Qualified Retirement Plans


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  • Slide 4 Let’s start by looking at the two major types of qualified retirement plans: the defined contribution plan and the defined benefit plan.
  • Slide 7 We’re going to start out by looking at defined benefit plans because these are the plans that will enable your older clients to accumulate the highest possible benefits in the few years they have until retirement. We’re going to look at two types of defined benefit plans: the Traditional Defined Benefit Plan and the 412(i) or fully insured plan. Let’s start with the 412(i) plan.
  • Slide 47 We will have, in many cases, combined the New Comparability Profit Sharing plans with safe harbor 401(k) plans so let’s take a minutes to review safe harbor 401(k) plans. These 401(k) plans are not subject to certain nondiscrimination rules known as the ADP/ACP tests. This means your business owners can defer right up to the maximum deferral limits regardless of whether their other employees defer anything at all.
  • Slide 35 The Traditional Profit Sharing plan is your simplest profit sharing plan. The business owner is allowed to contribute anywhere between 0 and 25% of the plan payroll each year. He can change this contribution from year to year and he doesn’t need to have profits to make this contribution. The contribution is allocated in proportion to the salary with no age-weighting. Each participant will get the same percentage of his salary as an allocation.
  • Slide 46 You may be asking yourself: “How could a plan get away with this? Isn’t it discriminatory?” The new comparability plan works because it uses something called cross testing to satisfy the nondiscrimination rules. That means that this defined contribution is tested as if it were a defined benefit plan. The plan’s servicing firm uses computer software to project each participant’s contributions to retirement. The total accumulated contribution for each participant is then converted into a monthly benefit and the monthly benefits are tested for discrimination.
  • Slide 45 With a new comparability plan, however, this can be easy to accomplish. Here is an example of a new comparability plan used where there are two business owners with different ages and different salaries. In most age-weighted plans, like the age-based plan shown on the left, you probably couldn’t design a plan where the business partners could have equal contributions. In this new comparability plan shown on the right, both owners are receiving the same contributions. This can be a very valuable feature for businesses with multiple owners.
  • Slide 16 The next plan we will look at is the Traditional Defined Benefit Plan. The clients these plans work best for are very similar to the clients that the 412(i) plan works well for. Your client should be age 40 or older with relatively steady profits. He should also have relatively few employees and ideally these employees should be younger than the business owner because the contributions for older employees will be higher. However, since the cost for the other employees is considerably lower than in a 412(i) plan, these plans will sell to clients with many more than four employees.
  • Slide 10 The major advantages of the 412(i) plans are that they can provide older business owners with the highest possible benefits, contributions, and deductions. However, in an uncertain economy, these plans can also provide your clients with an incredible level of security. All the plan assets are in policies with cash values that are completely guaranteed and totally recession-proof. Your older clients can also protect their families with higher levels of death benefit in the fully insured plan than in virtually any other type of qualified retirement plan.
  • Slide 11 We’ve been talking about how much higher the contributions can be for older employees in 412(i) Plans. Let’s look at just what we mean. In this example we are showing the maximum possible first year contribution four older business owners could have in three different types of qualified retirement plans in 2004. I’d like you to look at Jim, the 60 year old. If you had set him up with a profit sharing plan, his contribution would be just $44,000. If you had designed the maximum possible Traditional Defined Benefit Plan, both he and you would be happier because his contribution would be over $236,000. However, look at his contribution in the 412(i) plan. He is getting over $450,000. That’s 923% more than he’d get in a maximum defined contribution plan.
  • Slide 59 Some of your client will need greater contribution flexibility and a lower cost for the other employees. For these clients a defined contribution plan is a better choice than either of the defined benefit plans. Although the Target Benefit Plan is age-weighted, it is not a good choice because of its required, inflexible contribution. If your client has no employees, a Traditional Profit Sharing Plan will allow them to contribute any amount from zero to 25% of the plan payroll each year. Adding a 401(k) element to the plan may enable them to contribute even more than the 25% of the plan payroll. If your clients have one to three employees, an Age-Based Profit Sharing/401(k) Plan may enable them to contribute up to $44,000 for themselves while limiting their contributions for their other employees to just 3 to 10% of their salaries, depending on their ages. If your clients have four or more employees, a New Comparability Profit Sharing/401(k) Plan may let work better for them. Older clients have fewer years to achieve their retirement goals so selecting the right plan can make a major difference in their retirement security. If you want to discuss which plan would best for any specific clients, please feel free to contact us.
  • Slide 2
  • Qualified Retirement Plans

    1. 1. How Many Years to Retirement? Which Qualified Plan Is Right for You? Castle Financial Advisors, LLC Like the Knights of Olde, Our Advisors Pledge to Help You Build & Fortify Your Financial Castle.
