DEFINED CONTRIBUTION PLANS Presented by: Mary Read, CPC, QPA National Director of Qualified Plan...
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Transcript of DEFINED CONTRIBUTION PLANS Presented by: Mary Read, CPC, QPA National Director of Qualified Plan...
DEFINED CONTRIBUTION PLANS
Presented by:
Mary Read, CPC, QPA
National Director of Qualified Plan Marketing
For Financial Professional Use Only. Not For Use With the Public.
DISCLOSURE
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This material is intended as a general discussion of
qualified plan concepts and strategies. It is not
intended as specific advice concerning any
individual legal, tax or accounting matter. Alliance
Benefit Group-Pentegra does not provide legal, tax
or accounting advice. Any questions regarding your
individual situation should be directed to your
personal advisor on such matters.
For Financial Professional Use Only- Not For Use With Public
TYPES OF RETIREMENT PLANS
Defined Contribution– Contribution is limited– Retirement benefit is unknown– Benefit depends on the amount of
contributions made and any growth of plan investments
• Profit Sharing• Money Purchase• 401(k)• Target Benefit
3For Financial Professional Use Only- Not For Use With Public
Contribution Limit25% of Participating Payroll
Allocation Limit100% of pay, maximum $50,000
WHO WILL BENEFIT?
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ELIGIBILITY
■ Typically age 21 with 1 year of service.
■ Can be as long as 2 years (1 year for 401(k))
■ Being Eligible does not affect status for a Traditional deductible IRA
5For Financial Professional Use Only- Not For Use With Public
PARTICIPATION
■ Actually being included in contributions
■ May exclude eligible employees
■ Must pass coverage test
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PARTICIPATION
70% Test % of Non-highly Compensated Employees (NHCE) participating must be at least 70% of Highly Compensated Employees (HCE) participating
Participating
2 HCE 17 NHCE 4
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ExampleEmployees:
2 HCE10 NHCE
For Financial Professional Use Only- Not For Use With Public
CASE STUDY - INDUSTRIAL DESIGN, INC.
Age Compensation
Owner A 61 $250,000
Owner B 48 $250,000
Employee 1 32 $60,000
Employee 2 62 $30,000
$590,000
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This example is purely hypothetical and for illustrative purposes only. The example shown does not represent any particular plan and your results will differ.
For Financial Professional Use Only- Not For Use With Public
SIMPLIFIED EMPLOYEE PENSION (SEP)
Age Salary Allocation % Pay
Owner A 61 $250,000
$50,000 20%
Owner B 48 250,000 50,000 20%
Emp 1 32 60,000 12,000 20%
Emp 2 62 30,000 6,000 20%
Total: $118,000
Keys: $100,000
Key %: 84.7%
EEs Contribution: $18,000
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This example is purely hypothetical and for illustrative purposes only. The example shown does not represent any particular plan and your results will differ.
For Financial Professional Use Only- Not For Use With Public
SIMPLE-IRA
Age Salary Deferral
Total w/ 3% Match
Owner A 61 $250,000
$14,000
$21,350
Owner B 48 250,000 11,500 18,850
Emp 1 32 60,000 1,800 3,600
Emp 2 62 30,000 900 1,800
Total: $28,200
$45,600
Keys: $25,500
$40,200
Key % 88%
EEs Contribution 2,70010
Savings Incentive Match Plan for Employees
This example is purely hypothetical and for illustrative purposes only. The example shown does not represent any particular plan and your results will differ.
For Financial Professional Use Only- Not For Use With Public
PROFIT SHARING - PAY BASED FORMULAS
Proportionate to Pay ■ Everyone gets the same percentage of pay (like SEP)
Permitted Disparity ■ Also known as Integration With Social Security■ Can help a plan favor higher paid employees ■ Formula takes into account payments the employer
already makes to Social Security ■ Sample formula
• 5.7% of compensation above SS Wage Base,
balance allocated in proportion to pay
11For Financial Professional Use Only- Not For Use With Public
Integrated Profit Sharing Plan
Age Salary Trad PS Integrated PS
Owner A 61 $250,000 $50,000 $50,000
Owner B 48 250,000 50,000 50,000
EE 1 32 60,000 12,000 10,086
EE 2 62 30,000 6,000 5,043
Total $590,000 $118,000 $115,129
Key Total $100,000 $100,000
Key % 85% 87%
Contribution
This example is purely hypothetical and for illustrative purposes only. The example shown does not represent any particular plan and your results will differ.
