401(k) Secrets Every Financial Advisor Should Know

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The MandMarblestone Group LLC
2929 Arch Street, Suite 600
Philadelphia, PA 19104-2889
Phone: (215) 222-5000
Fax: (215) 222-5522
Web: www.mand.com
401(k) Secrets
Every Financial Advisor Should Know
The MandMarblestone Group LLC
IRS Circular 230 Disclosure
IRS regulations require us to notify you that this
communication was not intended or written to be used, and
cannot be used, by you or any taxpayer, for the purpose of
avoiding penalties that the IRS might impose on the
taxpayer.
The MandMarblestone Group LLC
Adding Value Through Plan
Design
What Do Your Clients Want
Adding Value Through Plan Design
 Plans that deliver benefits to owners,
family and other valued employees –
“owner-centric” plan designs
 Plans that minimize contributions for
those who won’t appreciate them
 Plans that can easily adapt to changing
business conditions and changing
employee demographics
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Recognize Plan Design Strategies
 What does a 3% company contribution
buy for the owner?
 How much does the maximum owner
contribution cost the company in
employee contribution expense?
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Objectives
What does 3% of Participants’ Compensation
Buy for Owner?
 Assume owner > 50 years old, comp of $245,000
 3% = $7,350 contribution
 plus $22,000 deferral ($16,500 deferral plus $5,500
catch-up)
 plus 6% of comp = $14,700
(Assumes maximum cross-tested design)
3% of Participants’ Comp Buys Owner $44,050
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Objectives
What is Minimum Participants’
Contribution Expense to Maximize
Owner’s Contribution?
 Assume Owner > 50 years old, comp of $245,000
 $22,000 owner deferral ($16,500 deferral plus $5,500
catch-up)
 13.27% of owner’s comp = $32,500
 4.42% contribution to employees
(Assumes maximum cross-tested design)
Owner Maximum of $54,500 costs 4.42%
of Participants’ Compensation
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What is OCPP® ?
Adding Value Through Plan Design
 “One Category Per Participant”
 Defined Contribution (DC) Plan
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How OCPP® Satisfies Clients’ Wants
Adding Value Through Plan Design
 Ability to favor owners and family of any
age
 Ability to pay “tax-sheltered” bonus to
any employee without requirement to do
so again next year
 Ability to minimize contributions for nonfavored employees
 Flexible to changing business conditions
and demographics
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Adding Value Through Plan Design
Identify OCPP® Plan Design
Candidates
 Successful business. For example:
 Professional Practices (e.g. Medical, Dental, Law
and Accounting Firms)
 Family Owned Businesses
 Companies With High Sales/Profit Margins
 Willing to make a 3% to 5 % profit sharing
contribution for staff


Top-Heavy Plans
401(k) Plans with Non-Elective Safe Harbor
 Owners want to maximize contributions for
themselves and/or reduce contributions for staff
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Defined Contribution (Profit Sharing)
Plan Types
Adding Value Through Plan Design
 “Safe Harbor” Plans – Prototype
Documents


Non-Integrated
Integrated
 “General Test” Plans – Prototype
Documents

New Comparability
 “General Test” Plans – Customized
Documents

OCPP® – One Category Per Participant
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Adding Value Through Plan Design
New Comparability vs. OCPP®
 New Comparability
 Pre-Defined Categories or “Tiers” of
Participants
 “Cross-Tested” (Preferred Employees MUST
be older)
 OCPP® – One Category Per Participant
 Unlimited number of groups


