Cash balance plans.consumer

Copyright--The WPI 1

Using Cash Balance--Super 401(k)™ Plans

to Increase Retirement Plan Contributions

By: Roccy DeFrancesco, JD, CWPP, CAPP, MMB

Founder: The Wealth Preservation Institute

Co-Founder: The Asset Protection Society


The Retirement Dilemma

• Many business owners are NOT putting away sufficient tax-deferred dollars into a qualified retirement plan so they can:– retire in a timely, and – comfortable financial manner.

• Why?• Some business owners don’t have the money.• But, many do and still do not fund the “maximum”

amount of money they can to build a tax-deferred retirement nest egg.


Why continued

• There are two main reasons business owners do not allocate more dollars to tax-deferred qualified plans:

• 1) Some believe they are already putting the “maximum” away;

• 2) Many believe that in order to put significantly more money away will be cost prohibitive because of sizable contributions for employees.


Larger Owner Contributions

Age 401(k) only401(k) with Profit

Sharing Cash BalanceSuper 401(k) ™

Total

65 $20,500 $51,000 $188,000 $239,000

64 $20,500 $51,000 $193,000 $244,000

63 $20,500 $51,000 $197,000 $248,000

62 $20,500 $51,000 $202,000 $253,000

61 $20,500 $51,000 $191,000 $242,000

60 $20,500 $51,000 $181,000 $232,000

55 $20,500 $51,000 $138,000 $189,000

50 $20,500 $51,000 $106,000 $157,000

45 $15,500 $46,000 $81,000 $127,000

40 $15,500 $46,000 $62,000 $108,000

35 $15,500 $46,000 $47,000 $93,000

31 $15,500 $46,000 $38,000 $84,000


What is a Cash Balance Plan

• A CPB is a DB plan that looks like a PSP.• A DB plan is seen as a rigid plan that an employer

funds so the plan can provide EEs a monthly benefit in retirement (such as $800 a month starting at age 65).

• A CBP funds for a specific lump-sum dollar amount for EEs at retirement (an amount that can be rolled to an IRA so EEs can control the money).

• EEs can see a growing account balance and understand the benefit of a CBP much more so than a traditional DB or 412(i) DB Plan.

6

Pension Protection Act (PPA) of 2006:Good News for Cash Balance Plans

• Payroll limit – prior to PPA 2006 DC plans and combined DC/DB plans were limited to 25% of payroll.

– Under the PPA, the 25% limit is lifted for combined plans if profit sharing plan allocations do not exceed 6% of pay.

– For some plans the 6% number can be raised to 25% for certain qualifying companies.

• What does this mean in English?

– That business owners can put away significantly more money after the act than before the act.


Case Study: Jackson Tool & Die

• Mr. Jackson (Steve) owns a tool and die company with four (4) employees.

• The company has had five years of solid business growth.

• Steve wants to tax-defer more funds to build his retirement benefits.

• Steve wants to reduce his taxes.


Case Study: Jackson Tool & Die

Starting a Cash Balance Plan requires the following:

• Jackson T&D must cover the employees

• The plan cannot discriminate in favor of Steve

– Cannot discriminate in favor of Highly Compensated Employees (HCEs)

– HCEs are employees who earn over $105,000* or own more than 5% of the company

* Adjusted annually for cost of living. 2009 = $110,000


Case Study: Sample Cash Balance Plan design

Pay Contribution Credit % of Pay

Steve $225,000 $33,750 15%

Staff 30,000 4,500 15%Staff 30,000 4,500 15%Staff 30,000 4,500 15%Staff 30,000 4,500 15%

$18,000

• This is a common approach: – Steve gets a contribution credit of $33,750 → 15% of his $225,000

compensation; 2008 = $230,000; 2009 = $245,000– All staff also get 15% of pay


Case Study: Is the plan financiallyviable for Steve?

• Should Jackson T&D contribute to this plan?

– Benefit for Steve = $33,750 contribution

– Cost for Steve = $18,000 staff contribution

NO WAY! The cost of the plan simply does not justify implementation.

• How can Steve make the plan more viable?– Increase the size of Steve’s contribution– Lower EE Costs

• This can be done with a better plan design.


