© 2009, Kravitz Inc. All rights reserved. Greater Tax Deferral using Cash Balance Plans

Greater Tax Deferral usingCash Balance Plans

Qualified Retirement Plans-2 Types

Defined Contribution Plans 401(k) Plans Profit Sharing Plans

Defined Benefit Plans Traditional Defined Benefit Plans Cash Balance Plans (“hybrid plans”)

The Hybrid for the 21st Century

DefinedBenefit

DefinedContribution

CashBalance

An ERISA-governed, tax-qualified plan Tax deduction, tax deferral Creditor protection

Current Trend

Traditional defined benefit plans 1985: 112,208 2005: 29,000

Cash Balance Plans 2000: 4% 2005: 10%

Source: Employee Benefit Research Institute, 2005

2009 Contribution Limits

401(k) with

Age 401(k) only Profit Sharing Cash Balance TOTAL

60 - 65 $22,000 $54,500 $219,000 $273,500

55 - 59 $22,000 $54,500 $162,000 $216,500

50 - 54 $22,000 $54,500 $117,000 $171,500

45 - 49 $16,500 $54,500 $85,000 $139,500

40 - 44 $16,500 $49,000 $60,000 $109,000

35 - 39 $16,500 $49,000 $43,000 $92,000

30 - 34 $16,500 $49,000 $31,000 $80,000

2009 Contribution Limits

401(k) Profit Sharing & Cash Balance Plans

DB Versus CB Comparison

• Formula

Defined Benefit Plans Cash Balance Plans

• Account balance

(direct tracking)

• Archaic • Looks like 401(k) Profit Sharing

• Age-sensitive • Age-neutral (relatively)

Background: three key dates

1985 1990 2000

Introduced byBankAmerica

Pension Protection Act

•Safe Harbors•Clarification

Conversions: Defined Benefit to Cash Balance

How Do Cash Balance Plans Work?

401(k) Cash Balance

Guaranteed interest

credit (≈5%)ContributionContribution Earnings

Plan Investments

Earnings …next year’s contribution

7-year make-up

Investment Dynamics

• Pooled investments, no self-direction

• Guaranteed interest credit ~5%

• Investment risk with the employer

Investment Options

• Not dictated by regs

• Cash Balance Mutual Fund

• Portfolios with fixed-income slant

Interest Credit Flexibility

Three Month Treasury Note: ~3.5%

30 Year Treasury Bond: ~5%

Corporate Bond: ~6.4%

CASE STUDY: Dentist

Annual Age Salary

Dentist

Thomas 50 $ 245,000

5 Staff

Alfaro 33 63,789

Garibaldi 50 63,154

Sangha 33 52,822

Rivera 29 46,443

Stanton 24 22,347

Subtotals $ 248,555

CASE STUDY: Dentist

Profit TotalName 401(k) Sharing Contribution

Dentist

Thomas $ 22,000 $ 10,000 $0 to $ 115,000 $ 147,000

5 Staff 7.5% of pay

Alfaro $ 4,784 $ 1,000 $5,784

Garibaldi 4,737 1,000 5,737

Sangha 3,962 1,000 4,962

Rivera 3,483 1,000 4,483

Stanton 1,676 1,000 2,676

Subtotals $ 0 $ 18,642 $ 5,000 $ 23,642

Grand Totals $ 22,000 $ 28,642 $ 120,000 $ 170,642

Percent to owner 86%

CashBalance

CASE STUDY: Family Business

Age Compensation

Owners

Father 59 $ 245,000

Mother 58 245,000

Son 36 135,000

Son 34 120,000

Daughter 28 80,000

5 Salespeople >$100,000

25 Employees $ 1,125,000

Profit Cash TOTAL

Age 401(k) Sharing Balance CONTRIBUTION

OwnersFather 59 $ 22,000 $ 32,500 $ 175,000 $ 229,500Mother 58 22,000 32,500 165,000 219,500Son 36 16,500 10,000 0 26,500Son 34 16,500 10,000 0 26,500Daughter 28 0 0 0 0

Subtotal $ 77,000 $ 85,000 $ 340,000 $ 502,000

5 Salespeople Separate (k) plan 0 0

7.5% of pay $1,000 each25 Employees $ 84,375 $ 25,000 $ 109,375

Total $ 611,375

Percent to owners 82%

Succession: acquire stock or gifting 20062001

Exit strategy: accumulating funds ($2,522,000)

Plan is complementary with estate planning:

