1 Copyright 2013 Dedicated Defined Benefit Services LLC Advantages of Micro Defined Benefit Plans A 2013 Tax Strategy for High Income Professionals, Small

1Copyright 2013 Dedicated Defined Benefit Services LLCCopyright 2013 Dedicated Defined Benefit Services LLC

Advantages of Micro Defined Benefit Plans A 2013 Tax Strategy for High Income Professionals, Small Business Owners and Self-Employed Clients

For Broker/Dealer Use Only

2Copyright 2013 Dedicated Defined Benefit Services LLC 2Copyright 2013 Dedicated Defined Benefit Services LLC

Introductions Defined Benefit Plans as an effective tax

strategy How the new micro Defined Benefit plans

are simplified and flexible The type of clients that qualify for these

plans Questions?

Agenda


Introductions

Principal of The Wagner Law Group

Specialist in ERISA, employee benefits and executive compensation including qualified and non-qualified retirement plans

401k Wire: 100 Most Influential Persons in the 401(k) industry

Hundreds of articles and 13 books about retirement and benefit plans

The Wall Street Journal, Financial Times, Pension & Investments, and more

Marcia S. Wagner, EsquireManaging DirectorThe Wagner Law Group


Introductions

Karen Shapiro, CEODedicated Defined Benefit Services, LLC

Entrepreneur and business innovator in online marketing for financial services

Co-founder of Dedicated DB and a co-founder of Leaffer Shapiro

Opened more than 2,300 Micro Defined Benefit Plans

Bank of America - 18 years, SVP & Director of Online Channel Management


Tax Increases in 2013


How Much Can Someone Save?

Hypothetical Example: Maximum annual contribution limits in 2013 for a business owner age 52, earning $300,000 W-2 income annually, retiring in 10 years

Assumes 5-7% funding rate for Defined Benefit Plans

Defined Benefit (DB) Plans May Allow Clients to Contribute Significantly more Earned Income than other Retirement Plans

DB + 401(k)

DB

Individual 401(k)

SEP

SIMPLE $22,150

$51,000

$56,500

$173,800

$212,100


Tax Qualified Defined Benefit Plans

Definition– “Pension plan” which also meets the qualification

requirements under IRC Section 401(a).– Private employers may adopt tax-qualified plan.

Advantages of tax-qualified retirement plans.– Immediate deduction for employer contributions.– Employees are not taxed currently.– Earnings on plan trust assets are tax-exempt.– Tax on distributions can be deferred with rollovers.– Plan assets protected from creditors.

– PBGC insurance for benefits.– High amount of deferrals.


Defined Benefit Plans (DB Plans)

DB plan provides stated pension benefit beginning at retirement.– Normally stated in form of life annuity.

– Employer contributions are determined actuarially.

Types of DB plans– Unit Benefit Plan: benefit formula is based on years of

service (e.g., 1% of pay for each year).– Fixed Benefit Plan: fixed $ amount payable annually.– Flat Benefit Plan: % of pay payable annually.– Cash Balance Plan: benefit stated in the form of a

hypothetical account.


Defined Benefit Plans (cont’d)

Methods for calculating pay

– Final Average Pay – pension is based on average

compensation during defined period.

– Career Average Pay – pension is based on pay earned

during employee’s entire service period.

IRS limits on pay

– Plan may not consider more than $255,000 (2013),

$260,000 (2014) of pay per year.


Summary of Characteristics of DB Plans

Employer considerations– Commitment to contribute to plan– Fully financed by employer– Investment risk is borne by employer

Benefit considerations– DB plan can recognize past service.– Easier to provide cost of living adjustments (COLA).– May pay disability and death benefits.– Generally may not pay layoff or medical benefits.– No in-service distributions generally.– PBGC guarantee financed by employer premiums.– High HCE.


Basic Rules for Tax-Qualified Plans

ERISA and IRC impose comprehensive set of rules for tax-qualified retirement plans.

Philosophy of tax-qualification plan rules– To receive tax benefits, plan sponsor must help

advance government’s social policies.– For example, plan must help secure retirement

of “rank and file” employees as well as management.


Eligibility and Participation Rules

Minimum age and service conditions.– Must not exclude on account of age beyond age 21.– May require service minimum of up to 1 year

(limited exception for 2-year minimum).

No maximum age condition permitted. “1,000 hour” rule applies to minimum service. Plan entry may be delayed up to 6 months. DB plan must benefit lesser of 50 employees

or 40% of workforce. Examples of employee exclusions:

– Non-resident aliens

– Union employees– Certain employee classifications


Coverage and Nondiscrimination Rules

Minimum coverage rules

– Opportunity for Non-Highly Compensated Employees

(NHCs) to participate in plan must be similar to HCEs.

– Must satisfy one of following: (1)

Percentage Test: Plan covers at least 70% of NHCs

(2) Ratio Test: Ratio of percentage of NHCs covered to

percentage of HCEs covered is at least 70%

(3) Average Benefit

Percentage Test: 2-prong test.

