Cash balance plans.consumer
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Transcript of Cash balance plans.consumer
Copyright--The WPI 1
Using Cash Balance--Super 401(k)™ Plans
to Increase Retirement Plan Contributions
By: Roccy DeFrancesco, JD, CWPP, CAPP, MMB
Founder: The Wealth Preservation Institute
Co-Founder: The Asset Protection Society
Copyright--The WPI 2
The Retirement Dilemma
• Many business owners are NOT putting away sufficient tax-deferred dollars into a qualified retirement plan so they can:– retire in a timely, and – comfortable financial manner.
• Why?• Some business owners don’t have the money.• But, many do and still do not fund the “maximum”
amount of money they can to build a tax-deferred retirement nest egg.
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Why continued
• There are two main reasons business owners do not allocate more dollars to tax-deferred qualified plans:
• 1) Some believe they are already putting the “maximum” away;
• 2) Many believe that in order to put significantly more money away will be cost prohibitive because of sizable contributions for employees.
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Larger Owner Contributions
Age 401(k) only401(k) with Profit
Sharing Cash BalanceSuper 401(k) ™
Total
65 $20,500 $51,000 $188,000 $239,000
64 $20,500 $51,000 $193,000 $244,000
63 $20,500 $51,000 $197,000 $248,000
62 $20,500 $51,000 $202,000 $253,000
61 $20,500 $51,000 $191,000 $242,000
60 $20,500 $51,000 $181,000 $232,000
55 $20,500 $51,000 $138,000 $189,000
50 $20,500 $51,000 $106,000 $157,000
45 $15,500 $46,000 $81,000 $127,000
40 $15,500 $46,000 $62,000 $108,000
35 $15,500 $46,000 $47,000 $93,000
31 $15,500 $46,000 $38,000 $84,000
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What is a Cash Balance Plan
• A CPB is a DB plan that looks like a PSP.• A DB plan is seen as a rigid plan that an employer
funds so the plan can provide EEs a monthly benefit in retirement (such as $800 a month starting at age 65).
• A CBP funds for a specific lump-sum dollar amount for EEs at retirement (an amount that can be rolled to an IRA so EEs can control the money).
• EEs can see a growing account balance and understand the benefit of a CBP much more so than a traditional DB or 412(i) DB Plan.
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Pension Protection Act (PPA) of 2006:Good News for Cash Balance Plans
• Payroll limit – prior to PPA 2006 DC plans and combined DC/DB plans were limited to 25% of payroll.
– Under the PPA, the 25% limit is lifted for combined plans if profit sharing plan allocations do not exceed 6% of pay.
– For some plans the 6% number can be raised to 25% for certain qualifying companies.
• What does this mean in English?
– That business owners can put away significantly more money after the act than before the act.
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Case Study: Jackson Tool & Die
• Mr. Jackson (Steve) owns a tool and die company with four (4) employees.
• The company has had five years of solid business growth.
• Steve wants to tax-defer more funds to build his retirement benefits.
• Steve wants to reduce his taxes.
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Case Study: Jackson Tool & Die
Starting a Cash Balance Plan requires the following:
• Jackson T&D must cover the employees
• The plan cannot discriminate in favor of Steve
– Cannot discriminate in favor of Highly Compensated Employees (HCEs)
– HCEs are employees who earn over $105,000* or own more than 5% of the company
* Adjusted annually for cost of living. 2009 = $110,000
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Case Study: Sample Cash Balance Plan design
Pay Contribution Credit % of Pay
Steve $225,000 $33,750 15%
Staff 30,000 4,500 15%Staff 30,000 4,500 15%Staff 30,000 4,500 15%Staff 30,000 4,500 15%
$18,000
• This is a common approach: – Steve gets a contribution credit of $33,750 → 15% of his $225,000
compensation; 2008 = $230,000; 2009 = $245,000– All staff also get 15% of pay
Copyright--The WPI 10
Case Study: Is the plan financiallyviable for Steve?
• Should Jackson T&D contribute to this plan?
– Benefit for Steve = $33,750 contribution
– Cost for Steve = $18,000 staff contribution
NO WAY! The cost of the plan simply does not justify implementation.
• How can Steve make the plan more viable?– Increase the size of Steve’s contribution– Lower EE Costs
• This can be done with a better plan design.
