A Consultant’s View OfQualified Plan Design William G. Karbon, COPA, MSPA, CPCVice President, Director of ComplianceCBIZ B...
What We Will Cover•   Getting to know your client•   Client priorities•   Plan types•   Obstacles to plan design•   Case s...
Getting To Know Your Client                              3
Getting To Know Your Client• Entity type     • Private sector        – For profit (C corp, S corp, LLC, LLP, sole prop)   ...
Getting To Know Your Client• Controlled Group Issues     • Is client under common control with other entities        – How...
Getting To Know Your Client• Type of business    – Manufacturing    – Professional firm    – Technology    – Etc.    – Imp...
Getting To Know Your Client• Overview of their business    – How long have they been in business?    – Stability of revenu...
Getting To Know Your Client• Profile of employees    – Need to attract talent    – Need to retain certain employees    – T...
Getting To Know Your Client• Reward system    – Cash    – Deferred income    – Impacts       • Contribution sources / allo...
Getting To Know Your Client• Succession plan     – Time horizon     – Transition business to family or management     – Se...
Client Priorities                    11
Client Priorities• Focus on owners / senior management     – Maximize retirement accumulations     – Different benefit str...
Client Priorities• Flexibility     – Impacts       • Plan type       • Contribution sources / allocation       • Nondiscri...
Client Priorities• Benefit adequacy     – Impacts       • Plan type       • Benefit formula / contribution allocation• Avo...
Client Priorities• Attract talent     – Senior talent     – Specialized talent     – Impacts        •   Plan type        •...
Client Priorities• Paternalism     – Impacts       • Plan type       • Automatic enrollment       • Contribution sources /...
Client Priorities• Tax efficiency     – Impacts       •   Plan type       •   Benefit formula       •   Minimum coverage  ...
Client Priorities• Employee appreciation of retirement program     – Impacts       • Plan type       • Plan design       •...
Plan Type            19
Plan Type• DB sponsor should address some or all of:     – Maximize retirement accumulations     – Stable business (prefer...
Plan Type• DC sponsor should address some or all of:     – Provide employees with deferral opportunity        • Nondiscrim...
Plan Type• DB/DC sponsor should address some or all of:     – Maximize retirement accumulations        • Accumulations exc...
Obstacles To Plan Design                           23
Obstacles to Plan Design• Statutory Issues     – Minimum Coverage       • Excludable employees     – Minimum Participation...
Obstacles to Plan Design• Statutory Issues     – Top Heavy     – Gateway25
Case Studies               26
Case Study 1• High end business consultancy established in  2012• Come to you in November of 2012 as follows:     – At 12/...
Case Study 1• Reward system     – Owners (each own 50%) – share equally in all       forms of compensation     – MCs (comp...
Case Study 1 – 2012 CensusEmployees       Age   Service @    Pay                      12/31/12Younger Owner   40        1 ...
Case Study 1 – 2014 CensusEmployees       Age   Service @    Pay                      12/31/14Younger Owner   42        3 ...
Case Study 1• Plan sponsors goals     – Minimize tax impact of significant profits     – Maximize retirement accumulations...
Case Study 1• Potential solution     – DB Plan       • As part of program will allow plan sponsor to address         need ...
Case Study 1• Potential solution – Combine DB and DC Plan     – DB Plan       • Traditional vs. Cash Balance          – Ca...
Case Study 1• Potential solution – Combine DB and DC Plan     – Design Issues        • HCE definition           – AVOID to...
Case Study 1• Potential solution – Combine DB and DC Plan     – Design Issues        • ADP testing           – If plan is ...
Case Study 1• Potential solution – Combine DB and DC Plan     – Design Issues        • Minimum Participation Testing      ...
Case Study 1• Potential solution – Combine DB and DC Plan     – Design Issues        • 401(a)(4) General Test           – ...
Case Study 1 – 2012 1st Pass                          Cash       ProfitEmployees      Comp                           Defer...
Case Study 1 – 2012 2nd Pass                          Cash    ProfitEmployees      Comp                         Deferral  ...