For Financial Professional Use Only- Not For Use With Public
Pay and Age Based Formulas
Age Based
Allocations favor older employees Favor groups where the employer is older
than employees Allocations based on projected benefits at a
future retirement age The fewer years until retirement, the more
the allocation must be each year to accumulate the projected benefit
For Financial Professional Use Only- Not For Use With Public
Age Weighted Profit Sharing Plan
Age Salary Trad PS Age Weighted PS
Owner A 61 $250,000 $50,000 $50,000
Owner B 48 250,000 50,000 17,313
EE 1 32 60,000 12,000 1,800
EE 2 62 30,000 6,000 6,510
Total $590,000 $118,000 $75,623
Key Total $100,000
$67,313
Key % 85% 89%
Contribution
This example is purely hypothetical and for illustrative purposes only. The example shown does not represent any particular plan and your results will differ.
For Financial Professional Use Only- Not For Use With Public
Takes the concept of Age Based further
Allows for employees to be segregated into groups with different contribution rates
Allows the plan to test on projected benefits that are comparable instead of equal
Well suited to businesses where not all employees are younger than the owner or multiple owners are different ages
New Comparability Profit Sharing
For Financial Professional Use Only- Not For Use With Public
New Comparability Profit Sharing
Age Salary Trad PS New Comparability Profit Sharing
Owner A 61 $250,000 $50,000 $50,000
Owner B 48 250,000 50,000 50,000
EE 1 32 60,000 12,000 3,000
EE 2 62 30,000 6,000 1,500
Total $590,000 $118,000 $104,500
Key Total
$100,000 $100,000
Key % 85% 96%
Contribution
This example is purely hypothetical and for illustrative purposes only. The example shown does not represent any particular plan and your results will differ.Contributions: Owners – 20% of salary; Employees 5% of salary
For Financial Professional Use Only- Not For Use With Public
Case Study Industrial Design, Inc.
$50,000
$50,000
$12,000
$6,000PS
$50,000
$17,313
$1,800
$6,510AB
SSI$50,000
$50,000
$10,086
$5,043
NC$50,000
$50,000
$3,000
$1,500
These examples are purely hypothetical and for illustrative purposes only. The examples shown here do not represent the actual results of any particular plan and your results likely will differ.
For Financial Professional Use Only- Not For Use With Public
WHICH CLIENTS?
Business Owners■ Profitable■ Have cash flow■ Approaching retirement■ Could benefit from protection of assets■ Could benefit from tax deduction■ May already have a plan, but maybe not the
best plan
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Government Census Statisticshttp://www2.census.gov/csd/susb/2006/usst06.xlshttp://www.census.gov/epcd/nonemployer/2006/us/US000.HTMhttp://www2.census.gov/csd/susb/2006/usst06.xlshttp://www.census.gov/epcd/nonemployer/2006/us/US000.HTMU.S. Department of Labor, U.S. Bureau of Labor Statistics, August 2007National Compensation Survey: Employee Benefits in Private Industry in the United States, March 2009Update 2009 http://www.bls.gov/ncs/ebs/benefits/2009/benefits_retirement.htm
How About New Clients?30 million businesses
comprised of 9.5 million incorporated businesses with less than 10 employees and 20.7 million unincorporated
businesses
For Financial Professional Use Only- Not For Use With Public
IN A PERFECT WORLD…
Ask the employer:
■ How much do you want to contribute?
■ Which employees do you want to include?
■ Which employees do you want to favor?
…within the law we can help design a plan that
comes close to the client’s idea of “perfect”
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ALLIANCE BENEFIT GROUP-PENTEGRA
Outstanding Personal Service Industry Experts No Commission Splits No Hidden Fees
Lori J. CarpenterAdvisor Relationship Manager(800) 255-8678Direct: [email protected]
Mary Read CPC, QPANational Director of Qualified Plans [email protected]
For Financial Professional Use Only – Not For Use With Public
Training, custom plan proposals, prospecting and marketing materials are free. We are only a phone call away!
CIRCULAR 230 DISCLOSURES
The above information is not intended or written to be used, and it cannot
be used, by any person for the purposes of avoiding any penalty that may
be imposed by the Internal Revenue Service.
In the event the advice is also considered to be a “marketed opinion” within
the meaning of the IRS guidance, then as required by the IRS, please be
further advised of the following:
The above advice was written to support the promotion or marketing of the
transactions or matters addressed by the written advice and, based on the
particular circumstances, you should seek advice from an independent tax
advisor.
21For Financial Professional Use Only- Not For Use With Public