Tax Favored Benefits CE Presentation

Insight into the Successful RetirementPresented by Tim Gaigals, CFP®

Securities products and advisory services offered through registered

representatives and investment advisory associates of:

Ameritas Investment Corp., Inc. (AIC)Member FINRA/SIPC

P.O. Box 5507Lincoln, NE 68505

800-335-9858

AIC is not affiliated with Tax Favored Benefits, Inc.

Insight into the Successful Retirement

Retirement Planning is still one of the most important things you can do to ensure financial stability during the later years of life. This presentation will discuss two topics to successful retirement planning the topics will include:

*The Current economic and investment environment, where have we been? Where are we now and where might we be going?*Employer sponsored retirement plans and how they can fit your practice.

Presented by Tim Gaigals of Tax Favored Benefits. You may contact Tim at (800) 683-3440 or [email protected] Below is Tim’s biography.

TIMOTHY J. GAIGALS, CFP®Graduate of the University of Kansas with a B.S. in Business Administration.CERTIFIED FINANCIAL PLANNER™ The CFP® marks help identify a practitioner who has met rigorous standards of competency and ethics, thus differentiating a practitioner in the profession. Securities Series 7, 63, 65 Licensed.More than 8 years experience trading commodity futures and options.Formerly a Director of Trading at a nationally known energy company.Works with dental practices as well as other businesses on their qualified retirement plans.Member of the National Association of Insurance and Financial Advisors. [email protected]

mailto:[email protected]

Firm Profile

With over twenty-five years of experience, Tax Favored Benefits, Inc. is a closely-held financial services firm specializing in retirement plans, and financial planning for corporations and non-profit organizations. Boasting more than 700 employer clients in over 20 states, we are

committed to long-term advisory relationships with our clients.

Tax Favored Benefits, Inc. is organized to provide special services and strategies in today’s financial environment. Under one roof we provide comprehensive financial and employee benefits services such as qualified 401(k) and 403(b) plan design, complete plan administration of your plan, plan investing, plan participant education, ongoing communication, group health insurance and group benefits.

TFB has a staff, many with over 20 years experience in the financial services industry, and with such varied designations and degrees as Juris Doctor, Master of Business Administration, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Retirement Plan Specialist, Chartered Financial Analyst, Certified Financial Planner and Life Underwriter Training Counsel Fellow. We work with your other professional advisors to evaluate the complex issues surrounding our clients and work to design a solution, which most efficiently solves the financial planning problem.

We give our clients the best of both worlds: regional, personalized service coupled with exceptional products and people.

Some of Our Staff

Where Have we Been?

The 2008 financial crisis led to a deep decline in economic activity and a crash in global financial assets.

Sub-prime mortgage problems engulfed the worldwide financial system.

Fears of a world-wide recession/depression overshadowed everything.

Full economic recovery depends on the resumption of liquidity in the credit markets

Low equity valuations and wide fixed income spreads presented historical opportunities for long-term investors. Yet near term volatility was expected to remain high.

Where Have we Been?

Financial activity declined in 2008….

The fiscal year 2009 (12 months ending 9/30/2009) anticipated $2.7 trillion in tax receipts and $3.1 trillion of government spending resulting in a $407 billion deficit (Source: White House)

The reality….

The actual results for fiscal year 2009 were $2.1 trillion in tax receipts and $3.5 trillion in spending producing a $1.4 trillion deficit (Source: Treasury Department).

Where Have we Been?

Credit Availability…

Where Have we Been?

Confidence and Spending…

Where Have we Been?

What was the outlook going into 2009?

Where Have we Been?

Energy prices?

Where Have we Been?

Home prices and Inventory?

Where Have we Been?

Inventory levels?

Where Have we Been?

Credit markets thaw…

Where Have we Been?

Equities at the end of 2008…

Where are we now?

Third Quarter 2009 vs. Third Quarter 2008

Source: American Century Investments.

Where are we now?

Recessions….

Where are we now?

Where are we now?

The Dollar fell….

Where are we now?

Where are we now?

Stock Market Volatility….

Where are we now?

Where are we now?

Market Recoveries….

Where might we be going?

