Confidence in your plan™
Tycor Benefit Administrators, Inc.®
Advanced Plan Design
Maximizing tax efficiency and generating favorable
allocations to accelerate retirement savings
Presented by: Kelton Collopy
Agenda
• Identify reasons why an Employer does not offer a plan or
why a plan is not fully utilized
• Provide a broad overview of a variety of tax-qualified
retirement plans available for a sponsor to choose from
– Defined Contribution Plans
– Defined Benefit Plans
– Owner-Only Plans
• Case Study of Plans for a small employer
– Use plan design to improve the plan results and client satisfaction
– Demonstrate how tax treatment can increase retirement savings
Reasons Owners Don’t Take Full
Advantage of or Don’t Sponsor a Plan
• Their existing plan is already returning 401(k) deferrals so
they believe they have reached their limits
• They sponsor a DC plan, such as 401(k) Profit Sharing,
and believe that $52,000 is the maximum
• They believe maximizing their contribution would result in
a cost-prohibitive contribution to the plan
• Too busy re-investing into their own business
Properly designed, it may be possible to increase the contribution received by
favored person or group while reducing the overall contribution to the Plan, while
realizing significant tax savings at the same time
Defined Contribution Plans
•
•
•
•
•
Retirement benefits are derived from contributions that the employee
and/or employer make to Plan
Individual accounts are established for each participant and the
investment risk/reward is borne by the employee.
Employer contributions are tax deductible and can be up to 25% of
eligible compensation. Allocation to participants generally based on
compensation or based on combination of compensation and a deferral
amount made by employee (i.e., Match)
Maximum contribution to employee’s account for 2014 is $52,000. Ability
for employees over age 50 to save an additional $5,500 for total of
$57,500
Rules that each plan type is subject to vary & knowing how this affects
plan design & reporting requirements is important
Defined Contribution Plans
SIMPLE
401(k)
Feature
SEP
401(k)
Profit Sharing
Money
Purchase
Sponsor
another Plan?
No
Yes, unless
adopted on IRS
5305
Yes
Yes
Yes
Max EE Deferral
(2014)
Lesser of $12,000
or 100% of comp
None, only ER
Contributions
Lesser of $17,500
or 100% of
compensation
None
None
Catch Up
Contributions
permitted?
Yes, $2,500 (2014)
N/A
Yes, $5,500 (2014)
N/A
N/A
Employer
Contributions
Required Match
100% up to 3% or
2% of Eligible
Comp to all
Employees. Fully
Vested
Discretionary, up to
25% of comp.
Subject to vesting
Discretionary, up to
25% of comp.
Employee deferral
fully vested.
Employer subject
to vesting
Discretionary, up to
25% of comp.
Subject to vesting
Required
contribution as
stated in plan doc.
Up to 25% of comp.
Subject to vesting
Eligibility
Age cannot exceed
21, Service cannot
exceed 1 year
Age cannot exceed
21, earned
compensation of
$550 in 3 of 5
previous years
Age cannot exceed
21, Service cannot
exceed 1 year
Age cannot exceed
21, Service cannot
exceed 1 year.
2 Years if 100%
vested
Age cannot exceed
21, Service cannot
exceed 1 year.
2 Years if 100%
vested
Maximum
Contribution
$12,000 + $2,500 +
3% Match
25% of pay, up to
$52,000
$52,000 or $57,500
(not to exceed
100% of pay)
$52,000 (not to
exceed 100% of
pay)
$52,000 (not to
exceed 100% of
pay)
Loans or Roth?
Plan Option
No
Plan Option
Loan – Plan Option
Roth - No
Loan – Plan Option
Roth - No
Profit Sharing Plans
Flexibility
Methods to allocate the PS $
• Range of contribution can be
0% - 25% of payroll
• Contribution can vary every
year
• Can offer 401(k) and/or
Matching Contributions
• Max individual allocation is
lesser of 100% of W-2 or
$52,000 ($57,500 with Catch
Up)
•
•
•
•
Pro-Rata
Integrated
Age-Weighted
Cross-Tested, or New
Comparability
Defined Benefit Plans
• Promise to provide a monthly benefit beginning at retirement and
payable as long as retiree lives. The amount is typically based on
years of service and how much was earned during the highest-paid
three consecutive years of employment.