Case Study 1 - Results ER Contribution   ER Contribution  % to Owners         % to MCs     56.6%             43.4%        ...
Case Study 1 – 2014 if TH                            Cash       ProfitEmployees        Comp                            Def...
Case Study 1• PS Contribution Includes     – TH Minimum of $10,000 for MCs     – TH Minimum of $4,500 for Analysts     – T...
Case Study 1 - Results                   ER Contribution ER Contribution                      % to Non-  % to Owners      ...
Case Study 1 – 2014 if NOT TH                           Cash       ProfitName            Comp                            D...
Case Study 1 - Results ER Contribution   ER Contribution  % to Owners       % to Principals     70.2%             29.8%   ...
Case Study 2• Small manufacturing company     – Business started in 1990     – Revenues/profits are cyclical• Single owner...
Case Study 2• Client priorities     – Cash flow is cyclical, avoid long-term fixed costs     – Reward owner and management...
Case Study 2 - CensusEmployee           Age   Service    Pay       DeferralOwner               62     22      $170,000    ...
Case Study 2• ADP Results     – HCE ADP % = 10.0%     – NHCE ADP % = 3.8%     – Need to increase NHCE ADP % by 4.2%49
Case Study 2• Possible solutions     – Employees communications       • Typically has marginal success     – Automatic enr...
Case Study 2• Goals     – Provide employer contribution of 9% of pay to       Owner and Managers     – Minimize overall em...
Case Study 2• QACA / Stacked Match     – Pros        • Encourages employees savings        • Two year vesting on employer ...
Case Study 2• New Comparability with Nonelective SH     – Pros        • Cost is predictable        • More effectively leve...
Case Study 2 – Stacked MatchEmployee           Comp       Deferral QACA       Discretion   FixedOwner              $170,00...
Case Study 2 – Stacked Match Results                                         ER                          ER       Contribu...
Case Study 2 – New Comparability                                       NonelectiveEmployee           Comp       Deferral  ...
Case Study 2 – New Comp Results                                       ER                        ER       Contribution %  E...
Case Study 3• Small business owner     – Business started in 2010     – Revenues/profits are substantial and growing     –...
Case Study 3• Goals     – Maximize retirement accumulation for owner     – Minimize fixed liabilities     – Minimize cost ...
Case Study 3 - CensusEmployee           Age   Service    Pay       DeferralOwner               52     10      $250,000    ...
Case Study 3• Potential Solution     – DB Plan for Owner, Owner’s Son & NHCEs 1&2     – DC Plan for Owner’s Spouse & NHCEs...
Case Study 3• Solution     – Combine DB and DC plans for minimum coverage       purposes• Concerns     – Must provide mult...
Case Study 3 – DB PlanEmployee         Age     Pay       DB Benefit    DB CostOwner             52    $250,000      $200,0...
Case Study 3 – PS PlanEmployee         Age     Pay            PS                                   ContributionOwner’s Spo...
Case Study 3 – New Comparability       ER Contribution     ER        % to Owner & Contribution %           Spouse      to ...
Case Study 3• Concerns     – One participant terminating employment may       create substantial testing issues     – If a...
Case Study 4• Small business owner     – Business started in 2000     – Volatile revenues/profits     – 25 year old child ...
Case Study 4• Goals     – Flexibility in employer contribution requirement     – Provide opportunity for child to receive ...
Case Study 4• Plan Design for 2011     – Non-Safe Harbor 401(k) Plan     – PS feature with each participant in their own r...
Case Study 4 – 2011 ResultsEmployee    Age   Service    Pay       Deferral    PSOwner       47      9       $300,000     $...
Case Study 4 -2012• 25 year old son of owner making $100,000  enters plan• Add nonelective SH 401(k) feature     – Will al...
Case Study 4–2012 1st Pass (Cross Test)  Employee      Age Service     Pay      Deferral    PS  Owner         48     10   ...
Case Study 4 -2012• Cross testing blows up because of 25 year old  HCE• Solution     – Allocate using permitted disparity ...