The rate of economic decline has slowed. Consumer balance sheet has improved. Supply of homes for sale has begun to decline. Confidence in the financial system has

recovered. Consensus GDP expectations are for a slight

positive result in the second half of the year. Uncertainty remains as to the ultimate shape

and durability of the recovery. Much of the improvement in business

conditions have been attributed to China. Is the increase in Chinese demand for raw materials

speculative hoarding/move away from the U.S. dollar or a reflection of real underlying economic growth?

Major Concerns exist. Wars in Iraq and Afghanistan continue. Massive new health care program will

further increase the long term fiscal deficit.

Higher Taxes. Inflation is under control but early signs of

re-flation. A weak dollar and rising commodity prices.



Positive Signs are visible. Many companies are noting signs of stabilization

or pick-up in demand. Corporate profits are rising due to productivity

increases. Revenues are flat to lower indicating profits

could surge when the economy recovers. Companies with operations overseas are

benefiting from the weak dollar and stronger economies in emerging markets.

Credit spreads have tightened, enabling even lower rated companies to finance debt offerings.

Following the stock market crash equity valuations appear to be fair.


Market Cycles…


Final Thoughts.… Recession – is it over? Housing – has it bottomed? Unemployment – will we see 10%? The Fed – what is their next move? Stock Market – can the rally continue? Growth vs. Value, Large vs. Small,

Domestic vs. International, Bonds?

OBJECTIVESLEARN HOW TO - -

Increase your share of retirement plan contributions

Reduce practice costs for total contributions and plan administration

Reduce liability

Increase plan values while meeting objectives

Utilize new types of retirement plans and options

GENERAL RETIREMENT PLAN DESIGN FACTORS

Who is eligible

Waiting period

Amount and type of compensation

Vesting period

Normal retirement age

OTHER FACTORS

Budget for employer contributions

Do you want employees and owner(s) to share in plan contributions

Budget for employee contributions

Ages of employees and owners

Flexibility of required employer contributions

Accessibility to plan assets while employed

Desired age to receive plan income

Relative interest of owner(s) in deferring current income

Concerns about liability issues

MAIN TYPES OF RETIREMENT PLANS

Defined Contribution – A retirement plan in which a certain amount or percentage of money is set aside each year by a company for the benefit of the employee. There are restrictions as to when and how you can withdraw these funds without penalty.

Defined Benefit - An employer-sponsored retirement plan where employee benefits are sorted out based on a formula using factors such as salary history and duration of employment. Investment risk and portfolio management are entirely under the control of the company. There are also restrictions on when and how you can withdraw these funds without penalty.

TYPES OF RETIREMENT PLANS USED BY MOST PRACTICES

Pay Based Profit Sharing Plan

Integrated Profit Sharing Plan

Age Based Profit Sharing Plan

Comparability Profit Sharing Plan

Traditional 401(k) Plan

Safe Harbor 401(k) Plan

Defined Benefit Pension Plan

Combinations of Various Types of Profit Sharing and 401(k) Plans

Cash Balance Plan

When and Where to Use Pay Based Profit Sharing Plans

What it is – A Pay Based Profit Sharing Plan is a defined contribution plan under which the employer agrees to make variable contributions (usually at the discretion of its Board of Directors) for the benefit of its employees. Contributions are allocated by formula to the account of each participant. Benefits are the value of each participant’s account at retirement or termination of employment.

Conceptual simplicity Enables maintenance of equal

compensation packages for employees of different ages

Total contribution flexibility Forfeiture reallocations Twenty five percent deduction

limitation to employer

Difficult to weight it in favor of key employees

Contribution-orientation toward younger employees

Advantages Disadvantages

Businesses With Young Key Persons Are Best Prospects

A small, centralized management of young, highly-paid key persons;

A large, low-paid labor force

Pay Based Profit Sharing Plan

A plan where the employer agrees to make variable contributions for the benefit of employees. Contributions are allocated by formula to the account of each participant. Benefits are the value of each participant’s account at retirement or termination of employment.

HC – Represents Highly Compensated Employee

Non HC – Represents Non-Highly Compensated Employee

NHCE’s50.95%

HCE’s49.05%

ABC Company Retirement Plan ABC Company

Profit Sharing

When and Where to Use Integrated Profit Sharing Plans

What it is – An Integrated Profit Sharing Plan is a form of defined contribution plan under which the employer agrees to make variable contributions (usually at the discretion of its Board of Directors) for the benefit of its employees.

