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Pension Options for Small Business Owners


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New Comparability & Cash Balance plans offer small to mid-sized professional firms the opportunity to target large tax-deferred pension contributions to the owners while providing modest benefits to employees.

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Pension Options for Small Business Owners

  1. 1. NEW COMPARABILITY 401(K) PROFIT SHARING PLANS & CASH BALANCE PENSION PLANS A cost effective way to maximize retirement savings Prepared by Primoris Benefit Advisors, Inc.
  2. 2. WHAT IS A NEW COMPARABILITY PLAN? <ul><li>A profit sharing plan in which the employees are divided into groups </li></ul><ul><ul><li>The contribution varies for each group (i.e., 9% for owners & 3% for others) </li></ul></ul><ul><li>Groups must be based on a “reasonable business classification” such as Owners, Titles, etc. </li></ul>Prepared by Primoris Benefit Advisors, Inc.
  3. 3. WHO IS THE TARGET AUDIENCE FOR SUCH PLANS? <ul><li>Works very well for professional firms, physician groups, attorney, etc. </li></ul><ul><li>Target group should be older than a significant portion of their employees </li></ul><ul><li>Allows maximum deferrals for target group while maintaining flexibility in contribution amount </li></ul><ul><li>Those seeking to defer current income to avoid Federal & State taxation </li></ul>Prepared by Primoris Benefit Advisors, Inc.
  4. 4. ARE THERE DISCRIMINATION TESTS? <ul><li>The plan is tested for nondiscrimination on a cross-tested basis </li></ul><ul><li>This allows the plan to offer a higher contribution rate to older participants as the contributions are converted & tested at retirement age. </li></ul><ul><li>The discrimination test is passed if the employees in the favored groups are older than the employees in the less favored groups with lower contribution percentages. </li></ul>Prepared by Primoris Benefit Advisors, Inc.
  5. 5. CAN NEW COMPARABILITY BE USED WITH A 401(K) PLAN? <ul><li>Absolutely! - It works best for 401(k) plans in which the employees are not deferring enough to allow the highly compensated employees to defer at the level they desire. </li></ul><ul><li>Paired with a “safe-harbor” employer contribution of 3% of pay, it allows the highly compensation employees (“HCE’s”) to maximize their deferrals ($16,500 for 2009 plus catch-up, if applicable) </li></ul><ul><li>Allocation to non-highly compensated employees must be at least 1/3 of that provided to HCE’s or 5% (if less) </li></ul>Prepared by Primoris Benefit Advisors, Inc.
  6. 6. PROFIT SHARING ALLOCATION EXAMPLE Prepared by Primoris Benefit Advisors, Inc. Employee Age Compensation Contribution % of Pay Principal A 56 $230,000.00 $46,000.00 20.0% Principal B 50 230,000.00 46,000.00 20.0% NHCE 1 46 70,000.00 3,500.00 5.0% NHCE 2 37 50,000.00 2,500.00 5.0% NHCE 3 31 40,000.00 2,000.00 5.0% Totals $630,000.00 $100,000.00
  7. 7. KEY ISSUE – TOP-HEAVY <ul><li>Plan may be top-heavy (if account balances of “key employees” exceed 60% of total balances) – requires contribution of up to 3% to non-key employees </li></ul><ul><ul><li>The 3% “safe-harbor” employer contribution satisfies this requirement </li></ul></ul>Prepared by Primoris Benefit Advisors, Inc.
  8. 8. CASH BALANCE PLANS For those seeking far larger tax-deductible contributions Prepared by Primoris Benefit Advisors, Inc.
  9. 9. CASH BALANCE PLANS – WHY? <ul><li>Defined Contribution (“DC”) Plan limit “annual additions” to $49,000 in 2009 </li></ul><ul><li>Defined Benefit (“DB”) plan would allow tax deductible contributions of over $100,000 per targeted member </li></ul><ul><ul><li>DB Plans are more complicated & carry minimum funding requirements </li></ul></ul><ul><li>Cash Balance plans look very much like a DC plan with an “account balance” with a credited rate of interest </li></ul>Prepared by Primoris Benefit Advisors, Inc.
  10. 10. CASH BALANCE/DC COMBO EXAMPLE Prepared by Primoris Benefit Advisors, Inc. Comp Cash Balance Profit Sharing PS % of Pay 401(k) Deferral Total CB + PS + 401(k) Principal A 230,000 150,000 12,400 5.39% 20,500 182,900 Principal B 230,000 112,000 12,400 5.39% 20,500 144,900 NHCE 1 70,000 1,200 4,900 7.00% 6,100 NHCE 2 50,000 1,200 3,500 7.00% 4,700 NHCE 3 40,000 1,200 2,800 7.00% 4,000 Totals 620,000 265,600 36,000 41,000 342,600
  11. 11. CASH BALANCE PLAN – KEY ISSUES <ul><li>Subject to Minimum Funding Requirements </li></ul><ul><ul><li>Only sponsors with stable cash flow or willingness to commit to contributions for at least five (5) years </li></ul></ul><ul><li>Crediting rate provides opportunity & risk </li></ul><ul><ul><li>If plan earnings exceed crediting rate, the gains can be used to offset future contributions </li></ul></ul><ul><ul><li>If plan earnings lag crediting rate, the losses will necessitate higher future contributions </li></ul></ul><ul><li>While it may “look” like a DC plan with account balances, participants can not direct investments </li></ul><ul><li>Ability to defer $150K or more for targeted participants </li></ul>Prepared by Primoris Benefit Advisors, Inc.
  12. 12. WHAT’S NEXT? <ul><li>Work with your investment professional & a third-party administrator to perform a feasibility study to see if this would work for your group </li></ul><ul><li>Review your financial goals & limits </li></ul><ul><li>Amend your existing plan or start a new plan </li></ul><ul><li>Communicate enhanced benefits to the target group </li></ul>Prepared by Primoris Benefit Advisors, Inc.