Case Study 4–2012 2nd Pass (401(l)) Employee      Age Service     Pay      Deferral    PS Owner         48     10     $300...
Case Study 4 -2012                 ER             Contribution     ER    ER                % to      ContributionContribut...
Case Study 4 -2012•    Maximizes allocation to owner•    Significant allocations to owner’s son•    Tax efficient•    Flex...
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A Consultant’s View Of Qualified Plan Design

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Qualified Plan Design presentation given at the 2012 Annual Conference of the American Society of Pension Professionals and Actuaries (ASPPA)

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A Consultant’s View Of Qualified Plan Design

  1. 1. A Consultant’s View OfQualified Plan Design William G. Karbon, COPA, MSPA, CPCVice President, Director of ComplianceCBIZ Benefits & Insurance Services, Inc. Lawrenceville, NJ
  2. 2. What We Will Cover• Getting to know your client• Client priorities• Plan types• Obstacles to plan design• Case studies2
  3. 3. Getting To Know Your Client 3
  4. 4. Getting To Know Your Client• Entity type • Private sector – For profit (C corp, S corp, LLC, LLP, sole prop) – Not for profit • Governmental • Impacts – Compensation – Taxation – Contribution Deadlines – Plan Type4
  5. 5. Getting To Know Your Client• Controlled Group Issues • Is client under common control with other entities – How is data gathered? – Who determines members of controlled group? – Who is quarterbacking controlled group issues? • Impacts – HCE determination – Top heavy / Key ee determination – Minimum coverage – Nondiscrimination testing – Types of plan available5
  6. 6. Getting To Know Your Client• Type of business – Manufacturing – Professional firm – Technology – Etc. – Impacts • Plan type • Plan design • Participant expectations6
  7. 7. Getting To Know Your Client• Overview of their business – How long have they been in business? – Stability of revenue – Stability of profits – Need for cash – Impacts • Ability to commit to fixed contribution • Contribution sources7
  8. 8. Getting To Know Your Client• Profile of employees – Need to attract talent – Need to retain certain employees – Turnover – Disposable income – Impacts • Plan type • Benefit formula / contribution allocation • Nondiscrimination testing • Vesting8
  9. 9. Getting To Know Your Client• Reward system – Cash – Deferred income – Impacts • Contribution sources / allocation • Nondiscrimination testing• Threats to business – i.e. sensitive to technology or law changes – Impacts • Plan type9
  10. 10. Getting To Know Your Client• Succession plan – Time horizon – Transition business to family or management – Sell to unrelated entity – Impacts • Plan type • Benefit formula / contribution allocation • Minimum coverage • Nondiscrimination testing10
  11. 11. Client Priorities 11
  12. 12. Client Priorities• Focus on owners / senior management – Maximize retirement accumulations – Different benefit structures by job classifications – Impacts • Plan type • Benefit formula / contribution allocation • Nondiscrimination testing12
  13. 13. Client Priorities• Flexibility – Impacts • Plan type • Contribution sources / allocation • Nondiscrimination testing13
  14. 14. Client Priorities• Benefit adequacy – Impacts • Plan type • Benefit formula / contribution allocation• Avoid testing – Impacts • Plan type • Benefit formula / contribution allocations • Contribution sources14
  15. 15. Client Priorities• Attract talent – Senior talent – Specialized talent – Impacts • Plan type • Eligibility • Benefit formula / contribution allocation • Nondiscrimination testing15
