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?


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


PARTICIPATION

■ Actually being included in contributions

■ May exclude eligible employees

■ Must pass coverage test


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


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.


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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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



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


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



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


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



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


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


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.


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


http://www2.census.gov/csd/susb/2006/usst06.xls

http://www.census.gov/epcd/nonemployer/2006/us/US000.HTM

http://www2.census.gov/csd/susb/2006/usst06.xls

http://www.census.gov/epcd/nonemployer/2006/us/US000.HTM

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.


DEFINED CONTRIBUTION PLANS Presented by: Mary Read, CPC, QPA National Director of Qualified Plan...

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