The basis for allocating employer contributions under this type of plan is determined by a multi-step process which takes participant compensation and a Social Security Integration Level into account so that the rate of allocations above the integration level is greater than the rate of allocations at or below the integration level. The integration level must equal the Social Security taxable wage base in effect at the beginning of the plan year or must satisfy an alternative test. The disparity of the allocation above the integration level cannot exceed the lesser of 5.7% or an alternative percentage tied to the Social Security tax.

Favors more highly compensated employees who may be key employees

Enables maintenance of equal compensation packages for employees of different ages with similar wages

Total contribution flexibility Forfeiture reallocations Twenty five percent deduction

limitations to employer

Cannot weigh in favor of older employees

Contribution-orientation toward younger employees

Cannot provide proportionate benefit packages for employees with different wages


Businesses With Young Key Persons Are Best Prospects

A small, centralized management of young, highly-paid key persons


Integrated Plan

A plan integrated with social security benefits can provide for contributions and benefits which favor highly paid employees as long as the plan complies with rules which limit the disparity above and below a specified level and provides some minimum benefit for all employees.


Integrated Plan

HC – Represents Highly Compensated Employee

Non HC – Represents Non-Highly Compensated Employee

When and Where to Use Age Based Profit Sharing Plans

What it is – An Age Based Profit Sharing Plan is a form of defined contribution plan under which the employer agrees to make variable contributions (usually at the discretion of its Board of Directors) for the benefit of its employees. The basis for allocating contributions under this type of plan is determined by calculating the present value of an annuity for life equal to 1% of pay beginning at age 65.

Favors older, more highly compensated employees who may be key employees

Provides higher benefits for older employees who have fewer years to accumulate retirement benefits than younger employees

Forfeiture reallocations Twenty five percent deduction

limitation to employer

Difficult to maintain equal compensation packages for employees of different ages

Contribution-orientation toward older employees


Businesses With Older Key Persons Are Best Prospects

A small, centralized management of older, highly-paid key persons;


Age Weighted Plan

The age-weighted method allocates contributions based on both the age and compensation of eligible employees. It is similar to a defined benefit pension plan, only with discretionary contributions. Since the participants age, or length of time until retirement, is factored into the allocation formula, older participants receive a larger proportionate share of the contribution. This can be advantageous in a situation where the key employees are significantly older than the other employees.

In certain situations, an age-weighted plan design works extremely well, but a possible drawback could be employees with the same salaries receiving different allocations, based on age. Also, an older non-principal employee may receive a larger share than a younger principal.


Age Weighted Plan

When and Where to Use Comparability Profit Sharing Plans(Also Known As Cross-Tested Plans)

What it is – A Comparability Profit Sharing Plan is a form of defined contribution plan under which the employer agrees to make variable contributions (usually at the discretion of its Board of Directors) for the benefit of its employees. The employees are grouped according to some determining factor, such as executives, management, and clerical staff in a company. The structure of the group must be defined in the plan document.

Each grouping of employees has its own allocation method and must pass the minimum coverage test (or if it cannot, the general pension nondiscrimination test). There is one method of satisfying this coverage test. An allocation method might, for example, allocate the contribution for a specific group based on the ratio that an individual’s compensation within that group bears to the total compensation for all participants within that group along with age.

Favors owners or key employees

Advantages Disadvantages Favors owners or key

employees in small businesses or professional practices when one of the employee groups consist of highly compensated or key employees

Enables as much of the employer contribution as possible to go to the targeted group of highly compensated employees, while keeping the total plan contribution within an affordable range

Total contribution flexibility Forfeiture reallocations Twenty five percent employer

deduction limitation

Businesses in which Lower-Paid or Non-Key

Employees Represent a Significant Percentage of the Total Work Force are Best Prospects

The age of the principals is not a determining factor, but the age spread between the principals and the average non-participant

is important

A small centralized management of older, highly-paid key persons

A spread in age of at least 10-15 years between the key employee group and the non-key employee group

New Comparability Plan

The comparability, or cross-tested, allocation method allows the employer to divide the employees into different classifications for purposes of allocating the contribution. If non-discrimination requirements are met, a larger share of the company’s contribution may be made on behalf of those employees to whom the employer wishes to provide a more significant benefit.

