribution
7-year make-up
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Investment Dynamics
• Pooled investments, no self-direction
• Guaranteed interest credit ~5%
• Investment risk with the employer
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Investment Options
• Not dictated by regs
• Cash Balance Mutual Fund
• Portfolios with fixed-income slant
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Interest Credit Flexibility
Three Month Treasury Note: ~3.5%
30 Year Treasury Bond: ~5%
Corporate Bond: ~6.4%
© 2009, Kravitz Inc. All rights reserved.
CASE STUDY: Dentist
Annual Age Salary
Dentist
Thomas 50 $ 245,000
5 Staff
Alfaro 33 63,789
Garibaldi 50 63,154
Sangha 33 52,822
Rivera 29 46,443
Stanton 24 22,347
Subtotals $ 248,555
© 2009, Kravitz Inc. All rights reserved.
CASE STUDY: Dentist
Profit TotalName 401(k) Sharing Contribution
Dentist
Thomas $ 22,000 $ 10,000 $0 to $ 115,000 $ 147,000
5 Staff 7.5% of pay
Alfaro $ 4,784 $ 1,000 $5,784
Garibaldi 4,737 1,000 5,737
Sangha 3,962 1,000 4,962
Rivera 3,483 1,000 4,483
Stanton 1,676 1,000 2,676
Subtotals $ 0 $ 18,642 $ 5,000 $ 23,642
Grand Totals $ 22,000 $ 28,642 $ 120,000 $ 170,642
Percent to owner 86%
CashBalance
© 2009, Kravitz Inc. All rights reserved.
CASE STUDY: Family Business
Age Compensation
Owners
Father 59 $ 245,000
Mother 58 245,000
Son 36 135,000
Son 34 120,000
Daughter 28 80,000
5 Salespeople >$100,000
25 Employees $ 1,125,000
© 2009, Kravitz Inc. All rights reserved.
CASE STUDY: Family Business
Profit Cash TOTAL
Age 401(k) Sharing Balance CONTRIBUTION
OwnersFather 59 $ 22,000 $ 32,500 $ 175,000 $ 229,500Mother 58 22,000 32,500 165,000 219,500Son 36 16,500 10,000 0 26,500Son 34 16,500 10,000 0 26,500Daughter 28 0 0 0 0
Subtotal $ 77,000 $ 85,000 $ 340,000 $ 502,000
5 Salespeople Separate (k) plan 0 0
7.5% of pay $1,000 each25 Employees $ 84,375 $ 25,000 $ 109,375
Total $ 611,375
Percent to owners 82%
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Succession: acquire stock or gifting 20062001
Exit strategy: accumulating funds ($2,522,000)
CASE STUDY: Family Business
Plan is complementary with estate planning:
© 2009, Kravitz Inc. All rights reserved.
CASE STUDY: Midsize Professional Firm
Group I Age Compensation
Partner 1 52 $ 245,000
Partner 2 49 245,000
Partner 3 48 245,000
Partner 4 42 245,000
Partner 5 40 245,000
Partner 6 39 245,000
Group II
Associate $ 245,000
Group III
16 Employees $ 750,000
© 2009, Kravitz Inc. All rights reserved.
CASE STUDY: Midsize Professional Firm
Profit Cash TOTAL
Group I Age 401(k) Sharing Balance CONTRIBUTION
Partner 1 52 $ 22,000 $ 12,000 $ 129,000 $ 163,000
Partner 2 49 16,500 12,000 105,000 133,500
Partner 3 48 16,500 12,000 100,000 128,500
Partner 4 42 0 12,000 73,000 85,000
Partner 5 40 16,500 12,000 65,000 93,500
Partner 6 39 5,000 12,000 0 17,000
Group II
Associate Attorney excluded
Group III 7% of pay $1,000 each
16 Employees ? $ 52,500 $ 16,000 $ 68,500
Total $ 612,500
Percent to Partners 89%
excluded
© 2009, Kravitz Inc. All rights reserved.
CASE STUDY: Construction Company
Annual
Name Age Salary
2 Owners
Owner 56 $ 245,000
Spouse of owner 45 245,000
Subtotals $ 490,000
15 Staff
Employee 1 55 65,000
Employee 15 25 30,000
Subtotals $ 700,000
Grand Totals $ 1,190,000
© 2009, Kravitz Inc. All rights reserved.
CASE STUDY: Construction Company
Profit Total
Name 401(k) Sharing Contribution
2 Owners
Owner $ 22,000 $ 32,500 $0 to $ 154,274 $ 208,774
Spouse of owner 16,500 32,500 $0 to 85,605 134,605
Subtotals $ 38,500 $ 65,000 $ 239,879 $ 343,379
15 Staff 7.5% of pay
Employee 1 $ 4,875 $ 2,200 $7,075
Employee 15 2,250 500 2,750
Subtotals $ 0 $ 52,500 $ 23,600 $ 76,100
Grand Totals $ 38,500 $ 117,500 $ 263,479 419,479$
Percent of Employer Contribution to Owners 80.0%
Cash
Balance
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CASE STUDY: Large Professional Firm
Age Compensation
53 Shareholders
40+ $ 245,000
68 Shareholders
< 40 $ 245,000
240 Employees varied
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Profit Cash TOTAL Age Compensation 401(k) Sharing Balance CONTRIBUTION
53 Shareholders (average)
40+ $ 245,000 $ 16,500 $ 32,500 $ 55,000 $ 104,000
68 Shareholders
< 40 $ 245,000 $ 16,500 $ 32,500 $ 0 $ 49,000
6% of pay
240 Employees varied $ 720,000 $ 0 $ 720,000
CASE STUDY: Large Professional Firm
© 2009, Kravitz Inc. All rights reserved.
