NEW COMPARABILITY401(K) PROFIT SHARING PLANS&CASH BALANCE PENSION PLANS

A cost effective way to maximize retirement savings

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WHAT IS A NEW COMPARABILITY PLAN?

A profit sharing plan in which the employees are divided into groups The contribution varies for each group (i.e., 9%

for owners & 3% for others) Groups must be based on a “reasonable

business classification” such as Owners, Titles, etc.

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WHO IS THE TARGET AUDIENCE FOR SUCH PLANS?

• Works very well for professional firms, physician groups, attorney, etc.

• Target group should be older than a significant portion of their employees

• Allows maximum deferrals for target group while maintaining flexibility in contribution amount

• Those seeking to defer current income to avoid Federal & State taxation

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ARE THERE DISCRIMINATION TESTS?

• The plan is tested for nondiscrimination on a cross-tested basis

• This allows the plan to offer a higher contribution rate to older participants as the contributions are converted & tested at retirement age.

• The discrimination test is passed if the employees in the favored groups are older than the employees in the less favored groups with lower contribution percentages.

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CAN NEW COMPARABILITY BE USED WITH A 401(K) PLAN?

• Absolutely! - It works best for 401(k) plans in which the employees are not deferring enough to allow the highly compensated employees to defer at the level they desire.

• Paired with a “safe-harbor” employer contribution of 3% of pay, it allows the highly compensation employees (“HCE’s”) to maximize their deferrals ($16,500 for 2009 plus catch-up, if applicable)

• Allocation to non-highly compensated employees must be at least 1/3 of that provided to HCE’s or 5% (if less)

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PROFIT SHARING ALLOCATION EXAMPLE

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Employee Age Compensation Contribution % of Pay

Principal A 56 $230,000.00 $46,000.00 20.0%

Principal B 50 230,000.00 46,000.00 20.0%

NHCE 1 46 70,000.00 3,500.00 5.0%

NHCE 2 37 50,000.00 2,500.00 5.0%

NHCE 3 31 40,000.00 2,000.00 5.0%

Totals $630,000.00 $100,000.00

KEY ISSUE – TOP-HEAVY

Plan may be top-heavy (if account balances of “key employees” exceed 60% of total balances) – requires contribution of up to 3% to non-key employees The 3% “safe-harbor” employer contribution

satisfies this requirement

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CASH BALANCE PLANSFor those seeking far larger tax-deductible contributions

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CASH BALANCE PLANS – WHY?

Defined Contribution (“DC”) Plan limit “annual additions” to $49,000 in 2009

Defined Benefit (“DB”) plan would allow tax deductible contributions of over $100,000 per targeted member DB Plans are more complicated & carry minimum

funding requirements

Cash Balance plans look very much like a DC plan with an “account balance” with a credited rate of interest

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CASH BALANCE/DC COMBO EXAMPLE

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CompCash

BalanceProfit

SharingPS % of

Pay401(k)

DeferralTotal CB + PS + 401(k)

Principal A 230,000 150,000 12,400 5.39% 20,500 182,900

Principal B 230,000 112,000 12,400 5.39% 20,500 144,900

NHCE 1 70,000 1,200 4,900 7.00% 6,100

NHCE 2 50,000 1,200 3,500 7.00% 4,700

NHCE 3 40,000 1,200 2,800 7.00% 4,000

Totals 620,000 265,600 36,000 41,000 342,600

CASH BALANCE PLAN – KEY ISSUES

Subject to Minimum Funding Requirements Only sponsors with stable cash flow or willingness

to commit to contributions for at least five (5) years Crediting rate provides opportunity & risk

If plan earnings exceed crediting rate, the gains can be used to offset future contributions

If plan earnings lag crediting rate, the losses will necessitate higher future contributions

While it may “look” like a DC plan with account balances, participants can not direct investments

Ability to defer $150K or more for targeted participants

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WHAT’S NEXT?

Work with your investment professional & a third-party administrator to perform a feasibility study to see if this would work for your group

Review your financial goals & limits Amend your existing plan or start a new plan Communicate enhanced benefits to the

target group

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