Case Study: What if the contribution for Steve is increased?

Staff 25 30,000 4,500 15%Staff 50 30,000 4,500 15%Staff 23 30,000 4,500 15%Staff 30 30,000 4,500 15%

Cash Balance

Age Pay Contribution % of Pay

Steve 63 $225,000 $165,000 73%

How does this satisfy the non-discrimination rules? Note: EE Contributions are Age Neutral !!!


Case Study: Ratio Percentage Test

70% or more of staff have a projected benefit percentage equal to or greater than

the HCE’s projected benefit percentage

• In order to allow more to be contributed for Steve, the plan must pass the Ratio Percentage Test:


Case Study: Ratio Percentage Test

Projected Benefit Percentage

Age Pay Contrib.

Steve 63 $225,000 $165,000

Staff125 30,000 4,500 31,700 2,700 9.0%250 30,000 4,500 9,400 800 2.7%323 30,000 4,500 34,900 3,000 10.0%430 30,000 4,500 24,800 2,100 7.0%

Conclusion: Steve can increase his contribution to the Cash Balance plan

Projected

Acct. Bal.

Age 65

$181,900

Projected

Benefit

Age 65

$15,400

Projected

Benefit

%

6.8%


Super 401(k)™

• The PPA 2006 elimination of the 25% of payroll contribution limit for combined plans has spawned the creation of the Super 401(k) ™ Plan.

• A Super 401(k)™ Plan is a plan that can use a combination of all plans (401(k) plans, profit sharing plans, and a DB or CB plan) to create maximum contributions for the owners of a company with cost effective and manageable age neutral contributions for the rank-in-file employees.


Example # 2

• What you will notice about the following example is that a Super 401(k)™ allows the business owners to put away significantly more money by adding a Cash Balance Plan with very low add-on costs for the EEs.

• Also notice for example purposes that the CBP contribution is level for owners of different ages.

16

Date Annual Profit Cash D/B

Name

Age

of Hire

415

Comp 401k Sharing Match Total Balance Traditional

3 Shareholders

JLP 55 1/01.93 230,00020,500 13,800 9,200 43,500 100,000 139,397

RK 41 6/5/00 230,00015,500 13,800 9,200 38,500 100,000 71,103MK 41 6/5/00 115,00015,500 6,900 4,600 27,000 50,000 39,500

Subtotals 575,00051,500 34,500 23,000109,000 250,000 250,000

GA 21 8/22/05 25,000 0 1,875 0 1,875 1,250 2,498RO 40 2/14/05 27,000 0 2,025 0 2,025 1,250 6,435

GR 33 12/6/04 28,000 0 2,100 0 2,100 1,250 6,125KL 27 1/12/07 33,000 0 2,475 0 2,475 1,250 4,240

ME 34 8/1/01 34,500 0 2,588 0 2,588 1,250 7,929

TI 29 4/14/05 34,500 0 2,588 0 2,588 1,250 5,001WI 39 7/2/01 54,000 0 4,050 0 4,050 1,250 10,620

KL (Key) 50 1/1/01 125,00020,500 9,375 5,000 34,875 0 0

Subtotals 361,00020,500 27,076 5,000 52,576 8,750 42,848

Grand Totals 936,00072,000 61,576 28,000161,576 258,750 292,848Percent to Shareholders 65.6%71.5% 56.0% 82.1% 67.5% 96.6% 85.4%


Questions to ask yourself

• 1) Have you ever heard of a Cash Balance Plan or a Super 401(k)™ Plan?

• 2) Do want to maximize the amount of money you contribute through your business and minimize the amount you contribute for your employees?

• 3) Has your current pension plan provider contacted you to discuss the new PPA and how it may have a positive effect on your company’s qualified plan design?

• --If not, your administrator and financial planner who helped you setup your plan are doing you a disservice (which could be costing you thousands of dollars).


Summary

• There is no doubt that after the PPA there are new opportunities for business owners to income-tax defer significantly more each year for retirement through a Super 401(k)™.

• A CBP can now be added to many plans at very little cost.

• Isn’t it time you found out if your business’s current plan is accomplishing your goals?

• If you are ready, contact your locally trusted advisor.

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Cash balance plans.consumer