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  • Copyright The WPI Welcome to this presentation on using Cash balance and super 401(k) plans to increase your tax-deferred retirement plan Contributions
  • Copyright The WPI
  • Copyright The WPI The fact of the matter is that most business owners are not putting anywhere near the maximum amount of money away tax deferred because they do not have an optimal plan design and because of the new pension protection act that was recently passed by congress, new plan designs are available that allow businesses to legally discriminate in favor of business owners unlike anytime in recent memory.
  • Copyright The WPI Look at this chart, with a traditional 401(k)/PSP, business owners under the age of 50 are only allowed to put away $46,000 and those over the age of 50 can only tax-defer 51,000. However, look at how much can be tax deferred into a CBP. An ADDITIONAL amount raging from $38,000 for a 31 year old and $188,000 for a 65 years old. Therefore, with a super 401(k) plan a 31 year old business owner can tax-defer $84,000 a year, a 55 year old can tax defer $189,000 and a 65 year old can tax defer $239,000 a year to build a retirement nest egg.
  • Copyright The WPI
  • Copyright The WPI Before the PPA, contributions were limited by rules based on covered payroll limits (25% deduction limit). The PPA introduced rules to eliminate (two-year transition) the covered payroll limit (25% deduction limit). The elimination allows greater contributions (and therefore deductions) when combining a defined contribution plan and a defined benefit plan. (In 2006/2007, if no more than 6% of covered payroll is contributed to a profit sharing plan, the 25% of covered payroll limit applies only to defined benefit plans. This limit is eliminated in 2008, but only for plans covered by PBGC guarantees.) [Enter any extra notes here; leave the item ID line at the bottom] Avitage Item ID: {{0DB62838-1455-4A44-AC75-9D2B78DC5661}}
  • Copyright The WPI Let’s look at a typical candidate for a stand alone Cash Balance plan: Joe Smith is the owner of Paradigm Company a distribution company with 4 associates. Paradigm Company has had five years of solid business growth and a consistent profit stream. Working with his broker, Joe decides now is the time to put aside more to fund his retirement benefits and look at ways to reduce tax. Joe wants to contribute as much as possible into a retirement plan. Let’s follow this case study to see how a Cash Balance plan can help meet Joe’s goals of increasing retirement benefits and reducing taxes. [Enter any extra notes here; leave the item ID line at the bottom] Avitage Item ID: {{DE0AB6CA-C75B-40D0-B98E-7B29AB816AA1}}
  • Copyright The WPI What does adopting a Cash Balance plan mean for Paradigm? The plan should cover all employees (as outlined in the plan document). The plan cannot discriminate in Joe’s favor…let’s look at what this means. A plan cannot discriminate in favor of “Highly Compensated Employees” (HCEs). HCEs are employees who either: Earn over $100,000 per year, or Own more than 5% of the company I should mention the $100,000 per year is a “look-back” calculation. This means you look at the prior plan year and determine who earned more than $100,000 to determine HCEs for the current year. Now that I’ve set the stage for Paradigm Company, let’s see how a Cash Balance plan fits the need. [Enter any extra notes here; leave the item ID line at the bottom] Avitage Item ID: {{38555087-6BD0-477D-BC5F-B4221B926FA5}}
  • Copyright The WPI Now let’s look at what a typical CBP design might look like for Steve prior to the PPA. The plan would allocate 15% of pay for all employees into the plan. This design allows steve to tax-defer $33,750, however plan contributions for the employees will equal $18,000 a year.
  • Copyright The WPI Reviewing the numbers, Paradigm Coompany is not likely to setup the Cash Balance plan because it does not make fiscal sense for Joe. (Note: fiscal sense meaning the cost/benefit to the owner for setting up the plan.) Joe, like most employers, might not be willing to spend an additional $18,000 on a staff contribution plus administrative work and fees to run a plan to get $33,750 contribution credits for himself. However, what if we could increase contributions made for Joe? What if we could increase contributions for Joe from 15% of pay to, for example, 73% of pay? The increase from 15% to 73% is just an example of what might be needed to meet a typical prospect’s objective of immediate tax savings for long-term retirement income. The increase will vary for each client depending on objectives and demographics. [Enter any extra notes here; leave the item ID line at the bottom] Avitage Item ID: {{93EED098-FE59-4A0A-BF97-3F15D69CEFAD}}
  • Copyright The WPI What if contribution for Steve was increased? Would that help? Look at the contribution for steve now. It’s $165k a year. That is a much better contirubtion number for Steve to meet his retirement goals. But how can such discrimination be allowed? Why doesn’t the company have to conrtibute more money for the employees?