CASE STUDY: Midsize Professional Firm

Group I Age Compensation

Partner 1 52 $ 245,000

Partner 2 49 245,000

Partner 3 48 245,000

Partner 4 42 245,000

Partner 5 40 245,000

Partner 6 39 245,000

Group II

Associate $ 245,000

Group III

16 Employees $ 750,000

CASE STUDY: Midsize Professional Firm

Profit Cash TOTAL

Group I Age 401(k) Sharing Balance CONTRIBUTION

Partner 1 52 $ 22,000 $ 12,000 $ 129,000 $ 163,000

Partner 2 49 16,500 12,000 105,000 133,500

Partner 3 48 16,500 12,000 100,000 128,500

Partner 4 42 0 12,000 73,000 85,000

Partner 5 40 16,500 12,000 65,000 93,500

Partner 6 39 5,000 12,000 0 17,000

Group II

Associate Attorney excluded

Group III 7% of pay $1,000 each

16 Employees ? $ 52,500 $ 16,000 $ 68,500

Total $ 612,500

Percent to Partners 89%

excluded

CASE STUDY: Construction Company

Annual

Name Age Salary

2 Owners

Owner 56 $ 245,000

Spouse of owner 45 245,000

Subtotals $ 490,000

15 Staff

Employee 1 55 65,000

Employee 15 25 30,000

Subtotals $ 700,000

Grand Totals $ 1,190,000

CASE STUDY: Construction Company

Profit Total

Name 401(k) Sharing Contribution

2 Owners

Owner $ 22,000 $ 32,500 $0 to $ 154,274 $ 208,774

Spouse of owner 16,500 32,500 $0 to 85,605 134,605

Subtotals $ 38,500 $ 65,000 $ 239,879 $ 343,379

15 Staff 7.5% of pay

Employee 1 $ 4,875 $ 2,200 $7,075

Employee 15 2,250 500 2,750

Subtotals $ 0 $ 52,500 $ 23,600 $ 76,100

Grand Totals $ 38,500 $ 117,500 $ 263,479 419,479$

Percent of Employer Contribution to Owners 80.0%

Balance

CASE STUDY: Large Professional Firm

Age Compensation

53 Shareholders

40+ $ 245,000

68 Shareholders

< 40 $ 245,000

240 Employees varied

Profit Cash TOTAL Age Compensation 401(k) Sharing Balance CONTRIBUTION

53 Shareholders (average)

40+ $ 245,000 $ 16,500 $ 32,500 $ 55,000 $ 104,000

68 Shareholders

< 40 $ 245,000 $ 16,500 $ 32,500 $ 0 $ 49,000

6% of pay

240 Employees varied $ 720,000 $ 0 $ 720,000

CASE STUDY: Large Professional Firm

Five Key Features

Key feature #1

Cash BalancePlan

Other QualifiedPlan

rollover

Assets are portable

Key feature #2

Owners/partners can have different amounts

contributed for them

Example: Cash Balance Contribution

Partner 1, age 48: $90,000

Partner 2, age 48: $0

Contribution flexibility among partners

Key feature #3

1. Reduce 401(k) and/or Profit Sharing

2. Amend plan, but not frequently (2-3 years)

3. Freeze plan

Key amendment deadline: June 15th (1,000 hours)

Options if cash flows change

1/1/08 12/31/08

Funding preference

3/15/09

Plan year

Key feature #4

Funding of the Plan

9/15/09

Funding deadline(extension)

Funding Trends

1/1/09 12/31/09 3/15/10

Plan year

Professional firms

Family businesses

Funding Concern

1/1 12/31

Contribution becomes obligation

(1,000 hours/June 15)

Leave firm

Partners concerned that they will be liable for another partners contribution.

Funding Solution

1/1 12/311. Fund monthly

1,000 hours

Leave firm

2. Amend partnership agreement to accommodate

40% of eligible participants Example: 8/20 = 40%

50 total

Key feature #5

Participation requirement

Summarize: Why Cash Balance Plans Appeal to Partnerships

Direct tracking of contributions

(what goes in, plus interest, comes out)

Portability: if partner retires or leaves firm

Rolled to IRA or the new plan (lateral partners)

Contribution flexibility among partners

Liability for other partner’s contributions

Options if cash flows decrease

Summarize: Good Candidates

High wage-earners, >$250,000 Professional firms: law, medical… Successful family businesses, closely-held Size? No. Ratio? Yes. 1:10 ideal

Common Concerns

Less flexible than 401(k)

Enough partners to participate? (%)

Added cost: employer contribution & actuarial

Less investment flexibility (pooled and only 5%)

Why Clients Adopt These Plans

protection

Accelerate

SavingsTaxes

How TPAs Partner on Cash Balance

Local TPA KRAVITZ

DC Plan•DC Plan Document (including amendments)•Data Collection•ADP/ACP Testing•Coverage (410(b)) Test•415(c) Test•Send Kravitz testing results and data including corrections if testing failures

•Coordination of profit sharing allocation•Form 5500

Cash Balance Plan•CB Plan Document (including amendments)•Review Data•Coverage (410(b)) Testing•415(b), 401(a)(4) and 401(a)(26) Tests•Top Heavy•Actuarial Valuation

•Coordination of profit sharing allocation•Form 5500

For advisors

STAND OUT

If you don’t bring it, someone else will

Use as leverage to

win the 401(k) Plan

Principal-focused plans

Employees PrincipalsPartnersOwners

HR Office Boardroom

401(k) Cash Balance

Advisor

How do I explore feasibility for my business?

Picture worth 1,000 words

Profit TOTAL Tax

Age 401(k) Sharing CONTRIBUTION Savings*

Shareholder 1 60 $ 22,000 $ 32,500 $0 to $ 200,000 $ 254,500 $ 101,800

Shareholder 2 50 22,000 32,500 $0 to 105,000 159,500 63,800

Shareholder 3 40 16,500 32,500 $0 to 55,000 104,000 41,600

Shareholder 4 30 16,500 32,500 $0 to 35,000 84,000 33,600

Employees ? 5-7.5% of pay

Percent to Shareholders 85%

Balance

Information needed for Illustration

• Dates of birth

• Dates of hire

• Compensation

• In an excel file

Wealth of Information

www.CashBalanceDesign.com

Are you a good candidate?

Plan Investments

Case Studies

Advisor program

Case Studies

Contact Information

Ken Guidroz, Director of New Plan Design15760 Ventura BoulevardEncino, CA 91436(818) 379-6165

KGuidroz@LKravitz.com

© 2009, Kravitz Inc. All rights reserved. Greater Tax Deferral using Cash Balance Plans

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