Five Key Features
Key feature #1
$
Cash BalancePlan
IRA
Other QualifiedPlan
rollover
Assets are portable
© 2009, Kravitz Inc. All rights reserved.
Key feature #2
Owners/partners can have different amounts
contributed for them
Example: Cash Balance Contribution
Partner 1, age 48: $90,000
Partner 2, age 48: $0
Contribution flexibility among partners
© 2009, Kravitz Inc. All rights reserved.
Key feature #3
1. Reduce 401(k) and/or Profit Sharing
2. Amend plan, but not frequently (2-3 years)
3. Freeze plan
Key amendment deadline: June 15th (1,000 hours)
Options if cash flows change
© 2009, Kravitz Inc. All rights reserved.
1/1/08 12/31/08
Funding preference
3/15/09
Plan year
Key feature #4
Funding of the Plan
9/15/09
Funding deadline(extension)
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Funding Trends
1/1/09 12/31/09 3/15/10
Plan year
Professional firms
Family businesses
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Funding Concern
1/1 12/31
Contribution becomes obligation
(1,000 hours/June 15)
Leave firm
Partners concerned that they will be liable for another partners contribution.
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Funding Solution
1/1 12/311. Fund monthly
1,000 hours
Leave firm
2. Amend partnership agreement to accommodate
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40% of eligible participants Example: 8/20 = 40%
OR
50 total
Key feature #5
Participation requirement
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Summarize: Why Cash Balance Plans Appeal to Partnerships
Direct tracking of contributions
(what goes in, plus interest, comes out)
Portability: if partner retires or leaves firm
Rolled to IRA or the new plan (lateral partners)
Contribution flexibility among partners
Liability for other partner’s contributions
Options if cash flows decrease
© 2009, Kravitz Inc. All rights reserved.
Summarize: Good Candidates
High wage-earners, >$250,000 Professional firms: law, medical… Successful family businesses, closely-held Size? No. Ratio? Yes. 1:10 ideal
© 2009, Kravitz Inc. All rights reserved.
Common Concerns
Less flexible than 401(k)
Enough partners to participate? (%)
Added cost: employer contribution & actuarial
Less investment flexibility (pooled and only 5%)
© 2009, Kravitz Inc. All rights reserved.
Why Clients Adopt These Plans
Asset
protection
Accelerate
SavingsTaxes
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How TPAs Partner on Cash Balance
Local TPA KRAVITZ
DC Plan•DC Plan Document (including amendments)•Data Collection•ADP/ACP Testing•Coverage (410(b)) Test•415(c) Test•Send Kravitz testing results and data including corrections if testing failures
•Coordination of profit sharing allocation•Form 5500
Cash Balance Plan•CB Plan Document (including amendments)•Review Data•Coverage (410(b)) Testing•415(b), 401(a)(4) and 401(a)(26) Tests•Top Heavy•Actuarial Valuation
•Coordination of profit sharing allocation•Form 5500
© 2009, Kravitz Inc. All rights reserved.
For advisors
STAND OUT
If you don’t bring it, someone else will
Use as leverage to
win the 401(k) Plan
© 2009, Kravitz Inc. All rights reserved.
Principal-focused plans
Employees PrincipalsPartnersOwners
HCEs
HR Office Boardroom
401(k) Cash Balance
Advisor
© 2009, Kravitz Inc. All rights reserved.
How do I explore feasibility for my business?
Picture worth 1,000 words
Profit TOTAL Tax
Age 401(k) Sharing CONTRIBUTION Savings*
Shareholder 1 60 $ 22,000 $ 32,500 $0 to $ 200,000 $ 254,500 $ 101,800
Shareholder 2 50 22,000 32,500 $0 to 105,000 159,500 63,800
Shareholder 3 40 16,500 32,500 $0 to 55,000 104,000 41,600
Shareholder 4 30 16,500 32,500 $0 to 35,000 84,000 33,600
Employees ? 5-7.5% of pay
Percent to Shareholders 85%
Cash
Balance
© 2009, Kravitz Inc. All rights reserved.
Information needed for Illustration
• Dates of birth
• Dates of hire
• Compensation
• In an excel file
© 2009, Kravitz Inc. All rights reserved.
Wealth of Information
www.CashBalanceDesign.com
© 2009, Kravitz Inc. All rights reserved.
Are you a good candidate?
© 2009, Kravitz Inc. All rights reserved.
Plan Investments
© 2009, Kravitz Inc. All rights reserved.
Case Studies
© 2009, Kravitz Inc. All rights reserved.
Advisor program
© 2009, Kravitz Inc. All rights reserved.
Case Studies
© 2009, Kravitz Inc. All rights reserved.
Contact Information
Ken Guidroz, Director of New Plan Design15760 Ventura BoulevardEncino, CA 91436(818) 379-6165