  • Copyright The WPI 70% or more of the staff have a projected benefit percentage equal to or greater than the HCE’s projected Benefit percentage
  • Copyright The WPI If you look projected benefit as a % of current compensation you can see how the plan passes the 70% test. For retirement plan calculation purposes, Steve’s income is $225,000. His projected benefit with a $165,000 contribution at a retirement age is $15,400 which equals 6.8% of this that $225,000 number. Now, if you look at the EEs projected benefit at age 65 and calculate the it as a % of their current compensation, 3 of the 4 EEs have a higher % than steve does. Therefore the plan is compliant and steve can actually tax-defer $165,000 this year into the plan while only contributing a total of $18,000 for his staff. This is a terrific case design using CBP after the PPA. Since 3 out of 4 Staff, or 75%, have a projected benefit percentage greater than Joe (the HCE), the plan passes the Ratio Percentage Test. [Enter any extra notes here; leave the item ID line at the bottom] Avitage Item ID: {{F9346C32-724C-49C3-8D36-42B6F697BC12}}
  • Copyright The WPI
  • Copyright The WPI
  • Copyright The WPI The numbers for this example are staggering. I want you to focus on the 2 nd to last column on the right. Look at the CBP. For this three owner company, they were able to tax-defer an additional 250,000 collectively tax deferred for an employee cost of only $8750. prior to the PPA, the business would have been stuck with the last column where the cost for the employees would have been $42,848. Additionally, the owners were able to levelize the benefit which is important many times. However the wow factor with this plan design is that now after the PPA, with a creative Super 401(k) plan that uses both a PSP, 401(k) plan and CBP, the business owners were able to contribute sizable amounts of money to a tax-deferred qualified plan that that otherwise would have been price prohibitive. The Super 401(k) plan is the plan of the future for business owners who are looking to maximize pension plan contributions while minimizing the amount of money contributed for employees.
  • Copyright The WPI
  • Copyright The WPI
  • Cash balance plans.consumer

    1. 1. Using Cash Balance--Super 401(k) ™ Plans to Increase Retirement Plan Contributions By: Roccy DeFrancesco, JD, CWPP, CAPP, MMB Founder: The Wealth Preservation Institute Co-Founder: The Asset Protection Society Copyright--The WPI
    2. 2. The Retirement Dilemma <ul><li>Many business owners are NOT putting away sufficient tax-deferred dollars into a qualified retirement plan so they can: </li></ul><ul><ul><li>retire in a timely, and </li></ul></ul><ul><ul><li>comfortable financial manner. </li></ul></ul><ul><li>Why? </li></ul><ul><li>Some business owners don’t have the money. </li></ul><ul><li>But, many do and still do not fund the “maximum” amount of money they can to build a tax-deferred retirement nest egg. </li></ul>Copyright--The WPI
    3. 3. Why continued <ul><li>There are two main reasons business owners do not allocate more dollars to tax-deferred qualified plans: </li></ul><ul><li>1) Some believe they are already putting the “maximum” away; </li></ul><ul><li>2) Many believe that in order to put significantly more money away will be cost prohibitive because of sizable contributions for employees. </li></ul>Copyright--The WPI
    4. 4. Larger Owner Contributions Copyright--The WPI Age 401(k) only 401(k) with Profit Sharing Cash Balance Super 401(k) ™ Total 65 $20,500 $51,000 $188,000 $239,000 64 $20,500 $51,000 $193,000 $244,000 63 $20,500 $51,000 $197,000 $248,000 62 $20,500 $51,000 $202,000 $253,000 61 $20,500 $51,000 $191,000 $242,000 60 $20,500 $51,000 $181,000 $232,000 55 $20,500 $51,000 $138,000 $189,000 50 $20,500 $51,000 $106,000 $157,000 45 $15,500 $46,000 $81,000 $127,000 40 $15,500 $46,000 $62,000 $108,000 35 $15,500 $46,000 $47,000 $93,000 31 $15,500 $46,000 $38,000 $84,000