    2. 2. Age is not the Only Factor <ul><li>Traditional 401(k) Plans </li></ul><ul><li>Safe Harbor 401(k) Plans </li></ul><ul><li>Traditional Profit Sharing Plan </li></ul><ul><li>Age-Weighted PS Plan </li></ul><ul><li>New Comparability PS Plan </li></ul><ul><li>Traditional Defined Benefit Plans </li></ul><ul><li>Fully Insured 412i Defined Benefit Plans </li></ul><ul><li>Defined Benefit / Defined Contribution </li></ul><ul><li>Floor Offset Defined Benefit Plans </li></ul><ul><li>New Comparability Defined Benefit Plans </li></ul>Two Types of Qualified Plans Defined Contribution Defined Benefit
    3. 3. What is Your Annual Plan Budget? <ul><li>Defined Contribution Plans </li></ul><ul><li>Participant Receives Account Balance at Retirement Annual </li></ul><ul><li>Contribution = Usually % of Current Salary </li></ul><ul><li>Maximum Annual Contribution for each participant is the lesser of $41,000* or 100 % of salary for 2004 and thereafter </li></ul><ul><li>May favor younger or older employees based upon plan design </li></ul><ul><li>Define Benefit and 412(i) Fully Insured Plans </li></ul><ul><li>Pension at Retirement = Set by Plan Formula </li></ul><ul><li>Annual Contribution is Amount Needed Each Year to Provide Pension at Retirement </li></ul><ul><li>No Dollar Limit on Annual Contribution </li></ul><ul><li>Maximum Dollar Limit on Pension Benefit Lesser of 100% Salary* or $165,000* </li></ul><ul><li>Typically favors older employees </li></ul><ul><ul><li>* Dollar Amount indexed and may increase each year. </li></ul></ul>
    4. 4. Safe Harbor 401(k)Plans What Are They? <ul><li>Non Discrimination Tests Waived </li></ul><ul><ul><li>No ADP/ACP Tests </li></ul></ul><ul><ul><li>Owner Can Defer Up to Maximum Limit </li></ul></ul><ul><ul><ul><li>Regardless of Amount of Employees’ Deferrals </li></ul></ul></ul><ul><li>Must Provide One of the following Safe Harbor Contributions </li></ul><ul><ul><li>Either Non-elective Contribution </li></ul></ul><ul><ul><ul><li>3% Compensation To All Eligible Employee </li></ul></ul></ul><ul><ul><li>Matching Contribution </li></ul></ul><ul><ul><ul><li>100% First 3% Compensation Deferred plus </li></ul></ul></ul><ul><ul><ul><li>50% Next 2% Compensation Deferred </li></ul></ul></ul><ul><li>No Minimum Top Heavy Contributions Required! </li></ul>
    5. 5. Traditional Profit Sharing/401(k)Plans What Are They? <ul><li>Traditional Profit Sharing Plan </li></ul><ul><ul><li>Contribution of 0 to 25% Plan Payroll </li></ul></ul><ul><ul><ul><li>No Profits Necessary </li></ul></ul></ul><ul><ul><ul><li>Can Change Contribution Each Year </li></ul></ul></ul><ul><ul><li>Allocation – in Proportion to Salary </li></ul></ul><ul><ul><ul><li>No Age Weighting </li></ul></ul></ul><ul><li>401(k) Element </li></ul><ul><ul><li>Elective Deferral - $13,000* in 2004 </li></ul></ul><ul><ul><li>Catch-Up Contribution - $3,000* in 2004 </li></ul></ul><ul><ul><ul><li>Allowed for Those Age 50 & Older </li></ul></ul></ul><ul><ul><li>Max. Allocation for Individual </li></ul></ul><ul><ul><ul><li>$44,000** in 2004 if Age 50 or Older </li></ul></ul></ul><ul><ul><ul><li>$41,000** in 2004 if Under Age 50 </li></ul></ul></ul><ul><ul><ul><li>*Scheduled increases through 2006 & indexed for inflation after 2006 </li></ul></ul></ul><ul><ul><ul><li>**Indexed for inflation </li></ul></ul></ul>
