Advanced Plan DesignMaximizing tax efficiency and generating favorable

allocations to accelerate retirement savings

Presented by: Kelton Collopy

Tycor Benefit Administrators, Inc.®

Confidence in your plan™

Agenda

• Identify reasons why an Employer does not offer a plan or why a plan is not fully utilized

• Provide a broad overview of a variety of tax-qualified retirement plans available for a sponsor to choose from– Defined Contribution Plans– Defined Benefit Plans– Owner-Only Plans

• Case Study of Plans for a small employer– Use plan design to improve the plan results and client satisfaction– Demonstrate how tax treatment can increase retirement savings

Reasons Owners Don’t Take Full Advantage of or Don’t Sponsor a Plan

• Their existing plan is already returning 401(k) deferrals so they believe they have reached their limits

• They sponsor a DC plan, such as 401(k) Profit Sharing, and believe that $52,000 is the maximum

• They believe maximizing their contribution would result in a cost-prohibitive contribution to the plan

• Too busy re-investing into their own business

Properly designed, it may be possible to increase the contribution received by favored person or group while reducing the overall contribution to the Plan, while realizing significant tax savings at the same time

Defined Contribution Plans

• Retirement benefits are derived from contributions that the employee and/or employer make to Plan

• Individual accounts are established for each participant and the investment risk/reward is borne by the employee.

• Employer contributions are tax deductible and can be up to 25% of eligible compensation. Allocation to participants generally based on compensation or based on combination of compensation and a deferral amount made by employee (i.e., Match)

• Maximum contribution to employee’s account for 2014 is $52,000. Ability for employees over age 50 to save an additional $5,500 for total of $57,500

• Rules that each plan type is subject to vary & knowing how this affects plan design & reporting requirements is important

Defined Contribution Plans

FeatureSIMPLE 401(k)

SEP 401(k) Profit SharingMoney

Purchase

Sponsor another Plan?

No Yes, unless adopted on IRS 5305

Yes Yes Yes

Max EE Deferral (2014)

Lesser of $12,000 or 100% of comp

None, only ER Contributions

Lesser of $17,500 or 100% of compensation

None None

Catch Up Contributions permitted?

Yes, $2,500 (2014) N/A Yes, $5,500 (2014) N/A N/A

Employer Contributions

Required Match 100% up to 3% or 2% of Eligible Comp to all Employees. Fully Vested

Discretionary, up to 25% of comp. Subject to vesting

Discretionary, up to 25% of comp. Employee deferral fully vested. Employer subject to vesting

Discretionary, up to 25% of comp. Subject to vesting

Required contribution as stated in plan doc. Up to 25% of comp. Subject to vesting

Eligibility Age cannot exceed 21, Service cannot exceed 1 year

Age cannot exceed 21, earned compensation of $550 in 3 of 5 previous years

Age cannot exceed 21, Service cannot exceed 1 year

Age cannot exceed 21, Service cannot exceed 1 year.2 Years if 100% vested

Age cannot exceed 21, Service cannot exceed 1 year.2 Years if 100% vested

Maximum Contribution

$12,000 + $2,500 + 3% Match

25% of pay, up to $52,000

$52,000 or $57,500 (not to exceed 100% of pay)

$52,000 (not to exceed 100% of pay)

$52,000 (not to exceed 100% of pay)

Loans or Roth? Plan Option No Plan Option Loan – Plan Option Roth - No

Loan – Plan Option Roth - No

Profit Sharing Plans

Flexibility

• Range of contribution can be 0% - 25% of payroll

• Contribution can vary every year

• Can offer 401(k) and/or Matching Contributions

• Max individual allocation is lesser of 100% of W-2 or $52,000 ($57,500 with Catch Up)

Methods to allocate the PS $

• Pro-Rata • Integrated • Age-Weighted• Cross-Tested, or New

Comparability

Defined Benefit Plans• Promise to provide a monthly benefit beginning at retirement and

payable as long as retiree lives. The amount is typically based on years of service and how much was earned during the highest-paid three consecutive years of employment.

• Maximum annual lifetime benefit is $210,000 payable to a participant with retirement age of 62-65 or later in 2014

• These plans provide an employer with the potential for much higher contribution levels than defined contribution plans

• Older employees receive a larger share of contributions• May require PBGC insurance, does require the services of an

enrolled actuary• Two types of DB Plans

– Traditional Defined Benefit– Cash Balance

Traditional Defined Benefit Plan

Future Benefits Defined by Plan and promised by Employer

• Annual benefit defined as accrued monthly benefit payable at Retirement Age, based on factors such as current or past compensation and service

• Employer bears the investment risk of the pooled investments of the plan

Why do DBs permit higher contribution limits?

• Maximum benefit limit mandates 10 years of participation. Less than 10 years creates an adjustment

• Maximum annual benefit of $210,000 at age 62 has an approximate lump sum value of $2,400,000

• Participant at age 52 has only 10 years to receive contributions of approximately $200,000 to achieve maximum

A Closer Look: Owner-Only Plans

• Employers, such as Sole Proprietors or Partnerships often consist of just the business owner(s).