• Maximum annual lifetime benefit is $210,000 payable to a
participant with retirement age of 62-65 or later in 2014
• These plans provide an employer with the potential for much higher
contribution levels than defined contribution plans
• Older employees receive a larger share of contributions
• May require PBGC insurance, does require the services of an
enrolled actuary
• Two types of DB Plans
– Traditional Defined Benefit
– Cash Balance
Traditional Defined Benefit Plan
Future Benefits Defined by Plan
and promised by Employer
Why do DBs permit higher
contribution limits?
• Annual benefit defined as
accrued monthly benefit
payable at Retirement Age,
based on factors such as
current or past compensation
and service
• Employer bears the investment
risk of the pooled investments
of the plan
• Maximum benefit limit
mandates 10 years of
participation. Less than 10
years creates an adjustment
• Maximum annual benefit of
$210,000 at age 62 has an
approximate lump sum value of
$2,400,000
• Participant at age 52 has only
10 years to receive
contributions of approximately
$200,000 to achieve maximum
A Closer Look: Owner-Only Plans
• Employers, such as Sole
• Common Choices are:
Proprietors or Partnerships
– SIMPLE 401(k)
often consist of just the
– SEP
business owner(s).
– Solo 401(k)
• With no employees, or at least • Any Plan established is
no employees meeting plan
going to be Top Heavy
entry requirements, the plan
– Will they ever hire
may only cover the Owner(s)
employees?
• These plans are not subject to
– Will they become
ERISA
participants eligible to
enter the plan?
• They do have to comply with
• Consider Defined Benefit
variety of rules
Owner Only - Simple, SEP, 401(k) PS
SIMPLE 401(k)
Earned
Income
Employer
Match
$50,000
SEP
Solo 401(k)
Employee
EE Def &
ER Match
Employee
EE Def &
ER PS
Employer
$1,500
$12,000
$13,500
$ 12,500
$
12,500
$ 17,500
$ 30,000
$100,000
$3,000
$12,000
$15,000
$ 25,000
$
25,000
$ 17,500
$ 42,500
$138,000
$4,140
$12,000
$16,140
$ 34,500
$
34,500
$ 17,500
$ 52,000
$150,000
$4,500
$12,000
$16,500
$ 37,500
$
34,500
$ 17,500
$ 52,000
$200,000
$6,000
$12,000
$18,000
$ 50,000
$
34,500
$ 17,500
$ 52,000
$260,000
$7,800
$12,000
$19,800
$ 52,000
$
34,500
$ 17,500
$ 52,000
100% of 3% Def
25% of Elig.
Comp
ER Maximum 2% of Elig Comp
Employer
25% of Elig.
Comp.