Nondiscrimination rules

– General Test compares actual benefit accruals of NHCs

against actual benefit accruals of HCEs.


Minimum Vesting Standards

DB benefits must fully vest in 5 years or:Years of Service Vesting Percentage

Less than 3 0%

At least 3, 4, 5 or 6 20%, 40%, 60% or 80%

7 or more 100%

Special 3 year cliff vesting for cash balance plans.

Must vest upon Normal Retirement Age.

Year of service based on “1,000 hour” rule.


Top-Heavy Rules

Purpose– Participants who are NHCs must receive minimum

benefit or contribution if plan becomes Top Heavy.

Definition of “Top-Heavy” plan.– Disproportionate amount of plan’s accrued benefits

are for the benefit of key employees.– Key employees generally include officers earning more

than $165,000 for 2013 ($170,000 for 2014) and 1% owners.

If plan is top-heavy for any year, NHCs must receive minimum benefit/contribution.– Separate minimum vesting schedule also applies.


Special Accrual and Funding Rules for DB Plans

Benefit accrual rule for DB plans– Plan must not provide “back loaded” benefit

accruals.– Benefit must accrue ratably over employee’s

career.– After PPA, benefit can be “front loaded”

Minimum funding standard for DB plans– Designed to ensure plans are able to pay benefits

when they become due.– Requirements backed by 10% excise tax (and

100% excise tax if deficiency is not corrected).


Limitations on Benefits

Maximum annual benefit under DB plan

− Lesser of 100% of average pay, or $205,000 (2013), $210,000 (2014)

Maximum deduction for plan contributions

− linked to funding standards — minimum required contributions always deductible


Advantages and Disadvantages of Tax Qualified Defined Benefit Plans

Advantages– Tax benefits, including immediate deductions.– Upon termination, assets rolled to IRA

Disadvantages– Higher income or older employees earn high benefits

– Annual contributions

Examples of plans meeting business needs– To maximally benefit owners or management– To encourage long-term employment


How Does the “Micro” DB Work for Your Client?

Actuary calculates goal (benefit in retirement), the accumulation & contributions required to reach goal

Calculation based on– Compensation, age, years to retirement, benefit formula, interest

rates, etc.– Generally, the older you are, the higher the limit– Investment performance in subsequent years

Employer contributes annually Employer should be able to maintain the plan for a

minimum of three to five years When plan is terminated, assets rolled into an IRA


Owner–only, Sole Proprietor

Annual earnings: $450,000 Maximum DB+ 401(k) contribution for: $212,100

– Contribution to DB plan: $173,800 – Contribution to 401(k): $38,300

Annual tax savings: $80,500 – Combined marginal tax rate of 38%

Estimated DB accumulation at age 62: $2.48 MM -10 years, 5% – 7% rate of return

Annual DB benefit: $205,000

Charles, Age 52Objective: Maximum Tax Deduction


* Business can be incorporated or unincorporated.

Who Qualifies?

OnePersonPlus® Defined Benefit Plan– Owners and immediate family

– Owners with up to 4 common-law employees*

Defined Benefit Plan + Individual 401(k)

– Owners and immediate family

– Individual 401(k) + Defined Benefit Plan can be combined to MAXIMIZE deductible contributions for owner and spouse.


Prime Candidates

Earned Income, 1-5 employees‒ Individuals with self employment income‒ Small business owners (1-5 person) ‒ Independent Professionals ‒ Side Income (consulting, board fees, royalties, etc.)‒ Spouse income of highly-paid executive

Wants to contribute more than $50,000 or a higher percentage of compensation

Expect to contribute at least 3-5 years

Attorney Designer Sales Rep

Board Member Engineer Physician

Consultant Farmer Programmer

Contractor Financial Advisor Real Estate Agent

Dentist Insurance Agent


Compensation Considered for Plan

Type of Business Entity Determines What Can Be Counted as Compensation in Calculating the Contribution Amounts for a Defined Benefit Plan

Compensation Quick Reference ChartEntity Type Source of Income Compensation for Plan

Corporation W-2 income W-2 income

S-Corporation W-2 + Schedule K-1 W-2 income only

Sole Proprietorship Schedule C (net profit) Earned Income (calculate)*

Partnership Schedule K-1 (net profit) Earned Income (calculate)*

Limited Liability Company (LLC) – compensation for plan depends on how LLC is taxed. See above for partnership or corporation rules.

Employees, other than owners, are paid W-2 income for all entity types.

* Earned Income = net profit minus ½ self-employment tax minus plan contribution. Deductions for sole proprietors and partners are limited to net profit minus ½ self-employment tax.


