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    Combo Design Presentation Combo Design Presentation Presentation Transcript

    • Overview of the Pension Protection Act of 2006 as it applies to DB/DC combo plans
    • PPA ’06 Changes
      • Increases Defined Benefit (DB) plan deduction limits and repeals combined deduction limit when adding a Defined Contribution (DC) plan
      • Combined plan deduction limit for 404(a)(7) does not apply if the ER Contribution to a DC Plan does not exceed 6% of compensation
        • Could maximize the DB contribution
        • Replaces the old 25% rule
    • PPA ’06 Changes to DB/DC Plans
      • If the Employer contributions to the DC plan do exceed 6% of compensation, the new combined limit of 31% of compensation applies
      • Starting in 2008, combined deduction limit does not apply to PBGC-covered plans regardless of level of contributions
      • Non-PBGC plans still subject to the above rules
        • Plans can not elect to be covered by PBGC!
        • Though hiring children over 25 years might help!
      • Strategy One: Emphasize the DB
        • ER contributions to a DC plan, especially 401(k), are limited to 6% of total compensation (higher if PBGC)
        • The 6% to a 401(k) plan can be used to satisfy top heavy, safe harbor requirements AND gateway, MAX DB
      • Strategy Two: Emphasize the DC
        • Maximize the contribution to the owners under a PS or 401(k) plan, compute the percentage of ER contribution as a % of compensation, subtract this amount from 31%.
        • The difference is the contribution to the DB plan
      Two Major Strategies
    • Aggregation of Plans
        • THIS IS WHAT MAKES THE COMBO WORK!!!
      • In addition to designing plans individually to use the new limits, we can combine the plans using “permissive aggregation” thus testing both plans together:
        • This helps pass coverage and discrimination tests while often reducing the amount given to rank and file
    • Points to Consider
        • The defined benefit plan can be traditional, tiered and/or cash balance
          • Traditional/Tiered are based upon historical salary averages
            • This creates a required annual contribution even if the compensation drops, while
          • Cash balance plans normally written as a percent of current compensation, so if comp drops, so does the contribution
            • Easy to communicate to employees in terms of deposits and what is owed upon retirement or termination
    • Plan Designs in Action
    • SEPS are not always a GOOD idea!
      • It takes $196,000 of W-2 compensation to get to $49,000 in a SEP (25% of compensation)
      • It takes $130,000 of W-2 compensation to get to $49,000 in a 401(k) ($16,500 plus 25% of comp)
      • But MUCH lower W-2 compensations to get to $49,000 in a CB/DC Combo arrangement
        • Age 50, $35,000 - Age 55, $33,000
        • $16,500 plus 6% of compensation plus CB costs!!!
        • (No compensation = No required contribution!)
        • Need to be careful when a ER is a sole proprietor
    • One Person Designs
      • Combination of Defined Benefit Plan: Traditional or Cash Balance with a Defined Contribution Plan designed to maximize contributions, the greater of:
        • 31% of compensation ($75,950 for 2009) plus 401(k) salary deferrals ($16,500), or
        • 6% of compensation plus salary deferrals in a 401k Plan plus 100% of compensation in the cash balance or DB plan limited by 415 (can be greater than 31%)
        • Catchup deferrals of $5,500 can be added to both
    • One Person Designs
      • Cash Profit
      • Balance Sharing 401(k)
      • NAME Contribution Contribution Contribution Totals -------------- --------------- --------------- --------------- -------------
      • Up to 31% of Compensation - $245,000
      • Owner 30.. 43,450 32,500 16,500 92,450
      • Owner 35.. 43,450 32,500 16,500 92,450
      • 6% plus cost of DB – Comp at $245,000
      • Owner 40.. 77,979 14,700 16,500 109,179
      • Owner 45.. 101,912 14,700 16,500 133,112
      • Owner 50.. 133,195 14,700 22,000 169,895
      • Owner 55.. 174,077 14,700 22,000 210,777
    • One HCE Design
      • If the employer is a professional service corporation with less than 25 employees, then the limits are 6% of comp plus salary deferrals for the 401(k) Plan and Maximum for the Cash Balance/Defined Benefit Plan (or 31% if 401(k) goes over 6%)
      • If the employer is NOT a professional service corporation with less than 25 employees and covered by PBGC, then the limits are 25% of comp plus salary deferrals for the 401(k) Plan and maximum for the Cash Balance/Defined Benefit Plan
    • One HCE Design-Comp/Comp Age Comp PS Contribution Safe Harbor Deferrals Totals Dr. S A 68 245,000 25,150 7,350 22,000 54,500 Subtotal 245,000 25,150 7,350 22,000 54,500 PA1 B 58 70,000 8,400 2,100 0 10,500 PA2 B 48 70,000 8,400 2,100 0 10,500 Subtotal 140,000 16,800 4,200 0 21,000 Er Totals $385,000 $41,950 $11,550 $22,000 $75,500 Total ER % of Comp 10.90% 3.00% Owners % 72.19% 3% Safe Harbor plus 12% profit sharing contribution to everyone Dr. S's PS Contribution limited by 415
