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Professional firm cash balance plans


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A brief overview of cash balance pension plans for professional firms, with an illustration of tax deduction and contribution opportunities.

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Professional firm cash balance plans

  1. 1. Professional Firm Cash Balance Plans September 21, 2009
  2. 2. <ul><li>It’s a defined benefit (DB) plan </li></ul><ul><ul><li>subject to IRS maximum benefit limits </li></ul></ul><ul><ul><li>NOT subject to $49,000 defined contribution (DC) maximum deduction </li></ul></ul><ul><ul><li>can be used with a maximum DC plan </li></ul></ul><ul><ul><li>contributions are not discretionary </li></ul></ul>What is a cash balance plan?
  3. 3. <ul><li>It looks like a DC plan </li></ul><ul><ul><li>has an account for each participant </li></ul></ul><ul><ul><li>account grows with pension and interest credits </li></ul></ul><ul><ul><li>money paid out is directly related to money paid in </li></ul></ul>What is a cash balance plan?
  4. 4. <ul><li>Corporate plans: DC look and benefit pattern </li></ul><ul><li>Different reasons for professional groups </li></ul><ul><ul><li>Want to put away – and deduct - more than $49,000 DC limit </li></ul></ul><ul><ul><li>What you receive is directly tied to what you contribute – important for multiple owners </li></ul></ul><ul><li>Pension credit formula can be tied to compensation, age, service, title, points, etc. </li></ul>Corporate vs. Professional Plans
  5. 5. <ul><li>Profit sharing formula </li></ul><ul><ul><li>7½% integrated plan, plus </li></ul></ul><ul><ul><li>extra for top partners to reach DC maximum </li></ul></ul><ul><li>Cash balance formula </li></ul><ul><ul><li>Pension credit based on age and partnership percentage </li></ul></ul><ul><ul><li>Interest credit based on 10-year Treasuries (3.53% for 2009) </li></ul></ul>Sample plans
  6. 6. Sample plans $150,000 $800,000 Gross pay $36,513 $6,935 $16,500 (optional) $13,077 $121,674 Partner Age 35 $177,000 $122,500 $22,000 (optional) $32,500 $245,000 Partner Age 55 Total Cash Balance Pension Credit 401(k) deferral Profit Sharing Recognized Pay (net pay)
  7. 7. <ul><li>Plan must include 50 employees or 40% of all employees – with “meaningful” benefits </li></ul><ul><li>Need to satisfy cross-testing “gateways” </li></ul><ul><li>Limits on the interest crediting rate </li></ul><ul><li>Investing to match interest credits </li></ul><ul><li>In most cases, participants may not direct the investment of their accounts </li></ul><ul><li>Need to keep “funding target” 110% covered to pay lump sums to top 25 HCE’s </li></ul>Issues to consider
  8. 8. <ul><li>January 2007 guidance for “statutory hybrid plans”, Notice 2007-6 </li></ul><ul><ul><li>Market rate of return: guidance expected in 2007 </li></ul></ul><ul><ul><li>“ Preservation of Capital” a tricky issue: §411(b)(5) </li></ul></ul><ul><ul><li>Temporary safe-harbor rates </li></ul></ul><ul><ul><ul><li>Long-term investment grade corporate bonds, 412(b)(5) </li></ul></ul></ul><ul><ul><ul><li>3rd segment yield curve rate, §430(h)(2) </li></ul></ul></ul><ul><ul><ul><li>30-year Treasury, §417(e)(3) </li></ul></ul></ul><ul><ul><ul><li>Notice 96-8 rates </li></ul></ul></ul><ul><li>If plan meets vesting and interest credit rules, then: </li></ul><ul><ul><li>No age discrimination problem (prospectively) </li></ul></ul><ul><ul><li>No “whipsaw”: lump sum equals account balance </li></ul></ul>Pension Protection Act (PPA) Changes
  9. 9. Questions? Van Iwaarden Associates 612-596-5961, 888-596-5960 [email_address]