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Case Study: What if the contribution for Steve is increased?
Staff 25 30,000 4,500 15%Staff 50 30,000 4,500 15%Staff 23 30,000 4,500 15%Staff 30 30,000 4,500 15%
Cash Balance
Age Pay Contribution % of Pay
Steve 63 $225,000 $165,000 73%
How does this satisfy the non-discrimination rules? Note: EE Contributions are Age Neutral !!!
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Case Study: Ratio Percentage Test
70% or more of staff have a projected benefit percentage equal to or greater than
the HCE’s projected benefit percentage
• In order to allow more to be contributed for Steve, the plan must pass the Ratio Percentage Test:
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Case Study: Ratio Percentage Test
Projected Benefit Percentage
Age Pay Contrib.
Steve 63 $225,000 $165,000
Staff125 30,000 4,500 31,700 2,700 9.0%250 30,000 4,500 9,400 800 2.7%323 30,000 4,500 34,900 3,000 10.0%430 30,000 4,500 24,800 2,100 7.0%
Conclusion: Steve can increase his contribution to the Cash Balance plan
Projected
Acct. Bal.
Age 65
$181,900
Projected
Benefit
Age 65
$15,400
Projected
Benefit
%
6.8%
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Super 401(k)™
• The PPA 2006 elimination of the 25% of payroll contribution limit for combined plans has spawned the creation of the Super 401(k) ™ Plan.
• A Super 401(k)™ Plan is a plan that can use a combination of all plans (401(k) plans, profit sharing plans, and a DB or CB plan) to create maximum contributions for the owners of a company with cost effective and manageable age neutral contributions for the rank-in-file employees.
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Example # 2
• What you will notice about the following example is that a Super 401(k)™ allows the business owners to put away significantly more money by adding a Cash Balance Plan with very low add-on costs for the EEs.
• Also notice for example purposes that the CBP contribution is level for owners of different ages.
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Date Annual Profit Cash D/B
Name
Age
of Hire
415
Comp 401k Sharing Match Total Balance Traditional
3 Shareholders
JLP 55 1/01.93 230,00020,500 13,800 9,200 43,500 100,000 139,397
RK 41 6/5/00 230,00015,500 13,800 9,200 38,500 100,000 71,103MK 41 6/5/00 115,00015,500 6,900 4,600 27,000 50,000 39,500
Subtotals 575,00051,500 34,500 23,000109,000 250,000 250,000
GA 21 8/22/05 25,000 0 1,875 0 1,875 1,250 2,498RO 40 2/14/05 27,000 0 2,025 0 2,025 1,250 6,435
GR 33 12/6/04 28,000 0 2,100 0 2,100 1,250 6,125KL 27 1/12/07 33,000 0 2,475 0 2,475 1,250 4,240
ME 34 8/1/01 34,500 0 2,588 0 2,588 1,250 7,929
TI 29 4/14/05 34,500 0 2,588 0 2,588 1,250 5,001WI 39 7/2/01 54,000 0 4,050 0 4,050 1,250 10,620
KL (Key) 50 1/1/01 125,00020,500 9,375 5,000 34,875 0 0
Subtotals 361,00020,500 27,076 5,000 52,576 8,750 42,848
Grand Totals 936,00072,000 61,576 28,000161,576 258,750 292,848Percent to Shareholders 65.6%71.5% 56.0% 82.1% 67.5% 96.6% 85.4%
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Questions to ask yourself
• 1) Have you ever heard of a Cash Balance Plan or a Super 401(k)™ Plan?
• 2) Do want to maximize the amount of money you contribute through your business and minimize the amount you contribute for your employees?
• 3) Has your current pension plan provider contacted you to discuss the new PPA and how it may have a positive effect on your company’s qualified plan design?
• --If not, your administrator and financial planner who helped you setup your plan are doing you a disservice (which could be costing you thousands of dollars).
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Summary
• There is no doubt that after the PPA there are new opportunities for business owners to income-tax defer significantly more each year for retirement through a Super 401(k)™.
• A CBP can now be added to many plans at very little cost.
• Isn’t it time you found out if your business’s current plan is accomplishing your goals?
• If you are ready, contact your locally trusted advisor.