DEFINED CONTRIBUTION PLANS
Presented by:
Mary Read, CPC, QPA
National Director of
Qualified Plan Marketing
For Financial Professional Use Only. Not For
Use With the Public.
DISCLOSURE
This material is intended as a general discussion of
qualified plan concepts and strategies. It is not
intended as specific advice concerning any individual
legal, tax or accounting matter. Alliance Benefit
Group-Pentegra does not provide legal, tax or
accounting advice. Any questions regarding your
individual situation should be directed to your personal
advisor on such matters.
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TYPES OF RETIREMENT PLANS
Defined Contribution
–
Contribution is limited
–
Retirement benefit is unknown
–
Benefit depends on the amount of contributions
made and any growth of plan investments
•
Profit Sharing
•
Money Purchase
•
401(k)
•
Target Benefit
Contribution Limit
25% of Participating Payroll
Allocation Limit
100% of pay, maximum $50,000
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WHO WILL BENEFIT?
Must we cover everyone?
Yes
No
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ELIGIBILITY
■ Typically age 21 with 1 year of service.
■ Can be as long as 2 years (1 year for 401(k))
■ Being Eligible does not affect status for a
Traditional deductible IRA
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PARTICIPATION
■ Actually being included in contributions
■ May exclude eligible employees
■ Must pass coverage test
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PARTICIPATION
70% Test
 % of Non-highly Compensated Employees
(NHCE) participating must be at least 70% of
Highly Compensated Employees (HCE)
participating
Example
Employees:
2 HCE
10 NHCE
2
7
Participating
HCE
NHCE
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CASE STUDY - INDUSTRIAL DESIGN, INC.
Age
Compensation
Owner A
61
$250,000
Owner B
48
$250,000
Employee 1
32
$60,000
Employee 2
62
$30,000
$590,000
This example is purely hypothetical and for illustrative purposes only. The example shown does not represent any
particular plan and your results will differ.
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SIMPLIFIED EMPLOYEE PENSION (SEP)
Age
Salary
Allocation
% Pay
Owner A
61
$250,000
$50,000
20%
Owner B
48
250,000
50,000
20%
Emp 1
32
60,000
12,000
20%
Emp 2
62
30,000
6,000
20%
Total:
$118,000
Keys:
$100,000
Key %:
84.7%
EEs Contribution:
$18,000
This example is purely hypothetical and for illustrative purposes only. The example shown does not represent any particular
plan and your results will differ.
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SIMPLE-IRA
Savings Incentive Match Plan for Employees
Age
Salary Deferral
Total w/ 3%
Match
Owner A
61
$250,000
$14,000
$21,350
Owner B
48
250,000
11,500
18,850
Emp 1
32
60,000
1,800
3,600
Emp 2
62
30,000
900
1,800
Total:
$28,200
$45,600
Keys:
$25,500
$40,200
Key %
88%
EEs Contribution
2,700
This example is purely hypothetical and for illustrative purposes only. The example shown does not represent any particular
plan and your results will differ.
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PROFIT SHARING - PAY BASED FORMULAS
Proportionate to Pay
■ Everyone gets the same percentage of pay (like SEP)
Permitted Disparity
■ Also known as Integration With Social Security
■ Can help a plan favor higher paid employees
■ Formula takes into account payments the employer
already makes to Social Security
■ Sample formula
• 5.7% of compensation above SS Wage Base,
balance allocated in proportion to pay
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Integrated Profit Sharing Plan
Contribution
Age
Salary
Trad PS
Integrated PS
Owner A
61
$250,000
$50,000
$50,000
Owner B
48
250,000
50,000
50,000
EE 1
32
60,000
12,000
10,086
EE 2
62
30,000
6,000
5,043
$590,000
$118,000
$115,129
$100,000
$100,000
85%
87%
Total
Key Total
Key %
This example is purely hypothetical and for illustrative purposes only. The example shown does not represent any particular plan
and your results will differ.