The non-discrimination testing, like an age-weighted plan, is based on projected benefits at retirement, similar to a defined benefit plan. If the aggregated age of the preferred class is higher than the other classes, the allocation of current dollars can be skewed proportionately toward the older group.


New Comparability Plan

When To Use A Defined Benefit Plan

What it is – A Defined Benefit Plan is designed to provide plan participants with a plan defined benefit at retirement (example 20% of compensation). Contributions are based on the benefit provided and the actuarial assumptions and cost method determined by the plan’s enrolled actuary. Guaranteed Annuities and Retirement income contracts may also be used to fund benefits through an I.R.C. 412(i) plan.

Defined Benefit Calculation Process

Here’s a Defined Benefit Plan calculation, when putting all the important elements together:

BenefitFormula Provisions

Characteristicsof Plan Participants

+ +

Assumptions of Future Plan Experiences

=

Annual Contributions Necessary to Fund Future Benefits and Provide for the Insured Death Benefits

Calculating Annual Plan Contributions

An actuary reviews the plan each year and calculates the amount that must be contributed so the plan will have sufficient assets to pay the promised benefits to participants at retirement. The plan actuary bases the amount of plan contributions on factors that include:

* The retirement benefits promised by the plan* The age, salary and retirement age of the participant* The mathematical projections, using assumptions for:

- interest to be earned by the plan assets - future salary increases of the participants

- the projected rates of turnover, disability and mortality of the plan participants

It is effective when: Key employees are relatively older

Client believes that retirement income should be equated to salary; or

The employer can live with a fixed annual commitment.

Employer wants a tax deduction that is larger than tax deductible contribution(s) generated by a defined contribution plan(s).

The employee wants to maximize the use of Social Security integration to favor older, more highly compensated employees.

The corporate owners of a C-Corp. wish to remove significant cash from the Corporation on an income tax deductible basis to avoid double taxation and the accumulated earnings tax.

It is ineffective when: Client’s profits and cash flow

fluctuate dramatically from year to year;

Key employees are young relative to other participants;

The plan might have to be terminated within five years of its inception;

Employees wish to have quarterly statements.


Defined Benefit Plan

If employee #6 is eliminated then the contribution of $29,347.42 is gone which would reduce the total contribution to $195,893 and increasing the % of Budget to the Owner to 75.04%

If further employee #4 is also eliminated then the contributions of $29,347.42 and $20,511.11 are both gone reducing the total contribution to $175,382.70 and increasing the % of Budget to the Owner to 83.82%.

* 83.82% if eliminate employees #4 and #6


Plan Comparative Analysis

When and Where to Use 401(k) Plans

What it is – A 401(k) Plan is a form of a Profit Sharing Plan which permits employees to make pre-tax salary contributions. In addition, the employer can make matching contributions or discretionary profit sharing contributions. Benefits are the value of each participant’s account at retirement or termination of employment.

Advantages

Conceptual simplicity Permits voluntary employee contributions on tax-favored basis Permits the employer to make matching contributions only on behalf of the employees who voluntarily choose to participate Promotes sharing of contribution with employees Can exclude employees who work less than 1,000 hours per year or have not attained age 21 Forfeiture reallocations Permits vesting schedule so that employees must meet years of employment requirements before they receive all of the account value attributed to employer contributions Investment flexibility Contribution limits higher than IRA limits Tax favored participant loans to employees of all entities and employee owners 10% premature distribution penalty stops at age 55 without separation from service utilizing an in service distribution instead of 59 ½

Disadvantages

Difficult to weigh in favor of highly compensated employees

Administration requires plan trust document; reporting of participant account values to employees; Form 5500 filing


Traditional 401(k) with Matching Contributions

Note: Owner limited to 5% salary deferral because of Discrimination Test which permits him to contribute approximately 200 basis points more than the average deferral of the non-highly compensated employees. Assumes match of $0.50/$1.00 to 6% and the NHC employees only defer 3% of compensation. They could contribute more in which case the Owner could contribute more with higher matches.

