Maximizing Tax Deductions and Retirement Plan Contributions with a Cash Balance Plan

Transcription

1 Maximizing Tax Deductions and Retirement Plan Contributions with a Cash Balance Plan Joe Long, CEBS, CPC, QPA, QPFC, AIF Senior Retirement Plan Consultant July Business Services

2 Our Path Today Why Cash Balance? How Does it Work? Examples Best Candidates How to Get Started 78

3 WHY CASH BALANCE 79

4 Cash Balance Plan Advantages Larger contributions than 401(k) Minimize cost of employees Option to pair with profit sharing plan Easier for participants to understand than DB Flexibility in plan design Costs do not necessarily increase as participants age 80

5 Cash Balance Plan Advantages Larger Contributions $250,000 $200,000 $150,000 $100,000 $50,000 $0 $134,000 $175,000 $182,000 $234,000 $103,000 $78,000 $60,000 $50,000 $50,000 $50,000 $55,500 $55,500 $55,500 $55, Age 401(k) PS Contributions Cash Balance Contribution Credits This is a hypothetical example dependent on specific assumptions and used for illustrative purposes ONLY. Plan is assumed to have PBGC coverage, otherwise combined plan limits may apply. Full amounts may not be deductible in the first plan year. 81

6 Cash Balance Plan Advantages Increases participants understanding of their benefit Benefit statements are easier to understand. Annual increases in benefit amount are clear. 82

7 Cash Balance Plan Advantages Flexibility in Plan Design Set equal contribution credits for partners / owners Exclude partners Vary contribution levels by group Ownership Practice area 83

8 How does it work? 84

9 What is a Cash Balance Plan? Hybrid Plan: Technically a defined benefit plan. Benefit is defined. No investment risk to the participant. Annual Contributions are required. Assets are pooled. Provides a lump sum based benefit formula. Looks like a profit sharing plan. 85

10 Cash Balance Vocabulary Each participant has a hypothetical account. That account grows each year with a Contribution credit Interest credit Both the contribution credit and interest credit are specified by the plan document. 86

11 Cash Balance Plan Example Participant Data: Current Year Pay $150,000 Contribution Credit in Document 20% of pay Interest Credit Rate in Document 5% Hypothetical Account Balance at Beginning of Year $35,000 Contribution Credit $30,000 Interest Credit $1,750 Hypothetical Account Balance at End of Year $66,750 87

12 Plan Type Comparison Characteristic Traditional DB Cash Balance 401K / PS Contribution Levels? Not limited Not limited Who Bears Investment Risk? Direction of Investments? Limited to $55,500 Plan Sponsor Plan Sponsor Employee Pooled Pooled Participant Accounts? No Hypothetical Yes Are Contributions Required? PBGC Coverage Required? Retirement Benefit Formula? Yes Yes Sometimes Sometimes No Annuity Lump Sum N/A Individual / Pooled No, can be discretionary 88

13 How should Assets be Invested? If Actual Investment Return is Higher than Interest Credit Rate (ICR) ICR 89

14 How should Assets be Invested? If Actual Investment Return is Higher than Interest Credit Rate (ICR) Amount of Required Contribution Decreases ICR 90

15 How should Assets be Invested? If Actual Investment Return is Lower than Interest Credit Rate (ICR) Amount of Required Contribution Increases ICR 91

16 EXAMPLES 92

17 Cash Balance Plan Example 1 One Owner Plans at Different Ages EE Age Plan Comp. Deferrals Profit Sharing Contribution Credit Total Contribution w deferrals Owner 65 $245,000 $22,500 $32,500 $234,000 $289,000 Owner 60 $245,000 $22,500 $32,500 $182,000 $237,000 Owner 55 $245,000 $22,500 $32,500 $175,000 $230,000 Owner 50 $245,000 $22,500 $32,500 $134,000 $189,000 Owner 45 $245,000 $17,000 $32,500 $103,000 $152,500 Owner 40 $245,000 $17,000 $32,500 $78,000 $127,500 Owner 35 $245,000 $17,000 $32,500 $60,000 $109,500 This is a hypothetical example dependent on specific assumptions and used for illustrative purposes ONLY. Plan is assumed to have PBGC coverage, otherwise combined plan limits may apply. Full amounts may not be deductible in the first plan year. 93