Married Couple in Business Together, C-Corp

Paul, Age 60, Mary, Age 58Objective: Maximize Retirement Savings 5 Years from Retirement W-2 Income: $510,000 ($255,000 each) Total annual DB contribution: $412,100

$201,200 towards Paul’s Retirement

$210,900 towards Mary’s Retirement

Annual income tax savings: $156,500 Accumulation at retirement:

Paul: $1.15 Million

Mary: $1.21 Million

1. Assumes 38% combined federal/state marginal rate.2. 5-7% rate of return.


1. Assumes 38% combined federal/state marginal rate.2. 5-7% rate of return.

Small Business Owner, C-Corp, +2 Employees,

Owner’s W-2 income: $400,000– Employee 1 age 28 earning: $35,000– Employee 2 age 35 earning: $45,000

Maximum DB contribution for owner: $197,800– DB contribution for Employee 1: $6,100– DB contribution for Employee 2: $11,400– 92% of contribution for Mollie

Annual income tax savings for Mollie: $75,1001

Estimated accumulation for Mollie at 62: $1.73 Million2

Mollie, Endodontist, Age 55


Sole Proprietor, Spouse with Self-Employment Income

Annual earnings: $100,000— After paying SE Tax

Maximum DB contribution for 2013: $80,000 2013 max tax savings: $30,400

— combined marginal tax rate of 38%

DB Accumulation at age 65: $461,000— 5 years, 5 - 7% rate of return

Annual DB Benefit: $40,700

Ella, interior designer, Age 60


Owner-onlySole Proprietor, Age 40


401(k) contribution for: $42,500 Annual tax savings: $16,150 Combined marginal tax rate of 38% Compared to SEP contribution of $25,000

Cathy is a freelance journalist, married to a high-earning corporate employee


Owner-onlySole Proprietor, Age 40


DB contribution: $37,100 401(k) contribution: $23,500 DB + 401(k) contribution: $60,600 Annual tax savings: $23,000 Combined marginal tax rate of 38% Compared to 401(k) contribution of $42,500

If Cathy wants to maximize her tax-deferred contribution, she could open a DB+401(k):


New Flexibility Strategies

Adding an individual 401(k) to a DB Consultant age 50, $200,000 in W-2 income from his S-

Corporation Maximum DB Contribution ~$124,000 in 2013 More comfortable committing to $75,000 a year; more only

in high income years. 2013 Annual Estimated DB Contribution: $75,0002013 401(k) Contribution: $35,000Total 2013 Contribution $110,000 2014 DB Contribution: $75,0002014 401(k) Contribution: $0Total 2014 Contribution $75,000



Contributions ranges

Years Compensation Contribution Range Susan Chooses to Contribute

2010 $95,000 --- ---2011 $150,000 --- ---2012 $115,000 --- ---2013 $120,000 $40,000 to $120,000 $110,000

2014 $70,000 $30,000 to $120,000 $50,000

2015 $95,000 $44,000 to $120,000 $120,000

2016 $120,000 $25,000 to $120,000 $60,000

2017 $135,000 $25,000 to $135,000 $130,000



Funding over time

Amend Plan

Freeze the Plan

Terminate and roll to IRA


SUMMARY:Advantages of Micro DB Plans

LARGE contributions for the next 5-10 years $1MM to $2MM in new client savings

LARGE tax-deduction, saves client $40,000-$60,000* or more in 2013* Assumes a 38% tax rate

Seek stable, low risk investments, not chasing high returns

Access to wide variety of investments Loans available Streamlined, easy set up, IRS-approved prototype

document Clients ready to save who previously shied away from

commitment, now have more control over their contributions


SUMMARY: Plan Considerations

Defined Benefit Plans are not right for everyone

– Annual contributions are required

– More expensive to establish and maintain

– Primarily funded by the employer

– Benefits generally must be paid regardless of how plan performs


Plan Set-up / Funding Deadlines

Plan Set-up: Must be established by end of plan year, usually December 31st

Dedicated DB - Quick Adoption Process

Individual 401(k) Salary Deferral Contributions

Due as soon as administratively possible

Individual 401(k) Employer Profit-Sharing Contributions due by tax-filing deadline, including extensions

OnePersonPlus DB Contributions– 8 ½ Months after end of plan year


Supporting You & Your Clients

1. Online Calculator: Run an illustration comparing small business plans online at: www.OnePersonPlus.com

or Call for a custom proposal: 1(866)269-27062. Present to Client: Dedicated DB available for

call3. Client Completes Set-up Questionnaire & sends

to Dedicated DB - Set-up Fee ($1,250 for 1-person plan)

4. Client receives Adoption Agreement for signature5. Then opens investment account

http://www.onepersonplus.com/


Questions?

?


Thank You!

Dedicated Defined Benefit Services

Call: 1(866)269-2706

Visit: www.OnePersonPlus.com

Documents

1 Copyright 2013 Dedicated Defined Benefit Services LLC Advantages of Micro Defined Benefit Plans A 2013 Tax Strategy for High Income Professionals, Small