Designing the Right Retirement Plan Chapter 1 Employee Benefit & Retirement Planning Copyright 2009,...
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Transcript of Designing the Right Retirement Plan Chapter 1 Employee Benefit & Retirement Planning Copyright 2009,...
Copyright 2009, The National Underwriter Company
1
Designing the Right Retirement Plan
Chapter 1Employee Benefit & Retirement Planning
• Gather relevant facts• Identify employer goals and objectives• Select plan features that meet objectives
Initial steps:
Copyright 2009, The National Underwriter Company
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Designing the Right Retirement Plan
Chapter 1Employee Benefit & Retirement Planning
• Help employees with retirement savings• Tax deferral for owners and highly compensated
employees• Help recruit, reward, retain, and retire employees• Encourage productivity• Discourage collective bargaining
Advantages for the employer:
Copyright 2009, The National Underwriter Company
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Designing the Right Retirement Plan
Chapter 1Employee Benefit & Retirement Planning
• Employers may use qualified or nonqualified plans to meet their planning objectives
• Qualified plans – enjoy tax advantages but must meet strict IRS rules to ‘qualify’ for those advantages
• Nonqualified plans – allow employers more flexibility in plan design, but offer far fewer tax advantages than qualified plans
Copyright 2009, The National Underwriter Company
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Designing the Right Retirement Plan
Chapter 1Employee Benefit & Retirement Planning
• do not have to be duplicated among rank and file employees
• can exceed the dollar limits imposed under qualified plans
• can be custom tailored to meet needs of select executives or key employees
A nonqualified plan allows an employer to provide benefits for key employees that …
Copyright 2009, The National Underwriter Company
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Designing the Right Retirement Plan
Chapter 1Employee Benefit & Retirement Planning
With a nonqualified plan, an employer can:
• Recruit a key employee when matching or exceeding benefits of their current employer would make offered benefits exceed benefit levels given other employees
• Reward the individual or group that makes a substantial contribution to the success of the business
• Enable a business owner to use company earnings in ways that reduce or defer taxes and accumulate wealth
Copyright 2009, The National Underwriter Company
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Designing the Right Retirement Plan
Chapter 1Employee Benefit & Retirement Planning
Tax Advantages of Qualified Plans
• Plan contributions (employer contributions and employee salary reduction contributions)
- tax deductible for employer
- tax deferred for employee• Earnings on plan investments accumulate tax deferred• Some lump sum distributions may qualify for 10 year
averaging
Copyright 2009, The National Underwriter Company
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Designing the Right Retirement Plan
Chapter 1Employee Benefit & Retirement Planning
Types of Qualified Plans
Defined Contribution
- contribution to plan by employer or employee is specified,
but value of plan at retirement is not
- employee bears investment risk
Defined Benefit
- benefit to be paid to employee at retirement is specified
- employer responsible for meeting investment goals
Copyright 2009, The National Underwriter Company
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Designing the Right Retirement Plan
Chapter 1Employee Benefit & Retirement Planning
Defined Contribution PlansTwo Broad Types
• Money Purchase Pension Plan– Employer must contribute stated percentage of employee
compensation to account each year (up to 25%)
• Profit Sharing Plan– Employer determines amount of contribution, often based on
company profit– Contributions must be made on nondiscriminatory basis,
often based on compensation– Allocation can be weighted to favor older workers
Copyright 2009, The National Underwriter Company
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Designing the Right Retirement Plan
Chapter 1Employee Benefit & Retirement Planning
Defined Benefit Plans
• Plans funded on actuarial basis
• Funding amount greater for older employees– Makes defined benefit plans attractive to
professionals or closely held business owners
Copyright 2009, The National Underwriter Company
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Designing the Right Retirement Plan
Chapter 1Employee Benefit & Retirement Planning
In recent years, due to factors such as rising cost of providing benefits and more frequent job change among employees, the number of Defined Benefit plans has declined while the number of Defined Contribution plans has grown
Copyright 2009, The National Underwriter Company
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Designing the Right Retirement Plan
Chapter 1Employee Benefit & Retirement Planning
Not all employees value retirement benefits:• Younger employees• Transient employees• Low-paid employees
Plan design must• Maximize benefits for those who want them• Be perceived as providing valued benefits
Copyright 2009, The National Underwriter Company
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Designing the Right Retirement Plan
Chapter 1Employee Benefit & Retirement Planning
Which plan should an employer select?