    5. 5. What is a Cash Balance Plan <ul><li>A CPB is a DB plan that looks like a PSP. </li></ul><ul><li>A DB plan is seen as a rigid plan that an employer funds so the plan can provide EEs a monthly benefit in retirement (such as $800 a month starting at age 65). </li></ul><ul><li>A CBP funds for a specific lump-sum dollar amount for EEs at retirement (an amount that can be rolled to an IRA so EEs can control the money). </li></ul><ul><li>EEs can see a growing account balance and understand the benefit of a CBP much more so than a traditional DB or 412(i) DB Plan. </li></ul>Copyright--The WPI
    6. 6. Pension Protection Act (PPA) of 2006: Good News for Cash Balance Plans <ul><li>Payroll limit – prior to PPA 2006 DC plans and combined DC/DB plans were limited to 25% of payroll. </li></ul><ul><ul><li>Under the PPA, the 25% limit is lifted for combined plans if profit sharing plan allocations do not exceed 6% of pay. </li></ul></ul><ul><ul><li>For some plans the 6% number can be raised to 25% for certain qualifying companies. </li></ul></ul><ul><li>What does this mean in English? </li></ul><ul><ul><li>That business owners can put away significantly more money after the act than before the act. </li></ul></ul>
    7. 7. Case Study : Jackson Tool & Die <ul><li>Mr. Jackson (Steve) owns a tool and die company with four (4) employees. </li></ul><ul><li>The company has had five years of solid business growth. </li></ul><ul><li>Steve wants to tax-defer more funds to build his retirement benefits. </li></ul><ul><li>Steve wants to reduce his taxes. </li></ul>Copyright--The WPI
    8. 8. Case Study : Jackson Tool & Die <ul><li>Starting a Cash Balance Plan requires the following: </li></ul><ul><li>Jackson T&D must cover the employees </li></ul><ul><li>The plan cannot discriminate in favor of Steve </li></ul><ul><ul><li>Cannot discriminate in favor of Highly Compensated Employees (HCEs) </li></ul></ul><ul><ul><li>HCEs are employees who earn over $105,000* or own more than 5% of the company </li></ul></ul>Copyright--The WPI * Adjusted annually for cost of living. 2009 = $110,000
    9. 9. Case Study: Sample Cash Balance Plan design <ul><li> Pay Contribution Credit % of Pay </li></ul><ul><li>Steve $225,000 $33,750 15% </li></ul>Copyright--The WPI Staff 30,000 4,500 15% Staff 30,000 4,500 15% Staff 30,000 4,500 15% Staff 30,000 4,500 15% $18,000 <ul><li>This is a common approach: </li></ul><ul><ul><li>Steve gets a contribution credit of $33,750 -> 15% of his $225,000 compensation; 2008 = $230,000; 2009 = $245,000 </li></ul></ul><ul><ul><li>All staff also get 15% of pay </li></ul></ul>
    10. 10. Case Study : Is the plan financially viable for Steve? <ul><li>Should Jackson T&D contribute to this plan? </li></ul><ul><ul><li>Benefit for Steve = $33,750 contribution </li></ul></ul><ul><ul><li>Cost for Steve = $18,000 staff contribution </li></ul></ul><ul><ul><li>NO WAY! The cost of the plan simply does not justify implementation . </li></ul></ul><ul><li>How can Steve make the plan more viable? </li></ul><ul><ul><li>Increase the size of Steve’s contribution </li></ul></ul><ul><ul><li>Lower EE Costs </li></ul></ul><ul><li>This can be done with a better plan design. </li></ul>Copyright--The WPI
    11. 11. Case Study : What if the contribution for Steve is increased? Copyright--The WPI Staff 25 30,000 4,500 15% Staff 50 30,000 4,500 15% Staff 23 30,000 4,500 15% Staff 30 30,000 4,500 15% Cash Balance Age Pay Contribution % of Pay Steve 63 $225,000 $165,000 73% How does this satisfy the non-discrimination rules? Note: EE Contributions are Age Neutral !!!