NHCE’s

30.78%

HCE’s 69.22%

When and Where to Use Safe Harbor Plans

What it is – A Safe Harbor 401(k) Plan is one in which an employer is not required to perform nondiscrimination testing of elective contributions or matching contributions. To be within the safe harbor, a 401(k) plan must meet certain employer contribution requirements and must provide for 100 percent immediate vesting of these contributions.

Safe Harbor Plans. . .

Employees covered by a Safe Harbor 401(k) Plan may also be covered under any other qualified plans maintained by their employer.

Employees are able to defer up to Code Section 402(g) deferral limit $16,500 in 2010 without HC employees being subject to discrimination testing.

Age 50 catch-up provision of $5,500 in 2010

Employers can elect to make either a matching contribution or a 3 percent of compensation non-elective contribution.

To qualify under the Safe Harbor, a matching contribution must meet two requirements. First, an employer is required to provide each non-highly compensated employee a dollar-for-dollar match on salary deferrals up to 3 percent of compensation and 50 cents on the dollar match on salary deferral between 3 percent and 5 percent of compensation. Second, the rate of matching contribution for any highly compensated employee at any rate of salary cannot be greater than the rate of matching contribution provided to non-highly compensated employees.

Safe Harbor Plans. . .

With a Safe Harbor 401(k) Plan, an employer is permitted to make additional employer contributions to another qualified plan or profit sharing option.

No conditions may be imposed on who will receive the matching contribution or the 3 percent non-elective contribution. Therefore, once an employee has

satisfied any age and service requirement under the 401(k) plan and has become a participant, the employer must make the required contribution whether or not the participant is employed on the last day of the plan year or has completed 1,000 hours of service during the plan year.

A Safe Harbor 401(k) Plan must provide that the Safe Harbor matching or 3 percent of compensation non-elective contribution be 100 percent immediately vested. Any other employer contributions to a Safe Harbor 401(k) Plan can be made subject to a vesting schedule. (Example to a profit sharing account.)


Safe Harbor 401(k) with Matching Contributions

Safe Harbor 401(k) with Matching Contributions

A defined contribution plan in which employees can defer up to the lesser of $16,500.00 or 100% of compensation. Employer must match 100% of employee contributions up to 3% of compensation plus 50% of employee deferrals in excess of 3% up to 5% of compensation.

Note: Assumes Owner wishes to maximize his salary deferral and non-highly compensated employees contributes 5% of compensation. The non-highly compensated employees could contribute less, in which case the employer matches for them would be less.

Safe Harbor 401(k) with 3% Non-Elective Contribution Formula

A defined contribution plan in which employees can defer up to the lesser of $16,500.00 or 100% of compensation. Employer must contribute 3% on behalf of all eligible employees.

Note: Assumes Owner wishes to maximize his salary deferral and non-highly compensated employees make no salary deferrals because employer makes a 3% non-elective contribution for them. The non-highly compensated employees could make salary deferrals. However, the employer’s contribution is still limited to 3% of compensation.


Safe Harbor 401(k) with 3% Non-Elective Contribution Formula

COMBINATION

OF

VARIOUS TYPES OF 401(K) PLANS

WITH

VARIOUS TYPES OF PROFIT SHARING

PLAN ALLOCATIONS


Safe Harbor 401(k) with 3% Non-Elective Contribution Formula Plus 3% Pay Based Profit Sharing Allocation


Safe Harbor 401(k) with 3% Non-Elective Contribution

Formula Plus New Comparability Plan

Safe Harbor 401(k) Plan/New Comparability Plan with 3% Contribution

The Super Comparability Plan was created by new IRS rules in 1999. This plan combines the Safe Harbor 401(k) with the New Comparability Profit Sharing Plan. It allows you and your key employees to defer up to $16,500.00 into the 401(k) portion of the plan provided you contribute at least 3% of all eligible employees’ gross salaries to the profit sharing part of the plan.

TWO PLAN APPROACHALSO KNOW AS CASH BALANCE PLAN

Adopt a Maximum Defined Benefit Pension Plan (Plan I)

Plus, adopt a Defined Contribution Plan (Plan II)

• Profit Sharing Plan feature

• 401(K) Plan feature

6% Profit Sharing (inclusive of Non-elective 3% Safe Harbor)

If eliminate employee #6 then the contribution of $29,347.42 is gone reducing the total contribution to $195,893 and increasing the % of Budget to the Owner to 75.04%.