18 Cash Balance Plan Example 1 One Owner Plans at Different Ages $300,000 $250,000 Contribution $200,000 $150,000 $100,000 $50,000 $ Age Deferrals Profit Sharing Cash Balance This is a hypothetical example dependent on specific assumptions and used for illustrative purposes ONLY. Plan is assumed to have PBGC coverage, otherwise combined plan limits may apply. Full amounts may not be deductible in the first plan year. 94

19 Cash Balance Plan Example 2 One Owner Maximum in Both Plans EE Age Plan Comp. Deferrals Profit Sharing Contribution Credit Total Contribution w/o deferrals Owner 50 $245,000 $22,500 $32,500 $134,000 $166,500 NHCE 1 50 $40,000 $2,000 $3,800 $500 $4,300 NHCE 2 40 $35,000 $1,750 $3,325 $438 $3,763 NHCE 3 35 $45,000 $2,250 $4,275 $563 $4,838 NHCE 4 30 $50,000 $2,500 $4,750 $625 $5,375 NHCE 5 25 $30,000 $1,500 $2,850 $375 $3,225 %to Owner 63.11% 98.17% 88.56% This is a hypothetical example dependent on specific assumptions and used for illustrative purposes ONLY. Plan is assumed to have PBGC coverage, otherwise combined plan limits may apply. Full amounts may not be deductible in the first plan year. 95

20 Cash Balance Plan Example 2 One Owner Maximum in Both Plans Contribution 180, , , , ,000 80,000 60,000 40,000 20,000 0 Owner NHCE 1 NHCE NHCE 2 3 Participant NHCE 4 NHCE 5 Cash Balance Profit Sharing This is a hypothetical example dependent on specific assumptions and used for illustrative purposes ONLY. Plan is assumed to have PBGC coverage, otherwise combined plan limits may apply. Full amounts may not be deductible in the first plan year. 96

21 Cash Balance Plan Example 3 Two Owners Equal Contribution Credits EE Age Plan Comp. Deferrals Profit Sharing Contribution Credit Total Contribution w/o deferrals Owner 50 $245,000 $22,500 $32,500 $100,000 $132,500 Owner 45 $245,000 $17,000 $32,500 $100,000 $132,500 NHCE 1 50 $40,000 $2,000 $3,000 $500 $3,500 NHCE 2 40 $35,000 $1,750 $2,625 $438 $3,063 NHCE 3 35 $45,000 $2,250 $3,375 $563 $3,938 NHCE 4 30 $50,000 $2,500 $3,750 $625 $4,375 NHCE 5 25 $30,000 $1,500 $2,250 $375 $2,625 %to Owners 81.25% 98.77% 93.81% This is a hypothetical example dependent on specific assumptions and used for illustrative purposes ONLY. Plan is assumed to have PBGC coverage, otherwise combined plan limits may apply. Full amounts may not be deductible in the first plan year. 97

22 Cash Balance Plan Example 3 Two Owners Equal Contribution Credits Contribution 140, , ,000 80,000 60,000 40,000 20,000 0 Cash Balance Profit Sharing Participant This is a hypothetical example dependent on specific assumptions and used for illustrative purposes ONLY. Plan is assumed to have PBGC coverage, otherwise combined plan limits may apply. Full amounts may not be deductible in the first plan year. 98

23 BEST CANDIDATES 99

24 Best Candidates Desire contributions greater than $50,000/$55,500 Maintain steady, predictable profits Ability to accumulate a large benefit quickly Older owners and younger employees Contributions between 5% to 7.5% of pay to employees Medical practices, law firms, dentists, and other professional firms 100

25 GETTING STARTED 101

26 The Design Process Collect Data Proposal Review Date of Birth Date of Hire Compensation Desired Contribution Amount Goal of Plan Design Data provided to July Plan designed based on specific goals and demographics of the client July representative provides proposal Review design with client Request any modifications in design 102

27 Plan Implementation Set up Guide Document Preparation Document Signed 12/31/2012 Deadline* 2012 Valuation Prepared 2012 Contribution Made 9/15/2013 Deadline* *Deadlines are for 2012 calendar year plans. 103

28 Thanks.

29 Maximizing Tax Deductions and Retirement Plan Contributions with a Cash Balance Plan Joe Long, CEBS, CPC, QPA, QPFC, AIF Senior Retirement Plan Consultant July Business Services