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Transcript of © 2010, Kravitz Inc. All rights reserved. Ken Guidroz, MBA © 2010, Kravitz Inc. All rights...
© 2010, Kravitz Inc. All rights reserved.
Ken Guidroz, MBA
© 2010, Kravitz Inc. All rights reserved.
Greater Tax Deferral using Cash Balance Plans
© 2010, Kravitz Inc. All rights reserved.
Why Cash Balance and Why Now?
1) The new tax targets >$250,000
2) Catch-up Make up for 401(k) losses
3) Unique marketing opportunity
© 2010, Kravitz Inc. All rights reserved.
In the News
© 2010, Kravitz Inc. All rights reserved.
In the News
© 2010, Kravitz Inc. All rights reserved.
In the News
© 2010, Kravitz Inc. All rights reserved.
In the News
© 2010, Kravitz Inc. All rights reserved.
Cash Balance 101
© 2010, Kravitz Inc. All rights reserved.
101 Outline
1. What exactly is a Cash Balance Plan?
2. Case Studies
3. Six basic features you need to know
© 2010, Kravitz Inc. All rights reserved.
401(k)Profit Sharing
DefinedDefinedContributionContribution
Qualified Plans
DefinedDefinedBenefitBenefit
TraditionalHybrid
CashBalance
© 2010, Kravitz Inc. All rights reserved.
How Does Cash Balance Differ from a DB Plan?
• Complex formula
Defined Benefit Plans Cash Balance Plans
• Account balance,
$100,000
• Unfamiliar/archaic • Familiar: 401(k)
• Age-sensitive • Less age-sensitive
© 2010, Kravitz Inc. All rights reserved.
Legality of the Plan
Pension Protection Act 2006
Safe harbors
Clarification
1985
© 2010, Kravitz Inc. All rights reserved.
2010 Contribution Limits
Cash Balance lifetime limit $2,500,000
401(k) with
Age 401(k) only Profit Sharing Cash Balance TOTAL
60 - 65 $22,000 $54,500 $193,000 $247,500
55 - 59 $22,000 $54,500 $148,000 $202,500
50 - 54 $22,000 $54,500 $113,000 $167,500
45 - 49 $16,500 $49,000 $87,000 $136,000
40 - 44 $16,500 $49,000 $67,000 $116,000
35 - 39 $16,500 $49,000 $51,000 $100,000
30 - 34 $16,500 $49,000 $39,000 $88,000
401(k) Profit Sharing & Cash Balance Plans
© 2010, Kravitz Inc. All rights reserved.
How Do Cash Balance Plans Work?
401(k) Cash BalanceInterest Crediting
Rate (~5%)
ContributionContribution Earnings
© 2010, Kravitz Inc. All rights reserved.
Plan Investments
Earnings …next year’s contribution
Earnings …next year’s contribution
7-year make-up
© 2010, Kravitz Inc. All rights reserved.
Investment Dynamics
TARGET RETURN
Too low:
• Greater expense / larger contribution required
• Underfunding limitations
Too high:
• Lower contribution• Smaller tax deduction• Potential excise tax
© 2010, Kravitz Inc. All rights reserved.
CASE STUDIES
© 2010, Kravitz Inc. All rights reserved.
CASE STUDY: Small Business
Owners Age Compensation
Owner 1 62 $ 245,000
Owner 2 41 245,000
Employees
Jones 49 $ 89,000Keeler 63 88,000Marion 31 53,000Baldwin 29 50,000Dupre 41 48,000Ophir 25 39,000Smith 33 40,000Sabotin 48 35,000Parotta 22 15,000Keebler 30 14,000
Plan options?
© 2010, Kravitz Inc. All rights reserved.
All IRS-governed Plans: 2 basic rules
Employees
© 2010, Kravitz Inc. All rights reserved.
The Give to Get
Owners Age Compensation
Employees
Above the line
Below the line
© 2010, Kravitz Inc. All rights reserved.
CASE STUDY: Basic Plan
Profit TOTAL
Owners 401(k) Sharing CONTRIBUTION
5% of pay
Owner 1 $ 22,000 $ 12,250 $ 34,250
Owner 2 16,500 12,250 28,750
$ 63,000Employees 5% of pay
Jones 4,450Keeler 4,400Marion 2,650Baldwin 2,500Dupre 2,400Ophir 1,950Smith 2,000Sabotin 1,750Parotta 750Keebler 700
Subtotal $ 23,550 $ 23,550
Total $ 86,550
Percent to Owners 73%
Comparability
© 2010, Kravitz Inc. All rights reserved.