If further eliminate employee #4 then the contributions of $29,347.42 and $20,511.11 are gone reducing the total contribution to $175,382.70 and increasing the % of Budget to the Owner to 83.82%


Plan I Defined Benefit Plan

TWO PLAN APPROACH(Cash Balance Plan)


Plan II Safe Harbor 401(k) with 3% Non-Elective Contribution Formula Plus 3% Pay Based Profit Sharing Allocation

TWO PLAN APPROACHCash Balance

Defined Contribution


Defined Benefit Pension Plan and Defined Contribution Plan Consisting of Safe Harbor 401(k) with 3% Non-elective Contribution Formula Plus 3% Pay Based Profit Sharing Allocation

TWO PLAN APPROACH(Cash Balance Plan)

IRA and Roth IRA Contributions Under age 50 $5,500

Age 50 and over $6,500

Phaseout for Deducting IRAContribution (qualified plan participant)

Joint $89,000-$109,000 AGI

Single or head of household $56,000-$66,000 AGI

Spousal IRA $167,000-$177,000 AGI

Phaseout of Roth Contribution Check

Joint $167,000-$177,000 MAGI

Single $105,000-$120,000 MAGI

Filing separately $0-$10,000 MAGI

No Roth conversions if MAGI exceeds $100,000 or if married, filing separately MAGI does not include MRD’s*Limitation expires in 2010

Employer’s Deductible Defined Contribution Limit

Up to 25% of total employee compensation $49,000/Individual

Income Subject to Social Security Tax $106,800

401(k), 403(b), 457 $16,500*

50 & over $22,000*

*On 401(k) contributions this amount may need to be reduced if the employee is highly compensated based on the annual testing limit. A highly compensated employee is defined as: - 5% owner (including spouse, children, grandchildren, parents, etc.) - Employee with compensation > $110,000 in the 2009 plan year

Limit on additions to defined contributions plans $49,000

Annual benefit limit on defined benefit plan $195,000

Highly compensated employee makes $110,000

Annual compensation taken into account for qualified plans $245,000

2010 Retirement Plan Limits

Corporate Office4801 W. 110th Street, Ste. 200

Overland Park, KS 66211Ph: 913-648-5526Fax: 913-648-6798

www.taxfavoredbenefits.comSpecializing in Retirement Plans, Employee Benefit

Programs, Personal Planning and Investments

Questions and Factors to Consider

Only 42% of workers report they have tried to calculate how much money they will need to have by the time they retire so they can live comfortably (Congressional Research Service).

“Workers who invested in a broadly diversified plan with an appropriate mix of funds would see their plans’ average annual returns increase to 10.7% from 7.5%” (Wall Street Journal).

89% of employees want their employer to make personal financial planning advice available (CIGNA Retirement Services Study).

An ING Survey recently revealed that more than 75% would take advantage of retirement planning advice if their employer offered it.

79% of 401(k) participants made no trades within their retirement account over a 2 year period of time (Wharton School)

Do you know when you can afford to retire?

Do you expect to be financially comfortable during retirement?

Do you have an investment plan?

Are you confident that you are on track for a comfortable retirement?

Do you have someone qualified who you can rely on to provide financial management and investment advice for your retirement account?

Do you have the time to monitor the performance of every investment option in your retirement plan?

Investing for retirement is like boarding an ocean liner for a long trip. No one reasonably expects the seas to remain calm for the entire voyage. When storms do threaten, the worst thing a person can do is jump ship. The best approach is to stay calm and keep moving toward the ultimate goal.

Like nervous ship passengers, novice investors respond best to open discussions about how they can minimize damage, should markets turn turbulent, rather than scare tactics. It should be pointed out that participants have several "life boats" to weather a market storm. First, they have very long time horizons. Investors with a decade or more left before retirement can afford to ignore the day-to-day ups and downs in share prices.

Questions? Contact Tim Gaigals at [email protected]

Bon Voyage — Investing in Retirement Plans

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Tax Favored Benefits CE Presentation

Economy & Finance

Transcript of Tax Favored Benefits CE Presentation