    • One HCE Design-Integrated Age Comp PS Contribution Safe Harbor Deferrals Totals Dr. S A 68 245,000 25,150 7,350 22,000 54,500 Subtotal 245,000 25,150 7,350 22,000 54,500 PA1 B 58 70,000 4,665 2,100 0 6,765 PA2 B 48 70,000 4,665 2,100 0 6,765 Subtotal 140,000 9,330 4,200 0 13,530 Er Totals $385,000 $34,480 $11,550 $22,000 $68,030 Total ER % of Comp 8.96% 3.00% Owners % 80.11% 3% Safe Harbor plus 6.67% to Rank and File (integrated basis) Dr. S's PS Contribution limited by 415
    • One HCE Design- Combo Design Age Comp CB Contribution 401(k) ER Contribution Deferrals Totals Dr. S A 68 245,000 120,000 0 5,500 125,500 Subtotal 245,000 120,000 0 5,500 125,500 PA1 B 58 70,000 2,100 8,400 0 10,500 PA2 B 48 70,000 2,100 8,400 0 10,500 Subtotal 140,000 4,200 16,800 0 21,000 Er Totals $385,000 $124,200 $16,800 $5,500 $146,500 Total ER % of Comp 32.26% 4.36% Owners % 85.67% • The Cash Balance Plan • The 401(k) Plan `100% to Class A limited to 415/or passing test `0% to Class A `3% to Class B `catch up salary deferrals `12% to Class B
    • Multiple HCEs and Employees
      • The following designs are for a client with one major owner (54%), two minor shareholders (23% each) plus six rank and file employees
      • Combination of a Cash Balance Plan, 3% NHCEs, set $ for MSH and Safe Harbor 401(k) Plan , 3% SH plus 3.7% PS to NHCEs
      • Objective – Exit Strategy for Majority Owner
        • Maximize the Majority Owner
        • Structure transfer of Ownership to Minority Owners
    • Age Comp CB PLAN ER DEPOSIT DEFERRALS TOTALS HCE1 55 245,000 230,671 7,350 22,000 260,021 HCE2 42 110,000 11,000 3,300 16,500 30,800 HCE3 41 100,000 11,000 3,000 16,500 30,500 Subtotal 455,000 252,671 13,650 55,000 321,321 NHCE1 35 80,000 2,400 5,360 0 7,760 NHCE2 32 65,000 1,950 4,355 0 6,305 NHCE3 29 50,000 1,500 3,350 0 4,850 NHCE4 39 45,000 1,350 3,015 0 4,365 NHCE5 27 45,000 1,350 3,015 0 4,365 NCHE6 24 30,000 900 2,010 0 2,910 Subtotal 315,000 9,450 21,105 0 30,555 Plan Totals 770,000 262,121 34,755 55,000 351,876 Percent to HCEs 91.32% Percent of Compensation 38.55%
      • Clearly identify the client’s objectives
      • Revisit those objectives frequently (annually?)
      • Design the simplest plan or combination of plans to meet those objectives
      • General test designs usually provide better results than safe-harbor design
      • However, with very small groups these designs require constant tweaking as employees come and go
      • Exception: Young HCEs will always wreak havoc with a general-tested plan design unless they are specifically excluded from participation. If they are to be included, a safe harbor design may be the best
      • Owners and partners of different ages may require DB/DC combination designs to meet different objectives
      • When using a general test design, rarely hurts to cover all employees in the arrangement. Helps with nondiscrimination testing, improves the deductible limit, and helps reduce the variability of year-to-year results.
      • Caution: May be difficult to amend plan under 1.401(a)(4)-11(g) – AFTAP less than 60% may be a problem
      • For younger HCEs, it generally makes sense to maximize the defined contribution arrangement, as it is impossible to make up for lost DC contributions. In a defined benefit plan (assuming at least 10 years of participation), a participant can make up for years where the DB was not maximized
      • Question: Do you “burn” your DB 415 limits for a younger HCE? (Need guidance on MASD (multiple annuity starting date) rule for 415)
      • Any prior DB plan accruals?
      • Have any members of the controlled or affiliated service group maintained a defined benefit plan in the past?
      • Continue to maintain existing profit sharing or 401(k) plan?
      • DB Plan to be covered by PBGC?
      • Goal in establishing a defined benefit plan?
      • Principals who are 10-15 years from retirement Younger principals’ goals?
      • Maximizing current take-home pay or savings?
      • Attract or retain key personnel?
      • Any industry-standard plan types or provisions?
      • Can the business maintain the plan(s) for the long haul?
      • What about the impact of changes in the market?
    • New Limits for 2009
      • Salary Deferral - $16,500
      • Catch-up - $5,500 for those over 50 years of age
      • DC Limit - $49,000 annual additions
      • DB Limit - $16,250 per month
      • Compensation Limit - $245,000
      • Highly Compensated - $110,000
      • Taxable Wage Base - $106,800
    • Next Step
      • Complete the Request for Information on our website. We will provide you a side by side comparison of how a combo design can work for your client!
      • Contact RPS, Inc. at 407-365-3490 or 888-376-7222, or visit us at www.webpensionplans.com
      • Technical questions can be directed to Jeffrey T. Sparks, QPA, CLU, ChFC, FLMI