• With no employees, or at least no employees meeting plan entry requirements, the plan may only cover the Owner(s)

• These plans are not subject to ERISA

• They do have to comply with variety of rules

• Common Choices are:– SIMPLE 401(k)– SEP– Solo 401(k)

• Any Plan established is going to be Top Heavy– Will they ever hire

employees?– Will they become

participants eligible to enter the plan?

• Consider Defined Benefit

Owner Only - Simple, SEP, 401(k) PS

SIMPLE 401(k) SEP Solo 401(k)Earned Income

Employer Match Employee

EE Def & ER Match Employer Employer Employee

EE Def & ER PS

$50,000 $1,500 $12,000 $13,500 $ 12,500 $ 12,500 $ 17,500 $ 30,000

$100,000 $3,000 $12,000 $15,000 $ 25,000 $ 25,000 $ 17,500 $ 42,500

$138,000 $4,140 $12,000 $16,140 $ 34,500 $ 34,500 $ 17,500 $ 52,000

$150,000 $4,500 $12,000 $16,500 $ 37,500 $ 34,500 $ 17,500 $ 52,000

$200,000 $6,000 $12,000 $18,000 $ 50,000 $ 34,500 $ 17,500 $ 52,000

$260,000 $7,800 $12,000 $19,800 $ 52,000 $ 34,500 $ 17,500 $ 52,000

ER Maximum100% of 3% Def 2% of Elig Comp

25% of Elig. Comp

25% of Elig. Comp.

Maximum $12,000 $ - $ 17,500

Catch Up $2,500 $ - $ 5,500

Owner Only – Defined Benefit

Earned Income

$50,000 $100,000 $150,000 $200,000 or higher

Age Contribution Contribution Contribution Contribution

40 $19,000 $38,000 $57,000 $74,000

45 $25,000 $50,000 $75,000 $97,000

50 $33,000 $65,000 $98,000 $127,000

55 $43,000 $85,000 $128,000 $166,000

60 $56,000 $111,000 $167,000 $217,000

65 $58,000 $115,000 $173,000 $225,000

If the amount of savings provided by a Defined Benefit is still not high enough, can also utilize a 401(k) PS Plan to increase the savings and flexibility to the Owner

Case Study

• Employers have many options in offering retirement programs

• SIMPLE, SEP, and 401(k) Profit Sharing are the most common

• Less common, but growing, are Cash Balance Plans

• Depending on client objectives, any one of these, or even a combination of, these plans can be the solution

• Sample Client– 10 Employees, including 2 Owners– Annual payroll is approaching $1

million. Company is profitable with stable revenue

– Owners, age 64 and 49, are looking to save more for retirement

– Will provide benefits to staff if it makes sense financially

– Staff was surveyed and there is interest in saving among the group

• Objective: Maximize the 64 year old Owner, and possibly the 49 year old Owner, under various plan types and consider the tax efficiency of each solution

Sample For Small Employer

EmployeeAge as of 12/31/2014 Compensation 5% Owner

Tiered Class for New Comparability

Owner 64 $260,000 Y A

Owner 49 $200,000 Y B

Staff of 8 EEs Avg Age 42 Avg Comp $48,000 N C

Employee Simple DefSimple Match

Simple Total SEP 401(k) Pro-Rata Total

Owner $14,500 $7,800 $22,300 $52,000 $23,000 $34,500 $57,500

Owner $12,000 $6,000 $18,000 $40,000 $17,500 $26,538 $44,038

Total ER     $40,300 $92,000     $101,538                

Staff of 8 $11,450 $8,650 $20,100 $99,000 $11,450 $65,600 $77,050

The 401(k) PS allows for 64 yr old to reach maximum (with catch up). SEP gets to limit (without catch up) but is entirely funded by Employer at 20% of payroll. Under 401(k) PS, Owners receive $101,538 in total contributions

Employer Contributions Analyzed

Simple Match SEP Pro-Rata

Owner $7,800 $52,000 $34,500

Owner $6,000 $40,000 $26,538

Owner Total $13,800 $92,000 $61,038

EE Total $8,650 $99,000 $65,681

Total ER Contrib $22,450 $191,000 $126,719

40% Tax Rate  $8,980 $76,400 $50,688 Adjusted Cost of Contribution ($13,470) ($114,600) ($76,031)

Owners Share $13,800 $92,000 $61,038

Net Cost $330 ($22,600) ($14,993)

The SIMPLE is more efficient in terms of tax treatment but the income replacement to the Owner’s is likely insufficient to meet their objectives.

Meeting Client Objective With These Plans

• Objective: Maximize the 64 year old Owner, and possibly the 49 year old Owner, under various plan types and consider the tax efficiency of each solution– SIMPLE: Has tax efficiency but low overall benefit to owners– SEP: Solely the Employer responsibility to fund and not tax

efficient– PRO-RATA PROFIT SHARING: Maximizes the primary Owner

but not a tax efficient result

• Let’s consider advanced design techniques to better satisfy the objective. New Comparability, or cross-tested, plan design may work.

What is a New Comparability Plan?