Maximum
$12,000
$
-
$ 17,500
Catch Up
$2,500
$
-
$
5,500
Owner Only – Defined Benefit
Earned
Income
$50,000
$100,000
$150,000
$200,000 or
higher
Age
Contribution
Contribution
Contribution
Contribution
40
$19,000
$38,000
$57,000
$74,000
45
$25,000
$50,000
$75,000
$97,000
50
$33,000
$65,000
$98,000
$127,000
55
$43,000
$85,000
$128,000
$166,000
60
$56,000
$111,000
$167,000
$217,000
65
$58,000
$115,000
$173,000
$225,000
If the amount of savings provided by a Defined Benefit is still not high
enough, can also utilize a 401(k) PS Plan to increase the savings and
flexibility to the Owner
Case Study
• Employers have many options • Sample Client
– 10 Employees, including 2 Owners
in offering retirement
– Annual payroll is approaching $1
programs
million. Company is profitable with
stable revenue
• SIMPLE, SEP, and 401(k)
– Owners, age 64 and 49, are looking
Profit Sharing are the most
to save more for retirement
common
– Will provide benefits to staff if it
makes sense financially
• Less common, but growing,
– Staff was surveyed and there is
are Cash Balance Plans
interest in saving among the group
• Objective: Maximize the 64
• Depending on client
year old Owner, and possibly
objectives, any one of these,
the 49 year old Owner, under
or even a combination of,
various plan types and consider
these plans can be the
the tax efficiency of each
solution
solution
Sample For Small Employer
Age as of
12/31/2014
Employee
Compensation
5% Owner
Tiered Class for
New Comparability
Owner
64
$260,000
Y
A
Owner
49
$200,000
Y
B
Staff of 8 EEs
Avg Age 42
Avg Comp $48,000
N
C
Employee Simple Def
Simple
Match
Simple
Total
SEP
401(k)
Pro-Rata
Total
Owner
$14,500
$7,800
$22,300
$52,000
$23,000
$34,500
$57,500
Owner
$12,000
$6,000
$18,000
$40,000
$17,500
$26,538
$44,038
$40,300
$92,000
$20,100
$99,000
Total ER
Staff of 8
$11,450
$8,650
$101,538
$11,450
$65,600
$77,050
The 401(k) PS allows for 64 yr old to reach maximum (with catch up). SEP gets to limit
(without catch up) but is entirely funded by Employer at 20% of payroll. Under 401(k) PS,
Owners receive $101,538 in total contributions
Employer Contributions Analyzed
Simple Match
SEP
Pro-Rata
Owner
$7,800
$52,000
$34,500
Owner
$6,000
$40,000
$26,538
Owner Total
$13,800
$92,000
$61,038
EE Total
$8,650
$99,000
$65,681
Total ER Contrib
$22,450
$191,000
$126,719
40% Tax Rate
Adjusted Cost of
Contribution
$8,980
$76,400
$50,688
($13,470)
($114,600)
($76,031)
$13,800
$92,000
$61,038
$330
($22,600)
($14,993)
Owners Share
Net Cost
The SIMPLE is more efficient in terms of tax treatment but the
income replacement to the Owner’s is likely insufficient to meet their
objectives.
Meeting Client Objective
With These Plans
• Objective: Maximize the 64 year old Owner, and
possibly the 49 year old Owner, under various plan types
and consider the tax efficiency of each solution
– SIMPLE: Has tax efficiency but low overall benefit to owners
– SEP: Solely the Employer responsibility to fund and not tax
efficient
– PRO-RATA PROFIT SHARING: Maximizes the primary Owner
but not a tax efficient result
• Let’s consider advanced design techniques to better
satisfy the objective. New Comparability, or cross-tested,
plan design may work.
What is a New Comparability Plan?
Profit Sharing plan with:
These plans are attractive to
what type of company?
• Employees divided into groups
• The allocation % to each group
can vary (e.g., 3% to the staff,
9% to Owner)
• Groups can even be defined as
each employee is their own
group for ultimate flexibility
• Often have 401(k) and other
features as well (Safe Harbor,
Roth, etc.)
• Professional firms such as
physicians, attorney, CPA firms
but works for many other
businesses
• Favored group should be older
than a significant portion of
employees
• Allows larger contributions to
favored group without loss of
flexibility in funding
• Companies looking for tax
deductions
New Comparability Plan (cont.)
Is this plan discriminatory?
Can 401(k) deferrals be made?
• Projected benefits at
retirement age are considered,
not the $ received today,
allowing higher rate to older
participants
• The allocations must be tested
for non-discrimination on a
cross-tested basis
• Generally, the resulting
allocation favors selected,
older, higher paid employees.
Typically, the Owner(s) is/are
targeted for highest amount
• Definitely! It works best when
401(k) feature is available.