CASE STUDY: New Comparability
Profit TOTAL
Owners 401(k) Sharing CONTRIBUTION
13% of pay
Owner 1 $ 22,000 $ 32,500 $ 54,500
Owner 2 16,500 32,500 49,000
$ 103,500Employees 5% of pay
Jones 4,450Keeler 4,400Marion 2,650Baldwin 2,500Dupre 2,400Ophir 1,950Smith 2,000Sabotin 1,750Parotta 750Keebler 700
Subtotal $ 23,550 $ 23,550
Total $ 127,050
Percent to Owners 81%
© 2010, Kravitz Inc. All rights reserved.
CASE STUDY: Cash Balance Options
Profit
Owners Age 401(k) Sharing
Owner 1 62 $ 22,000 $ 32,500 $0… $ 225,000
Owner 2 41 16,500 32,500 $0… 60,000
Employees 7.5% of pay
Jones 49 $ 6,675 $ 650Keeler 63 6,600 650Marion 31 3,975 650Baldwin 29 3,750 650Dupre 41 3,600 650Ophir 25 2,925 650Smith 33 3,000 650Sabotin 48 2,625 650Parotta 22 1,125 650Keebler 30 1,050 650
Cash
Balance
© 2010, Kravitz Inc. All rights reserved.
CASE STUDY: Cash Balance Actual
Profit TOTAL
Owners 401(k) Sharing CONTRIBUTION
Owner 1 $ 22,000 $ 32,500 $ 225,000 $ 279,500
Owner 2 16,500 32,500 25,000 74,000
Employees 7.5% of pay
Jones 6,675 $ 650 7,325Keeler 6,600 650 7,250Marion 3,975 650 4,625Baldwin 3,750 650 4,400Dupre 3,600 650 4,250Ophir 2,925 650 3,575Smith 3,000 650 3,650Sabotin 2,625 650 3,275Parotta 1,125 650 1,775Keebler 1,050 650 1,700
Subtotal $ 35,325 $ 6,500 $ 41,825
Total $ 395,325
Percent to Owners 89%
Cash
Balance
© 2010, Kravitz Inc. All rights reserved.
Basic Plan
New Comparability
Cash Balance Plan
The Share of the Pie
Percent to Owners 73%
Percent to Owners 81%
Percent to Owners 89%Percent to Owners 89%
© 2010, Kravitz Inc. All rights reserved.
89% to 89% to Owners Owners
($353,500)($353,500)+$116,305+$116,305
No PlanNo Plan PlanPlan
60% to Owners
($237,195)
40%
tax bracket
$395,325
40% tax($158,130)
11% to employees11% to employeesversus Uncle Samversus Uncle Sam
Is the Cash Balance Plan tax-efficient?
© 2010, Kravitz Inc. All rights reserved.
CASE STUDY: Midsize Firm/Practice
Group I: Partners Age Compensation
Partner 1 62 $ 245,000
Partner 2 54 245,000
Partner 24 43 245,000
Partner 25 37 245,000
Group II: Associates
5 Associates various $ 175,000
Group III: Employees
30 Employees various $ 1,500,000
© 2010, Kravitz Inc. All rights reserved.
CASE STUDY: Current Plan
Profit
Partners 401(k) Sharing
Partner 1 $ 22,000 $ 32,500
Partner 2 22,000 32,500
Partner 24 16,500 32,500
Partner 25 16,500 32,500
Associates 5% of pay
5 Associates
Employees 5% of pay
30 Employees ? $ 75,025
© 2010, Kravitz Inc. All rights reserved.
Profit
Partners 401(k) Sharing
Partner 1 $ 22,000 $ 32,500 $0 to… $ 65,000
Partner 2 22,000 32,500 $0 to… 65,000
Partner 24 16,500 32,500 $0 to… 65,000
Partner 25 16,500 32,500 $0 to… 40,000
Associates 5% of pay
5 Associates $ 0
Employees 5% of pay
30 Employees ? $ 75,025 $ 0
Percent to Partners
Cash
Balance
85%
CASE STUDY: Add Cash Balance
© 2010, Kravitz Inc. All rights reserved.
CASE STUDY: Partner-Only Plan
Partners
Partner 1 $0 to… $ 65,000
Partner 2 $0 to… 65,000
Partner 24 $0 to… 65,000
Partner 25 $0 to… 40,000
Associates
5 Associates $ 0
Employees
30 Employees $ 0
Cash
Balance
© 2010, Kravitz Inc. All rights reserved.