Profit Sharing plan with:

• Employees divided into groups• The allocation % to each group

can vary (e.g., 3% to the staff, 9% to Owner)

• Groups can even be defined as each employee is their own group for ultimate flexibility

• Often have 401(k) and other features as well (Safe Harbor, Roth, etc.)

These plans are attractive to what type of company?• Professional firms such as

physicians, attorney, CPA firms but works for many other businesses

• Favored group should be older than a significant portion of employees

• Allows larger contributions to favored group without loss of flexibility in funding

• Companies looking for tax deductions

New Comparability Plan (cont.)

Is this plan discriminatory?• Projected benefits at retirement

age are considered, not the $ received today, allowing higher rate to older participants

• The allocations must be tested for non-discrimination on a cross-tested basis

• Generally, the resulting allocation favors selected, older, higher paid employees. Typically, the Owner(s) is/are targeted for highest amount

Can 401(k) deferrals be made?

• Definitely! It works best when 401(k) feature is available. Roth or traditional deferrals available

• Better yet, pair with “Safe Harbor” contributions so HCEs can max 401(k) deferral

• Allocation to NHCE must be at least 1/3 of that provided to HCEs or 5% (if less)

401(k) New Comparability With 3% Safe Harbor

EE Deferrals3% Safe Harbor

New Comparability

Total Employer Total Contributions

Owner $23,000 $7,800 $26,700 $34,500 $57,500

Owner $17,500 $6,000 $20,538 $26,538 $44,038

Owner Totals       $61,038 $101,538            

Staff of 8 Ees $11,450 $14,850 $7,040 $21,890 $33,340

    Total Employer Contribution $82,928  

    Estimated Tax Rate 40%  

    Tax Savings  $33,171  

    Cost of EE Contribution ($21,890)  

    Net Cost of Contribution $11,281  

By using New Comparability design, we are able to keep the Owner’s at the same contribution level ($101,538) but greatly reduce the cost of providing the employee’s benefits ($65,682 to $21,894). The Employer Contribution is very effective from a tax perspective as well.

Meeting Client Objective With This Plan

• Objective: Maximize the 64 year old Owner, and possibly the 49 year old Owner, under various plan types and consider the tax efficiency of each solution

• New Comparability Design meets the criteria of maximizing the Owner, treats the 49 year old equally in terms of % of pay and is tax efficient allocation so it may be the solution.

• However, Owner is 64 and may be looking for more retirement savings. Let’s consider adding a Cash Balance Plan

Cash Balance Plan

• Benefit is based on hypothetical account

• Account is credited with annual contribution and with interest credit as defined by plan (generally in 5% range)

• Plan looks like a Money Purchase Plan

• Accrued benefit is in the form of a Lump Sum Distribution, making it very understandable to participants

• Assets held in Trust and managed by Trustees, not employee directed.

• Almost always paired with a New Comparability 401(k) Plan for maximizing benefits and adding flexibility

• Defined Benefit Plans have required annual contributions and employer bears the investment risk

CB/DC Combo Plans

• Two separate plans (documents, reporting & administration for each)

• No contribution restrictions for employers that (a) are NOT Professional Service entities and (b) have rank & file employees

• Professional Service entities with >25 employees do not have contribution restriction either

• The restrictions on Sole Proprietors or Professional Service firm with <25 employees limit the Profit Sharing to a max of 6% of total eligible compensation

• Sole Proprietor Plans want to use most restrictive eligibility rules and communicate changes early

CB/DC Combo – Cash Balance Plan Paired With 401(k) New Comparability 3% Safe Harbor Plan

The combination of Cash Balance Plan with a 401(k) Profit Sharing Plan is an exceptional method for increasing both the Owner’s and the Staff opportunity for income replacement in retirement and can be done in a tax efficient manner. Note: These plans can also be used in succession planning.

EE401(k)

Deferrals 3% Safe Harbor

7.5% Profit Sharing

Cash Balance

Total Employer Total

Owner $23,000 $ - $ - $243,557 $243,557 $266,557

Owner $17,500 $ - $ - $132,320 $132,320 $149,820

Owner Totals   $ - $ - $375,877 $375,877 $416,377              

Employee $11,450 $14,850 $37,125 $14,850 $66,825 $78,275              

      Total Employer Contribution $442,702  

      Estimated Tax Rate 40%  

      Tax Savings  $177,081  

      Cost of EE Contribution ($66,825)  

      Net Cost of Contribution $110,256  

Agenda - Recap

• Identify reasons why an Employer does not offer a plan or why a plan is not fully utilized

• Provide a broad overview of a variety of tax-qualified retirement plans available for a sponsor to choose from– Defined Contribution Plans– Defined Benefit Plans– Owner-Only Plans

• Case Study of plan available for a small employer– Use plan design to improve the plan results and client satisfaction– Demonstrate how tax treatment can increase retirement savings

Thank You For Your Time Today!

Kelton CollopyVP, TPA Services

Tycor Benefit Administrators, Inc.®

O: (610) 251-0670 x19

Kcollopy@tycorplan.com

Confidence in your plan™