    12. 12. Case Study : Ratio Percentage Test <ul><li>In order to allow more to be contributed for Steve, the plan must pass the Ratio Percentage Test : </li></ul>Copyright--The WPI 70% or more of staff have a projected benefit percentage equal to or greater than the HCE’s projected benefit percentage
    13. 13. Projected Benefit Percentage <ul><li>Age Pay Contrib. </li></ul><ul><li>Steve 63 $225,000 $165,000 </li></ul>Copyright--The WPI Case Study: Ratio Percentage Test Staff 1 25 30,000 4,500 31,700 2,700 9.0% 2 50 30,000 4,500 9,400 800 2.7% 3 23 30,000 4,500 34,900 3,000 10.0% 4 30 30,000 4,500 24,800 2,100 7.0%    Conclusion: Steve can increase his contribution to the Cash Balance plan Projected Acct. Bal. Age 65 $181,900 Projected Benefit Age 65 $15,400 Projected Benefit % 6.8%
    14. 14. Super 401(k) ™ <ul><li>The PPA 2006 elimination of the 25% of payroll contribution limit for combined plans has spawned the creation of the Super 401(k) ™ Plan. </li></ul><ul><li>A Super 401(k) ™ Plan is a plan that can use a combination of all plans (401(k) plans, profit sharing plans, and a DB or CB plan) to create maximum contributions for the owners of a company with cost effective and manageable age neutral contributions for the rank-in-file employees. </li></ul>Copyright--The WPI
    15. 15. Example # 2 <ul><li>What you will notice about the following example is that a Super 401(k) ™ allows the business owners to put away significantly more money by adding a Cash Balance Plan with very low add-on costs for the EEs . </li></ul><ul><li>Also notice for example purposes that the CBP contribution is level for owners of different ages. </li></ul>Copyright--The WPI
    16. 16.     Date Annual   Profit     Cash D/B Name Age of Hire 415 Comp 401k Sharing Match Total Balance Traditional 3 Shareholders                 JLP 55 1/01.93 230,000 20,500 13,800 9,200 43,500 100,000 139,397 RK 41 6/5/00 230,000 15,500 13,800 9,200 38,500 100,000 71,103 MK 41 6/5/00 115,000 15,500 6,900 4,600 27,000 50,000 39,500 Subtotals     575,000 51,500 34,500 23,000 109,000 250,000 250,000 GA 21 8/22/05 25,000 0 1,875 0 1,875 1,250 2,498 RO 40 2/14/05 27,000 0 2,025 0 2,025 1,250 6,435 GR 33 12/6/04 28,000 0 2,100 0 2,100 1,250 6,125 KL 27 1/12/07 33,000 0 2,475 0 2,475 1,250 4,240 ME 34 8/1/01 34,500 0 2,588 0 2,588 1,250 7,929 TI 29 4/14/05 34,500 0 2,588 0 2,588 1,250 5,001 WI 39 7/2/01 54,000 0 4,050 0 4,050 1,250 10,620 KL (Key) 50 1/1/01 125,000 20,500 9,375 5,000 34,875 0 0 Subtotals     361,000 20,500 27,076 5,000 52,576 8,750 42,848 Grand Totals     936,000 72,000 61,576 28,000 161,576 258,750 292,848 Percent to Shareholders   65.6% 71.5% 56.0% 82.1% 67.5% 96.6% 85.4%
    17. 17. Questions to ask yourself <ul><li>1) Have you ever heard of a Cash Balance Plan or a Super 401(k)™ Plan ? </li></ul><ul><li>2) Do want to maximize the amount of money you contribute through your business and minimize the amount you contribute for your employees? </li></ul><ul><li>3) Has your current pension plan provider contacted you to discuss the new PPA and how it may have a positive effect on your company’s qualified plan design? </li></ul><ul><li>--If not, your administrator and financial planner who helped you setup your plan are doing you a disservice (which could be costing you thousands of dollars ). </li></ul>Copyright--The WPI
    18. 18. Summary <ul><li>There is no doubt that after the PPA there are new opportunities for business owners to income-tax defer significantly more each year for retirement through a Super 401(k) ™. </li></ul><ul><li>A CBP can now be added to many plans at very little cost. </li></ul><ul><li>Isn’t it time you found out if your business’s current plan is accomplishing your goals? </li></ul><ul><li>If you are ready, contact your locally trusted advisor. </li></ul>Copyright--The WPI