  16. 16. Client Priorities• Paternalism – Impacts • Plan type • Automatic enrollment • Contribution sources / allocation• Accounting issues – Impacts • Plan type • Benefit formula16
  17. 17. Client Priorities• Tax efficiency – Impacts • Plan type • Benefit formula • Minimum coverage • Nondiscrimination testing17
  18. 18. Client Priorities• Employee appreciation of retirement program – Impacts • Plan type • Plan design • Other rights & features18
  19. 19. Plan Type 19
  20. 20. Plan Type• DB sponsor should address some or all of: – Maximize retirement accumulations – Stable business (preferably mature) – Adequate cash flow – Willingness to accept plan’s investment risk – If GAAP compliant, able to cope with volatile FASB expense and liability results20
  21. 21. Plan Type• DC sponsor should address some or all of: – Provide employees with deferral opportunity • Nondiscrimination testing (SH or no SH) • Auto enrollment and escalation – Contribution flexibility • Amount • Allocation21
  22. 22. Plan Type• DB/DC sponsor should address some or all of: – Maximize retirement accumulations • Accumulations exceeding $50,000/year – Cash Balance vs. Traditional DB – Combo vs. Offset – Nondiscrimination testing opportunities22
  23. 23. Obstacles To Plan Design 23
  24. 24. Obstacles to Plan Design• Statutory Issues – Minimum Coverage • Excludable employees – Minimum Participation • Meaningful benefits – Nondiscrimination • 401(k) • 401(m) • 401(a)(4) • 414(s)24
  25. 25. Obstacles to Plan Design• Statutory Issues – Top Heavy – Gateway25
  26. 26. Case Studies 26
  27. 27. Case Study 1• High end business consultancy established in 2012• Come to you in November of 2012 as follows: – At 12/31/2012 – 4 employees • 2 Owners (ages 40 and 48) • 2 Managing Consultants (MCs) – Will grow to 14 ees in next 12 – 18 months – 2012 Profit - $1.2 million – Anticipated 2013 Profit - $1.5 million27
  28. 28. Case Study 1• Reward system – Owners (each own 50%) – share equally in all forms of compensation – MCs (compensation > $200,000) • Cash compensation plus variable deferred income – Analysts & Associates (compensation > $125,000) • Cash compensation – Administrative support (compensation = $50,000) • Cash compensation and modest deferred income28
  29. 29. Case Study 1 – 2012 CensusEmployees Age Service @ Pay 12/31/12Younger Owner 40 1 $300,000Older Owner 48 1 $300,0002 MCs 50 1 $200,000Total $1,000,000 29
  30. 30. Case Study 1 – 2014 CensusEmployees Age Service @ Pay 12/31/14Younger Owner 42 3 $300,000Older Owner 50 3 $300,0003 MCs 50 3 $200,0003 Analysts 40 2 $150,0003 Associates 30 2 $125,0003 Support 35 2 $50,000Total $2,175,000 30
  31. 31. Case Study 1• Plan sponsors goals – Minimize tax impact of significant profits – Maximize retirement accumulations for owners – Provide for flexibility in annual retirement plan obligation to MCs – Minimize retirement plan obligations to Analysts, Associates & Administrative support31
  32. 32. Case Study 1• Potential solution – DB Plan • As part of program will allow plan sponsor to address need to minimize tax impact of significant profits and maximize retirement accumulations for owners – DC Plan • As part of program will allow plan sponsor to address need to provide for flexibility in annual retirement plan obligation to MCs32
  33. 33. Case Study 1• Potential solution – Combine DB and DC Plan – DB Plan • Traditional vs. Cash Balance – Cash balance allows for equal contributions to owners – DC Plan • 401(k)/Profit Sharing Plan – Deferrals allow all employees to achieve significant retirement accumulations – Profit sharing feature provides needed flexibility33
