Pension Options for Small Business Owners

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Information about Pension Options for Small Business Owners
Finance

Published on December 18, 2008

Author: pelmore2000

Source: slideshare.net

Description

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.

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.

WHAT IS A NEW COMPARABILITY PLAN? A profit sharing plan in which the employees are divided into groups The contribution varies for each group (i.e., 9% for owners & 3% for others) Groups must be based on a “reasonable business classification” such as Owners, Titles, etc. Prepared by Primoris Benefit Advisors, Inc.

A profit sharing plan in which the employees are divided into groups

The contribution varies for each group (i.e., 9% for owners & 3% for others)

Groups must be based on a “reasonable business classification” such as Owners, Titles, etc.

WHO IS THE TARGET AUDIENCE FOR SUCH PLANS? Works very well for professional firms, physician groups, attorney, etc. Target group should be older than a significant portion of their employees Allows maximum deferrals for target group while maintaining flexibility in contribution amount Those seeking to defer current income to avoid Federal & State taxation Prepared by Primoris Benefit Advisors, Inc.

Works very well for professional firms, physician groups, attorney, etc.

Target group should be older than a significant portion of their employees

Allows maximum deferrals for target group while maintaining flexibility in contribution amount

Those seeking to defer current income to avoid Federal & State taxation

ARE THERE DISCRIMINATION TESTS? The plan is tested for nondiscrimination on a cross-tested basis This allows the plan to offer a higher contribution rate to older participants as the contributions are converted & tested at retirement age. 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. Prepared by Primoris Benefit Advisors, Inc.

The plan is tested for nondiscrimination on a cross-tested basis

This allows the plan to offer a higher contribution rate to older participants as the contributions are converted & tested at retirement age.

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.

CAN NEW COMPARABILITY BE USED WITH A 401(K) PLAN? 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. 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) Allocation to non-highly compensated employees must be at least 1/3 of that provided to HCE’s or 5% (if less) Prepared by Primoris Benefit Advisors, Inc.

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.

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)

Allocation to non-highly compensated employees must be at least 1/3 of that provided to HCE’s or 5% (if less)

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

KEY ISSUE – TOP-HEAVY 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 The 3% “safe-harbor” employer contribution satisfies this requirement Prepared by Primoris Benefit Advisors, Inc.

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

The 3% “safe-harbor” employer contribution satisfies this requirement

CASH BALANCE PLANS For those seeking far larger tax-deductible contributions Prepared by Primoris Benefit Advisors, Inc.

CASH BALANCE PLANS – WHY? Defined Contribution (“DC”) Plan limit “annual additions” to $49,000 in 2009 Defined Benefit (“DB”) plan would allow tax deductible contributions of over $100,000 per targeted member DB Plans are more complicated & carry minimum funding requirements Cash Balance plans look very much like a DC plan with an “account balance” with a credited rate of interest Prepared by Primoris Benefit Advisors, Inc.

Defined Contribution (“DC”) Plan limit “annual additions” to $49,000 in 2009

Defined Benefit (“DB”) plan would allow tax deductible contributions of over $100,000 per targeted member

DB Plans are more complicated & carry minimum funding requirements

Cash Balance plans look very much like a DC plan with an “account balance” with a credited rate of interest

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

CASH BALANCE PLAN – KEY ISSUES Subject to Minimum Funding Requirements Only sponsors with stable cash flow or willingness to commit to contributions for at least five (5) years Crediting rate provides opportunity & risk If plan earnings exceed crediting rate, the gains can be used to offset future contributions If plan earnings lag crediting rate, the losses will necessitate higher future contributions While it may “look” like a DC plan with account balances, participants can not direct investments Ability to defer $150K or more for targeted participants Prepared by Primoris Benefit Advisors, Inc.

Subject to Minimum Funding Requirements

Only sponsors with stable cash flow or willingness to commit to contributions for at least five (5) years

Crediting rate provides opportunity & risk

If plan earnings exceed crediting rate, the gains can be used to offset future contributions

If plan earnings lag crediting rate, the losses will necessitate higher future contributions

While it may “look” like a DC plan with account balances, participants can not direct investments

Ability to defer $150K or more for targeted participants

WHAT’S NEXT? Work with your investment professional & a third-party administrator to perform a feasibility study to see if this would work for your group Review your financial goals & limits Amend your existing plan or start a new plan Communicate enhanced benefits to the target group Prepared by Primoris Benefit Advisors, Inc.

Work with your investment professional & a third-party administrator to perform a feasibility study to see if this would work for your group

Review your financial goals & limits

Amend your existing plan or start a new plan

Communicate enhanced benefits to the target group

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