Copyright 2009, The National Underwriter Company
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Designing the Right Retirement Plan
Chapter 1Employee Benefit & Retirement Planning
Which plan should an employer select?
A plan that matches, as best as possible, employer goals and qualified plan characteristics
Consider how employers might achieve the following objectives
Copyright 2009, The National Underwriter Company
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Designing the Right Retirement Plan
Chapter 1Employee Benefit & Retirement Planning
1. Employer wants to maximize the portion of plan costs that benefit highly-compensated employees.
Copyright 2009, The National Underwriter Company
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Designing the Right Retirement Plan
Chapter 1Employee Benefit & Retirement Planning
1. Maximize the portion of plan costs that benefit highly-compensated employees.
- Defined benefit plans - Service based contribution or benefit formulas- Age weighting and cross-testing- Combine defined benefit and defined contribution
plans- 401(k) plans- Social Security integration
Copyright 2009, The National Underwriter Company
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Designing the Right Retirement Plan
Chapter 1Employee Benefit & Retirement Planning
2. Provide a savings medium that employees perceive as valuable
Copyright 2009, The National Underwriter Company
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Designing the Right Retirement Plan
Chapter 1Employee Benefit & Retirement Planning
2. Provide a savings medium that employees perceive as valuable
- Defined contribution plans
- Cash balance plans
- Plans with employee participation
Copyright 2009, The National Underwriter Company
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Designing the Right Retirement Plan
Chapter 1Employee Benefit & Retirement Planning
3. Provide adequate replacement income for each employee’s retirement
- Defined benefit plan
Copyright 2009, The National Underwriter Company
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Designing the Right Retirement Plan
Chapter 1Employee Benefit & Retirement Planning
4. Create an incentive for employees to maximize performance
- Profit sharing plan
- ESOP/stock bonus plan
- Any other defined contribution or cash balance plan
Copyright 2009, The National Underwriter Company
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Designing the Right Retirement Plan
Chapter 1Employee Benefit & Retirement Planning
5. Minimize turnover
- Defined benefit plan
- Graduated vesting
Copyright 2009, The National Underwriter Company
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Designing the Right Retirement Plan
Chapter 1Employee Benefit & Retirement Planning
6. Encourage retirement
- Defined benefit plan
Copyright 2009, The National Underwriter Company
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Designing the Right Retirement Plan
Chapter 1Employee Benefit & Retirement Planning
7. Maximize employer contribution flexibility
- Qualified profit sharing plans
- SEPs
Copyright 2009, The National Underwriter Company
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Designing the Right Retirement Plan
Chapter 1Employee Benefit & Retirement Planning
Application Exercise
Software Solutions, Inc. is a 5 year old company that develops computer programs for clients. Jeff, the owner, is 35; average age of the 20 employees is 31. Jeff wants a plan that will encourage his employees to be more productive, but will also help reduce turnover. He’s also concerned about the cash flow of his young company. Which plan (s) should Jeff consider?
Copyright 2009, The National Underwriter Company
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Designing the Right Retirement Plan
Chapter 1Employee Benefit & Retirement Planning
Application Exercise
• profit share or ESOP -would encourage employees to produce more since these plans are typically based on company profit -would give Jeff discretion in contributions
•gradual vesting -Could help reduce employee turnover -Funds forfeited by non-vested, departing employees could be used to benefit remaining employees