  34. 34. Case Study 1• Potential solution – Combine DB and DC Plan – Design Issues • HCE definition – AVOID top paid group election – Only administrative support will be NHCEs – PROBLEM – Year 1, only owners will be HCEs as there was no 2011 compensation • Top Heavy – Unless MCs act as officers, only key ees will be owners – If designed efficiently, plan sponsor may be subject to top heavy minimum contribution requirements34
  35. 35. Case Study 1• Potential solution – Combine DB and DC Plan – Design Issues • ADP testing – If plan is top heavy, use nonelective safe harbor. Only NHCEs (administrative support) will need to receive SH contribution. – PROBLEM, plan effective after 10/1/12 cannot use SH provisions. May need to use PY testing. • ACP testing – Employer matching contributions cannot be used in 401(a)(4) general test, therefore, should not provide matching contributions35
  36. 36. Case Study 1• Potential solution – Combine DB and DC Plan – Design Issues • Minimum Participation Testing – Minimum participation test under Code §401(a)(26) requires 40% of group to participate in CB Plan. Ultimately, must cover at least 6 employees in plan. As plan sponsor’s goal is to maximize cash compensation to Analysts and Associates, they can be excluded from CB Plan.36
  37. 37. Case Study 1• Potential solution – Combine DB and DC Plan – Design Issues • 401(a)(4) General Test – PROBLEM, 1st year the MCs will be NHCEs and are older than the owners who are the only HCEs. Testing may limit use of Cash Balance Plan. – After 1st year, the PS contributions to the owners can be adjusted based on testing results and cash flow.37
  38. 38. Case Study 1 – 2012 1st Pass Cash ProfitEmployees Comp Deferral Total Balance SharingYounger $300,000 $82,073 $0 $12,500 $94,573OwnerOlder Owner $300,000 $82,073 $0 $12,500 $94,5732 MCs $200,000 $76,500 $45,000 $5,000 $126,500Total $317,146 $90,000 $35,000 $442,146 38
  39. 39. Case Study 1 – 2012 2nd Pass Cash ProfitEmployees Comp Deferral Total Balance SharingYounger $300,000 $0 $37,500 $12,500 $50,000OwnerOlder Owner $300,000 $0 $37,500 $12,500 $50,0002 MCs $200,000 $0 $28,745 $5,000 $33,745Total $0 $132,490 $35,000 $167,490 39
  40. 40. Case Study 1 - Results ER Contribution ER Contribution % to Owners % to MCs 56.6% 43.4% 40
  41. 41. Case Study 1 – 2014 if TH Cash ProfitEmployees Comp Deferral Total Balance SharingYounger $300,000 $82,073 $33,000 $17,000 $132,073OwnerOlder Owner $300,000 $82,073 $33,000 $22,500 $137,5733 Principals $200,000 $6,500 $15,000 $22,500 $44,0003 Analysts $150,000 $0 $4,500 $15,000 $19,5003 Associates $125,000 $0 $3,750 $7,500 $11,2503 Support $50,000 $1,500 $9,625 $1,000 $12,125Total $188,146 $164,625 $177,500 $530,271 41
  42. 42. Case Study 1• PS Contribution Includes – TH Minimum of $10,000 for MCs – TH Minimum of $4,500 for Analysts – TH Minimum of $3,750 for Associates – SH Contribution of $1,500 for Support – TH Minimum of $1,000 for Support42
  43. 43. Case Study 1 - Results ER Contribution ER Contribution % to Non- % to Owners owners 65.2% 34.8% 43
  44. 44. Case Study 1 – 2014 if NOT TH Cash ProfitName Comp Deferral Total Balance SharingYounger $300,000 $82,073 $33,000 $17,000 $132,073OwnerOlder $300,000 $82,073 $33,000 $22,500 $132,073Owner3 Principals $200,000 $6,500 $15,000 $22,500 $44,0003 Analysts $150,000 $0 $0 $15,000 $15,0003 Associates $125,000 $0 $0 $7,500 $7,5003 Support $50,000 $1,500 $9,625 $1,000 $12,125Total $188,146 $139,875 $177,500 $500,021 44