Other Cases
© 2010, Kravitz Inc. All rights reserved.
Other Cases
Annual
Name Age Salary
2 Owners
Hardt 45 $ 245,000
Hardt 45 183,000
Subtotals $ 428,000
5 Eligible employees (>1 year)
Gren 46 45,500
Strom 56 31,605
Rivera 39 15,914
Anderson 46 12,000
Doll 61 11,000
Similar ages: owners and employees
© 2010, Kravitz Inc. All rights reserved.
Other Cases
Family business
A couple, mid 50s
College-age children (2)
120 employees: office and warehouse
© 2010, Kravitz Inc. All rights reserved.
Other Cases
Younger Owners
4 owners, early 40s
6 associate consultants
10 employees
© 2010, Kravitz Inc. All rights reserved.
Other Cases
Large Medical Group
700 Doctors
© 2010, Kravitz Inc. All rights reserved.
Who is Ideal?
1. Income, income, income ($250,000 plus)
a. Plumbers to pathologists
2. “Ologists”: 11,000 with a Profit Sharing contributiona. Anesthesiology, radiology
3. Law firms
4. Venture capital/financial services
5. Businesses with New Comparability plan in place
6. 1-500 partners
© 2010, Kravitz Inc. All rights reserved.
Why Cash Balance Plans Appeal to Partnerships
1. There is direct tracking of contribution(what goes in, plus interest, comes out)
2. Portable: if partner retires or leaves firm, rolled to IRA or the new plan
3. There can be contribution flexibility among partners
4. Liability among partners can be minimized
5. There are options if cash flows decrease
© 2010, Kravitz Inc. All rights reserved.
Six Basic Features You Need to Know
© 2010, Kravitz Inc. All rights reserved.
$
Cash BalancePlan
IRA
Other QualifiedPlan
rollover
Assets are portable
Feature #1
© 2010, Kravitz Inc. All rights reserved.
Feature #2
Owners/partners can have different amounts
contributed for them
Cash Balance Contribution
Partner 1, age 50: $100,000
Partner 2, age 50: $0
Contribution flexibility among partners
© 2010, Kravitz Inc. All rights reserved.
Feature #3
Contribution amounts can change, but use caution.
What are business owners most
concerned about these days?
© 2010, Kravitz Inc. All rights reserved.
Feature #3
What if the cash flows decrease?
1. Reduce 401(k) and/or Profit Sharing
2. Amend plan to change contribution amounts (3 years)
3. Freeze plan
1/1 12/31
Plan amendment deadline(1,000 hours/~June 15)
© 2010, Kravitz Inc. All rights reserved.
Feature #4
Funding of the Plan
1/1/10 12/31/10
Funding deadline
3/15/11
Plan year
9/15/11
Funding extension
Filing of the company tax return
© 2010, Kravitz Inc. All rights reserved.
1/1/10 12/31/10 3/15/11
4/15/11
Plan year
Professional firms
Family businesses
Feature #4
Funding Trends
© 2010, Kravitz Inc. All rights reserved.
40% of eligible participants Example: 8/20 = 40%
OR
50 total
Feature #5
Participation requirement(how many people need to be in the CB Plan?)
© 2010, Kravitz Inc. All rights reserved.
Feature #6
Non-discrimination testing primarily satisfied in the Profit Sharing Plan
(gateway contributions 5%-7.5%)
Profit TOTAL
Owners 401(k) Sharing CONTRIBUTION
Owner 1 $ 22,000 $ 32,500 $ 225,000 $ 279,500
Owner 2 16,500 32,500 25,000 74,000
Employees 7.5% of pay
Jones 6,675 $ 650 7,325Keeler 6,600 650 7,250Marion 3,975 650 4,625Baldwin 3,750 650 4,400Dupre 3,600 650 4,250Ophir 2,925 650 3,575Smith 3,000 650 3,650Sabotin 2,625 650 3,275Parotta 1,125 650 1,775Keebler 1,050 650 1,700
Subtotal $ 35,325 $ 6,500 $ 41,825
Total $ 395,325
Percent to Owners 89%
Cash
Balance
© 2010, Kravitz Inc. All rights reserved.
Contact Information
Ken Guidroz, MBA(818) [email protected]
Steven S. Sansone, J.D., AIF©
(818) [email protected]
© 2010, Kravitz Inc. All rights reserved.
www.CashBalanceDesign.com