For Financial Professional Use Only- Not For Use With Public
Pay and Age Based Formulas
Age Based
 Allocations favor older employees
 Favor groups where the employer is older than
employees
 Allocations based on projected benefits at a
future retirement age
 The fewer years until retirement, the more the
allocation must be each year to accumulate
the projected benefit
For Financial Professional Use Only- Not For Use With Public
Age Weighted Profit Sharing Plan
Contribution
Age
Salary
Trad PS
Age Weighted PS
Owner A
61
$250,000
$50,000
$50,000
Owner B
48
250,000
50,000
17,313
EE 1
32
60,000
12,000
1,800
EE 2
62
30,000
6,000
6,510
$590,000
$118,000
$75,623
$100,000
$67,313
85%
89%
Total
Key Total
Key %
This example is purely hypothetical and for illustrative purposes only. The example shown does not represent any particular plan
and your results will differ.
For Financial Professional Use Only- Not For Use With Public
New Comparability Profit Sharing
Takes the concept of Age Based further
 Allows for employees to be segregated into
groups with different contribution rates
 Allows the plan to test on projected benefits
that are comparable instead of equal
 Well suited to businesses where not all
employees are younger than the owner or
multiple owners are different ages
For Financial Professional Use Only- Not For Use With Public
New Comparability Profit Sharing
Contribution
Age
Salary
Trad PS
New Comparability
Profit Sharing
Owner A
61
$250,000
$50,000
$50,000
Owner B
48
250,000
50,000
50,000
EE 1
32
60,000
12,000
3,000
EE 2
62
30,000
6,000
1,500
$590,000
$118,000
$104,500
$100,000
$100,000
85%
96%
Total
Key Total
Key %
This example is purely hypothetical and for illustrative purposes only. The example shown does not represent any particular plan and your
results will differ.
Contributions: Owners – 20% of salary; Employees 5% of salary
For Financial Professional Use Only- Not For Use With Public
Case Study
PS
Industrial Design, Inc.
$50,000
$50,000
$50,000
$50,000
$1,500
$6,510
$1,800
SSI
$10,086
$12,000
AB
$50,000
$5,043
$6,000
NC
$3,000
$50,000
$17,313
$50,000
These examples are purely hypothetical and for illustrative purposes only. The examples shown here do not represent the actual results of any
particular plan and your results likely will differ.
For Financial Professional Use Only- Not For Use With Public
WHICH CLIENTS?
How About New Clients?
30 million businesses comprised
of 9.5 million incorporated
businesses with less than 10
employees and 20.7 million
unincorporated businesses
Business Owners
■ Profitable
■ Have cash flow
■ Approaching retirement
■ Could benefit from protection of assets
■ Could benefit from tax deduction
■ May already have a plan, but maybe not the best
plan
Government Census Statistics
http://www2.census.gov/csd/susb/2006/usst06.xls
http://www.census.gov/epcd/nonemployer/2006/us/US000.HTMhttp://www2.census.gov/csd/susb/2006/usst06.xls
http://www.census.gov/epcd/nonemployer/2006/us/US000.HTM
U.S. Department of Labor, U.S. Bureau of Labor Statistics, August 2007
National Compensation Survey: Employee Benefits in Private Industry in the United States, March 2009
Update 2009 http://www.bls.gov/ncs/ebs/benefits/2009/benefits_retirement.htm
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IN A PERFECT WORLD…
Ask the employer:
■ How much do you want to contribute?
■ Which employees do you want to include?
■ Which employees do you want to favor?
…within the law we can help design a plan that
comes close to the client’s idea of “perfect”
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ALLIANCE BENEFIT GROUP-PENTEGRA
Training, custom plan proposals,
prospecting and marketing
materials are free.
 Outstanding Personal Service We are only a phone call away!
 Industry Experts
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Lori J. Carpenter
Advisor Relationship Manager
(800) 255-8678
Direct: 704.716.8596
lcarpenter@abgcarolinas.com
Mary Read CPC, QPA
National Director of Qualified
Plans Marketing
802-477-2018
mread@abgpentegra.com
For Financial Professional Use Only – Not For Use With Public
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CIRCULAR 230 DISCLOSURES
The above information is not intended or written to be used, and it cannot be
used, by any person for the purposes of avoiding any penalty that may be
imposed by the Internal Revenue Service.
In the event the advice is also considered to be a “marketed opinion” within
the meaning of the IRS guidance, then as required by the IRS, please be
further advised of the following:
The above advice was written to support the promotion or marketing of the
transactions or matters addressed by the written advice and, based on the
particular circumstances, you should seek advice from an independent tax
advisor.
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