  45. 45. Case Study 1 - Results ER Contribution ER Contribution % to Owners % to Principals 70.2% 29.8% 45
  46. 46. Case Study 2• Small manufacturing company – Business started in 1990 – Revenues/profits are cyclical• Single owner• Two key members of management• Remainder of employees earn modest incomes – Limited discretionary income – High turnover46
  47. 47. Case Study 2• Client priorities – Cash flow is cyclical, avoid long-term fixed costs – Reward owner and management with employer contributions – Concerned about retirement readiness of non- management employees – Address ADP testing problems47
  48. 48. Case Study 2 - CensusEmployee Age Service Pay DeferralOwner 62 22 $170,000 $22,500Manager 1 45 15 $100,000 $10,000Manager 2 35 10 $80,000 $4,800Assemblers 1 - 3 35 5 $40,000 $1,600Operators 1 & 2 30 3 $30,000 $1,200Laborers 1 & 2 25 1 $25,000 $0Clerical 30 2 $30,000 $600Total $610,000 $45,100 48
  49. 49. Case Study 2• ADP Results – HCE ADP % = 10.0% – NHCE ADP % = 3.8% – Need to increase NHCE ADP % by 4.2%49
  50. 50. Case Study 2• Possible solutions – Employees communications • Typically has marginal success – Automatic enrollment • Limited success • May partially address retirement readiness concern – Safe harbor / QACA • Need to determine employer contribution budget • Will deferrals increase if SH match is implemented • Opportunity for stacking of match • Nonelective with new comparability50
  51. 51. Case Study 2• Goals – Provide employer contribution of 9% of pay to Owner and Managers – Minimize overall employer contribution – Encourage all participants to save for retirement51
  52. 52. Case Study 2• QACA / Stacked Match – Pros • Encourages employees savings • Two year vesting on employer contributions – Cons • Cost is unpredictable • Likely more expensive if employees understand that there is a substantial match on the first 6% they defer52
  53. 53. Case Study 2• New Comparability with Nonelective SH – Pros • Cost is predictable • More effectively leverages SH contribution in favor of owner and managers – Cons • Immediate vesting • Rewards participants that do not save for their retirement53
  54. 54. Case Study 2 – Stacked MatchEmployee Comp Deferral QACA Discretion FixedOwner $170,000 $22,500 $5,950 $6,800 $2,550Manager 1 $100,000 $10,000 $3,500 $4,000 $1,500Manager 2 $80,000 $4,800 $2,800 $3,200 $1,200Assemblers 1 - 3 $40,000 $1,600 $1,000 $1,067 $400Operators 1 & 2 $30,000 $1,200 $750 $800 $300Laborers 1 & 2 $25,000 $0 $0 $0 $0Clerical $30,000 $600 $450 $400 $150Total $45,100 $17,200 $19,201 $7,200 54
  55. 55. Case Study 2 – Stacked Match Results ER ER Contribution % ER Contribution Contribution % to All Others % to Owner to Managers 35.1% 37.2% 27.7% 55
  56. 56. Case Study 2 – New Comparability NonelectiveEmployee Comp Deferral PS SHOwner $170,000 $22,500 $5,100 $10,200Manager 1 $100,000 $10,000 $3,000 $6,000Manager 2 $80,000 $4,800 $2,400 $4,800Assemblers 1 - 3 $40,000 $1,600 $1,200 $0Operators 1 & 2 $30,000 $1,200 $900 $0Laborers 1 & 2 $25,000 $0 $750 $0Clerical $30,000 $600 $900 $0Total $45,100 $18,300 $21,000 56
  57. 57. Case Study 2 – New Comp Results ER ER Contribution % ER Contribution Contribution % to All Others % to Owner to Managers 38.9% 41.2% 19.9% 57
  58. 58. Case Study 3• Small business owner – Business started in 2010 – Revenues/profits are substantial and growing – Plans to sell company in 5 – 10 years• Single owner without significant retirement savings• Spouse and son works for business as well• Employees are attracted and retained by cash compensation – Retirement program is not a priority58