Roth or traditional deferrals
available
• Better yet, pair with “Safe
Harbor” contributions so HCEs
can max 401(k) deferral
• Allocation to NHCE must be at
least 1/3 of that provided to
HCEs or 5% (if less)
401(k) New Comparability With 3%
Safe Harbor
Deferrals
3% Safe
Harbor
New
Comparability
Total
Employer
Total Contributions
Owner
$23,000
$7,800
$26,700
$34,500
$57,500
Owner
$17,500
$6,000
$20,538
$26,538
$44,038
$61,038
$101,538
$21,890
$33,340
EE
Owner Totals
Staff of 8 Ees
$11,450
$14,850
$7,040
Total Employer Contribution
Estimated Tax Rate
Tax Savings
$82,928
40%
$33,171
Cost of EE Contribution
($21,890)
Net Cost of Contribution
$11,281
By using New Comparability design, we are able to keep the Owner’s at
the same contribution level ($101,538) but greatly reduce the cost of
providing the employee’s benefits ($65,682 to $21,894). The Employer
Contribution is very effective from a tax perspective as well.
Meeting Client Objective
With This Plan
• Objective: Maximize the 64 year old Owner, and
possibly the 49 year old Owner, under various plan types
and consider the tax efficiency of each solution
• New Comparability Design meets the criteria of
maximizing the Owner, treats the 49 year old equally in
terms of % of pay and is tax efficient allocation so it may
be the solution.
• However, Owner is 64 and may be looking for more
retirement savings. Let’s consider adding a Cash
Balance Plan
Cash Balance Plan
• Benefit is based on
hypothetical account
• Account is credited with
annual contribution and
with interest credit as
defined by plan (generally
in 5% range)
• Plan looks like a Money
Purchase Plan
• Accrued benefit is in the
form of a Lump Sum
Distribution, making it very
understandable to
participants
• Assets held in Trust and
managed by Trustees, not
employee directed.
• Almost always paired with
a New Comparability
401(k) Plan for maximizing
benefits and adding
flexibility
• Defined Benefit Plans have
required annual
contributions and employer
bears the investment risk
CB/DC Combo Plans
• Two separate plans
(documents, reporting &
administration for each)
• No contribution restrictions
for employers that (a) are
NOT Professional Service
entities and (b) have rank &
file employees
• Professional Service
entities with >25 employees
do not have contribution
restriction either
• The restrictions on Sole
Proprietors or Professional
Service firm with <25
employees limit the Profit
Sharing to a max of 6% of
total eligible compensation
• Sole Proprietor Plans want
to use most restrictive
eligibility rules and
communicate changes
early
CB/DC Combo – Cash Balance Plan Paired With
401(k) New Comparability 3% Safe Harbor Plan
EE
401(k)
Deferrals
3% Safe
Harbor
7.5% Profit
Sharing
Cash
Balance
Total
Employer
Total
Owner
$23,000
$
-
$
-
$243,557
$243,557
$266,557
Owner
$17,500
$
-
$
-
$132,320
$132,320
$149,820
$
-
$
-
$375,877
$375,877
$416,377
$14,850
$66,825
$78,275
Owner Totals
Employee
$11,450
$14,850
$37,125
Total Employer Contribution
Estimated Tax Rate
Tax Savings
$442,702
40%
$177,081
Cost of EE Contribution
($66,825)
Net Cost of Contribution
$110,256
The combination of Cash Balance Plan with a 401(k) Profit Sharing Plan
is an exceptional method for increasing both the Owner’s and the Staff
opportunity for income replacement in retirement and can be done in a
tax efficient manner.
Note: These plans can also be used in succession planning.
Agenda - Recap
• Identify reasons why an Employer does not offer a plan or
why a plan is not fully utilized
• Provide a broad overview of a variety of tax-qualified
retirement plans available for a sponsor to choose from
– Defined Contribution Plans
– Defined Benefit Plans
– Owner-Only Plans
• Case Study of plan available for a small employer
– Use plan design to improve the plan results and client satisfaction
– Demonstrate how tax treatment can increase retirement savings
Thank You For Your Time Today!
Kelton Collopy
VP, TPA Services
Tycor Benefit Administrators, Inc.®
O: (610) 251-0670 x19
Kcollopy@tycorplan.com
Confidence in your plan™