A AM Best AA- S & P COMDEX of Years Old GALVESTON TEXAS

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1 Cash Balance Pension Plans Presented By Michael F. Kresl, CPA National Sales Manager The American National Insurance Company 1 The AMERICAN NATIONAL INSURANCE COMPANY (ANICO) A AM Best AA- S & P COMDEX of Years Old GALVESTON TEXAS 2 1

2 American National Ins. Co. For Agent For use Agent only. Use Not Only. for use Not for with use the with general public. IM Cash Balance Pension Plans Cash Balance plan designs have been around for many years, with some high profile conversions in the late 1990s (IBM, Citigroup); Prior to PPA 2006 significant lawsuits concerning plan design Cooper v. IBM; In 1999 IRS placed a moratorium on Cash Balance Plan approvals; 4 2

3 Cash Balance Pension Plans The Pension Protection Act of 2006 removes doubt as to plan design legitimacy; IRS lifts approval moratorium 1/1/2007; Hybrid Plans become an important planning tool for successful businesses as economic changes occur Present 5 What is a Cash Balance Plan? An ERISA Qualified Plan; A Hybrid Defined Benefit Plan with Defined Contribution Features; A uniquely positioned plan design with the ability to equalize contributions between owners or HCEs of disparate ages 6 3

4 What is a Cash Balance Plan? Defined Benefit Plan Features Maximized i and potentially ti equalized contributions ti for Owners or HCEs; A required annual contribution with minimal flexibility; No employee portion of contributions; Employer bears investment risk; IRC 415 limits apply no $49,000 limit; 7 What is a Cash Balance Plan? Defined Contribution Features Flexibility to base contribution amounts on different classes of employees; Lower contribution for employees (New Comparability); Participants have an account balance with contributions and interest added annually; Combo Plans allow for concurrent DB and DC plans; 8 4

5 What is a Cash Balance Plan? Comparison with New Comparability Profit Sharing Plan New Comp 401(k) P/S Cash Balance Hybrid Plan Age Salary Contribution Contribution 55 $196,000 $ 49,000 $ 166, ,000 1,700 2, ,000 1,500 1, ,000 1, , , $ 308,000 $ 54,700 $ 172, % to Owner 97 % to Owner 9 What is a Cash Balance Plan? Comparison with a Traditional Defined Benefit Plan Traditional DB Plan Cash Balance Hybrid Plan Age Salary Contribution Contribution 62 $ 225,000 $ 190,000 $ 100, ,000 48, , ,000 3,100 2, ,000 2,500 1, ,000 1,900 1,200 $ 245,500 $ 205,800 For illustration purposes only, numbers rounded. 10 5

6 COMPARISON OF MAXIMUM CONTRIBUTIONS (ASSUMING NRA OF 65) Traditional AGE $401(k) DASH Defined Benefit Cash Balance Plans 412(e)(3) 40 $ 49,000 $ 33,361 $ 38,000 $ 94, $ 49,000 $ 50,159 $ 55,000 $ 108, $ 49,000 $ 79,272 $ 88,000 $ 166, $ 49,000 $ 139,362 $ 153,000 $ 215, $ 49,000 $ 163, $ 179,000 $ 287, The numbers shown above are for illustration purposes only and in some cases are rounded. Actual numbers could be more or less and will depend upon plan design, employee participation, use of life insurance in the plan, and other factors. 11. What is a Cash Balance Plan? Lets look at some examples... See Sample Employer, Inc. (Plan Design #1) 12 6

7 Plan Summary Sample Employer, Inc. For the Plan Year 01/01/2009 through 12/31/2009 American National Ins. Co. the General Public 13 First Year Plan Contributions American National Ins. Co. the General Public 14 7

8 Plan Allocation Formulas Sample Employer, Inc. For the Plan Year 01/01/2009 through 12/31/2009 American National Ins. Co. the General Public 15 Employee Census Sample Employer, Inc. For the Plan Year 01/01/2009 through 12/31/2009 American National Ins. Co. the General Public 16 8

9 Valuation Statement Sample Employer, Inc. For the Plan Year 01/01/2009 through 12/31/2009 American National Ins. Co. the General Public 17 Financial Results Sample Employer, Inc. For the Plan Year 01/01/2009 through 12/31/2009 Tax Summary American National Ins. Co. the General Public 18 9

10 Cash Balance Pension Plans Plan Design # 2: Two Owners, 4 EEs Age Salary Contribution 61 $ 225,000 $ 150, , , ,000 3, ,000 1, ,000 1, , $ 562,000 $ 306,981 98% to Owners 19 Cash Balance Pension Plans Plan Design # 3: 5 Owners, 20 EEs Objective: Defer $100,000 Per Owner $ 560,573 Total Plan Contribution $ 60,573 To Employees 90 % To Owners! 20 10

11 Cash Balance Pension Plans Plan Design # 4: 10 Owners/HCEs, 34 EEs Objective: Defer $100,000 per Owner/HCE $1,070,563 Contribution $70,563 to EEs 93 % to Owners! 21 Cash Balance Pension Plans Summary: A Defined Benefit Plan with the ability to equalize contributions between different aged Owners/HCEs; Stated Annual Contributions with Little Flexibility; Annual Contribution Credits and Interest Credits credited to Participant hypothetical Accounts; Employer Bears Investment Risk; Can use a variety of Fixed or Variable Investments including Life Insurance 22 11

12 Cash Balance Pension Plans Typical Costs associated with Plans * $ 500 Installation Fee (Covers Documents) $ 1,000 IRS Letter Of Determination ** $ 2,000 Annual Administration Fee (up to 25 Lives) * Based upon American National Insurance Company posted fees 1/1/09; ** May vary depending upon plan design; New plans may be eligible for tax credits up to $500 for first 3 years 23 Cash Balance Pension Plans An underserved market especially Successful Owners looking for large tax deductions & catch up with possible guarantees; Change in Pension Rules (PPA 06) allow for excellent plan design capabilities beyond what most clients and advisors realize; Prospective clients are more approachable now than ever; 24 12

13 An Underserved Marketplace Owners seeking higher tax deductions than Defined Contribution Plans can provide; Owners seeking to accumulate significant retirement funds in a relatively short time; Multiple Owners looking to equalize contributions between owners/hces; Older Owners with younger, lower paid employees; Owners seeking additional protection of assets from liability and creditors; 25 Why American National? Turnkey Program One Throat to Choke Featuring... Free, no-obligation professional plan design and/or review Preparation and filing of plan documents Various investment platforms from fixed to variable Complete Low Cost Administration/Record Keeping No Gray areas, No Off-Shore Schemes, No Audit Flags 26 13

14 American National Insurance Company 104 years old, closely held and publicly traded (ANAT) A AM Best AA- S&P COMDEXof90 Asset/Liability Ratio over 120% Has Paid Dividends in 99 Years No Corporate Debt Issued Buy & Hold Strategy in Bond Portfolio No CDOs, CMOs, CLOs, CBOs, NO TARP 27 Not to Mention... Deferred Annuities Including CD Type MYGs Immediate Annuities (SPIA & SPLIT) Indexed Annuities Annual Reset & End Term Life Insurance WL, UL, Term and VUL Pension Design and Administration Voluntary Benefits with List Bill or Payroll Ded 28 14

15 Your ANICO Team Outside Group Mike Kresl, CPA North Region Scott Whitten, FLMI South Region Don Noble, CLU West Region Gil Dudrow, - East Region Inside Support Brad Bennett - Home Office Ext 5976 Marci Dutton Home Office Ext