  59. 59. Case Study 3• Goals – Maximize retirement accumulation for owner – Minimize fixed liabilities – Minimize cost for employees59
  60. 60. Case Study 3 - CensusEmployee Age Service Pay DeferralOwner 52 10 $250,000 $22,500Owner’s Spouse 50 5 $60,000 $0Owner’s Son 30 5 $70,000 $2,000NHCEs 1-2 30 3 $35,000 $1,000NHCEs 3-5 45 5 $50,000 $3,000Total $600,000 $35,500 60
  61. 61. Case Study 3• Potential Solution – DB Plan for Owner, Owner’s Son & NHCEs 1&2 – DC Plan for Owner’s Spouse & NHCEs 3-5• Issue – DB Plan fails 410(b) ratio test61
  62. 62. Case Study 3• Solution – Combine DB and DC plans for minimum coverage purposes• Concerns – Must provide multiple plan gateway – Subjects the multiple plans to the general test – DB Plan must pass Code §401(a)(26) testing62
  63. 63. Case Study 3 – DB PlanEmployee Age Pay DB Benefit DB CostOwner 52 $250,000 $200,000 $139,000Owner’s Son 30 $70,000 $56,000 $9,400NHCEs 1-2 30 $35,000 $28,000 $4,700Total $390,000 $153,100 63
  64. 64. Case Study 3 – PS PlanEmployee Age Pay PS ContributionOwner’s Spouse 50 $60,000 $6,000NHCEs 3-5 45 $50,000 $3,500Total $210,000 $16,500 64
  65. 65. Case Study 3 – New Comparability ER Contribution ER % to Owner & Contribution % Spouse to NHCEs 85.5% 14.5% 65
  66. 66. Case Study 3• Concerns – One participant terminating employment may create substantial testing issues – If a NHCE terminates, problem if they are replaced by older employee66
  67. 67. Case Study 4• Small business owner – Business started in 2000 – Volatile revenues/profits – 25 year old child hired 2nd half of 2010• Young workforce not motivated by retirement program67
  68. 68. Case Study 4• Goals – Flexibility in employer contribution requirement – Provide opportunity for child to receive substantial retirement plan accumulations – Motivate employees to contribute to plan68
  69. 69. Case Study 4• Plan Design for 2011 – Non-Safe Harbor 401(k) Plan – PS feature with each participant in their own rate group69
  70. 70. Case Study 4 – 2011 ResultsEmployee Age Service Pay Deferral PSOwner 47 9 $300,000 $5,500 $49,000Sheldon 25 3 $40,000 $0 $2,000Leonard 26 3 $40,000 $0 $2,000Howard 30 2 $50,000 $1,000 $2,500Rajesh 31 2 $50,000 $1,000 $2,500Total $480,000 $7,500 $58,000 70
  71. 71. Case Study 4 -2012• 25 year old son of owner making $100,000 enters plan• Add nonelective SH 401(k) feature – Will allow owner’s child to maximize accumulations in plan• Add automatic enrollment71
  72. 72. Case Study 4–2012 1st Pass (Cross Test) Employee Age Service Pay Deferral PS Owner 48 10 $300,000 $17,000 $33,000 Owner’s Son 25 2 $100,000 $17,000 $33,000 Sheldon 26 4 $40,000 $0 $2,000 Leonard 27 4 $40,000 $0 $2,000 Howard 31 3 $50,000 $1,000 $2,500 Rajesh 32 3 $50,000 $1,000 $2,500 Total $580,000 $36,000 $75,000 72
  73. 73. Case Study 4 -2012• Cross testing blows up because of 25 year old HCE• Solution – Allocate using permitted disparity – Cannot use SH contribution to comply with Code §401(l) – No need to amend plan73
  74. 74. Case Study 4–2012 2nd Pass (401(l)) Employee Age Service Pay Deferral PS Owner 48 10 $300,000 $17,000 $33,000 Owner’s Son 25 2 $100,000 $17,000 $9,726 Sheldon 26 4 $40,000 $0 $3,891 Leonard 27 4 $40,000 $0 $3,891 Howard 31 3 $50,000 $1,000 $4,863 Rajesh 32 3 $50,000 $1,000 $4,863 Total $580,000 $36,000 $60,234 74
  75. 75. Case Study 4 -2012 ER Contribution ER ER % to ContributionContribution Owner’s Son % to all% to Owner others 54.8% 16.1% 29.1% 75
  76. 76. Case Study 4 -2012• Maximizes allocation to owner• Significant allocations to owner’s son• Tax efficient• Flexible76
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