    6. 6. New Comparability Profit Sharing Plans What Are They? <ul><li>Non Discrimination Test - Cross Testing </li></ul><ul><ul><li>Test Defined Contribution Plan as Defined Benefit Plan </li></ul></ul><ul><ul><li>Project Contributions to Retirement </li></ul></ul><ul><ul><li>Convert Accumulated Contributions to Monthly Benefit </li></ul></ul><ul><ul><li>Designed to Provide older groups of Employees a Larger Benefit </li></ul></ul><ul><li>Plan Contribution Levels May Be Customized </li></ul><ul><ul><li>Preferred Employees may receive a Higher Contribution </li></ul></ul><ul><ul><li>Rank & File Employees may receive a Lower Contribution * </li></ul></ul><ul><ul><li>Each Year based upon Plan Budget & Census Information </li></ul></ul><ul><ul><li>401(k) Element may be added to Maximize Contributions </li></ul></ul><ul><ul><li>Allocation Levels Based on Job Classifications </li></ul></ul>The Minimum employee contribution permitted is typically 5 percent
    7. 7. New Comparability Profit Sharing Plans Customized Allocations Owner 60 205,000 41,000* 20% 41,000* 20% Owner 54 150,000 30,000 20% 41,000* 27% Mgr 50 80,000 16,000 20% 8,000 10% EE 1 35 35,000 7,000 20% 1,750 5% EE 2 34 30,000 6,000 20% 1,500 5% EE 3 24 25,000 5,000 20% 1,250 5% Totals $105,000 $94,500 Both Owners Get Same Contribution Manager Receives Higher Contribution Rate than Other Employees Traditional PSP New Comp PSP Age Salary Contribution Contribution *2004 maximum allocation, indexed for inflation & may increase in future
    8. 8. Defined Benefit Plans For Maximum Plan Contributions! <ul><li>Client Profile </li></ul><ul><ul><li>Ages 45-85 </li></ul></ul><ul><ul><li>Relatively Stable Profits </li></ul></ul><ul><li>Employees </li></ul><ul><ul><li>Relatively Few Employees </li></ul></ul><ul><ul><li>Relatively Young Employees </li></ul></ul><ul><li>Client Goals </li></ul><ul><ul><li>Maximum </li></ul></ul><ul><ul><ul><li>Contributions/Deduction </li></ul></ul></ul><ul><ul><ul><li>Benefits </li></ul></ul></ul><ul><ul><li>Sustained Plan Contributions </li></ul></ul><ul><ul><li>Totally Flexible Contributions not Important </li></ul></ul>
    9. 9. 412(i) Plans Advantages for Older Business Owners <ul><li>Highest Possible </li></ul><ul><ul><li>Contribution/Deduction </li></ul></ul><ul><ul><li>Benefits </li></ul></ul><ul><ul><li>Death Benefits </li></ul></ul><ul><li>Highest Security </li></ul><ul><ul><li>Benefits Guaranteed </li></ul></ul><ul><ul><li>Totally Recession Proof </li></ul></ul><ul><li>No Investment Fund </li></ul><ul><ul><li>Guaranteed Interest Rate </li></ul></ul><ul><ul><li>No Stock Market Investments </li></ul></ul>
    10. 10. Comparison of Qualified Plans First Year Contributions 45/62 41,000 80,278 164,970 50/62 44,000 133,131 258,019 55/62 44,000 211,448 395,634 60/65 44,000 236,910 450,112 * Assumes maximum contributions & maximum life insurance for 2004. Traditional Defined Benefit uses Guardian Life PTWL100 Pref, 412(i) uses Guardian Life PTWL3 Pref. & PTAPRA-3F Att Age/ Ret Age Defined Defined Contribution * Benefit * 412i Plan *
    11. 11. A Qualified Retirement Plan is Available for You! <ul><li>Defined Contribution Plans </li></ul><ul><ul><li>401(k) Savings Plans </li></ul></ul><ul><ul><ul><li>Excellent Employee Contributory Plan </li></ul></ul></ul><ul><ul><li>Traditional Profit Sharing Plans </li></ul></ul><ul><ul><ul><li>Ideal for One-Person Plans </li></ul></ul></ul><ul><ul><li>Age-Based Profit Sharing Plans </li></ul></ul><ul><ul><ul><li>Each Age Has Separate Allocation Level </li></ul></ul></ul><ul><ul><li>New Comparability Profit Sharing Plans </li></ul></ul><ul><ul><ul><li>Different Allocation Levels for Different Groups </li></ul></ul></ul><ul><li>Defined Benefit Plans </li></ul><ul><ul><li>412(i) Plans </li></ul></ul><ul><ul><ul><li>Highest Possible Contributions </li></ul></ul></ul><ul><ul><li>Traditional Defined Benefit Plans </li></ul></ul><ul><ul><ul><li>High Contributions with More Flexibility </li></ul></ul></ul>
    12. 12. The information in this presentation is designed to be general in nature and for educational purposes only . Castle Financial Advisors , its agents and employees do not give tax or legal advice .