Each participant is in their own category
Complete Testing Flexibility

Preferred Employees need NOT be older
OCPP®: NOT A MULTI-TIERED NEW COMPARABILITY DESIGN
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MMG OCPP® Plan Document
Adding Value Through Plan Design
 Form of plan has received a favorable
opinion letter from the IRS as a volume
submitter document under EGTRRA
 May be submitted for individual
determination letters based on each
client’s unique fact pattern
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The MandMarblestone Group LLC
Case Studies
CASE STUDY #1 - ILLUSTRATION A
INTEGRATED CONTRIBUTION ALLOCATION
Participant
Owner
Child of Owner
Spouse of Owner
Father of Owner
Sub-Total
Age
51
26
51
76
Sales Manager
Sales Staff 1
Sales Staff 2
Office Manager
Office Staff 1
Office Staff 2
Office Staff 3
Warehouse Manager
Warehouse Staff 1
Warehouse Staff 2
Sub-Total
48
53
38
41
60
50
64
41
25
30
Total
Salary
$245,000
$125,000
$45,000
$25,000
$440,000
Employer
401(k)
Contribution Deferrals*
$32,500.00 $4,600.00
$32,500.00 $2,600.00
$11,326.54 $2,500.00
$6,292.52
$0.00
$82,619.06 $9,700.00
$87,000 $21,897.97
$79,000 $19,884.36
$49,000 $12,333.34
$54,000 $13,591.84
$29,000
$7,299.32
$24,000
$6,040.82
$18,000
$4,530.61
$31,000
$7,802.73
$27,000
$6,795.92
$28,000
$7,047.62
$426,000 $107,224.53
Total Contribution
As % of As % of
Contribution Salary** Total**
$37,100.00 15.14% 18.59%
$35,100.00 28.08% 17.59%
$13,826.54 30.73%
6.93%
$6,292.52 25.17%
3.15%
$92,319.06
46.27%
$1,040.00 $22,937.97
$0.00 $19,884.36
$0.00 $12,333.34
$0.00 $13,591.84
$435.00
$7,734.32
$520.00
$6,560.82
$0.00
$4,530.61
$310.00
$8,112.73
$500.00
$7,295.92
$0.00
$7,047.62
$2,805.00 $110,029.53
$866,000 $189,843.59 $12,505.00 $202,348.59
25.17%
25.17%
25.17%
25.17%
25.17%
25.17%
25.17%
25.17%
25.17%
25.17%
10.97%
9.96%
6.18%
6.81%
3.66%
3.03%
2.27%
3.91%
3.41%
3.53%
53.73%
100.00%
*Amount of 401(k) deferrlas(including catch up contributions) after the return of excess contributions.
**Calculations include 401(k) Deferrals for the favored family group.
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(Case #1 - Illustration A)
 This is a typical integrated allocation found in
safe harbor (prototype) documents.
 Because of low deferral rates by employers, the
family is unable to maximize their 401(k)
contributions.
 In order to maximize the contribution for Child
and Owner, a 25.17% contribution rate will be
needed for the staff.
 Family will receive less than 47% of company
contributions (including their own deferrals).
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CASE STUDY #1 - ILLUSTRATION B
INTEGRATED CONTRIBUTION ALLOCATION
Adding a 3% Non-Elective Safe Harbor
Participant
Owner
Child of Owner
Spouse of Owner
Father of Owner
Sub-Total
Age
51
26
51
76
Sales Manager
Sales Staff 1
Sales Staff 2
Office Manager
Office Staff 1
Office Staff 2
Office Staff 3
Warehouse Manager
Warehouse Staff 1
Warehouse Staff 2
Sub-Total
48
53
38
41
60
50
64
41
25
30
Total
Salary
$245,000
$125,000
$45,000
$25,000
$440,000
Employer
Contribution*
$32,500.00
$32,500.00
$11,326.54
$6,292.52
$82,619.06
$87,000 $21,897.97
$79,000 $19,884.36
$49,000 $12,333.34
$54,000 $13,591.84
$29,000
$7,299.32
$24,000
$6,040.82
$18,000
$4,530.61
$31,000
$7,802.73
$27,000
$6,795.92
$28,000
$7,047.62
$426,000 $107,224.53
Total Contribution
401(k)
As % of As % of
Deferrals Contribution Salary** Total**
$22,000.00 $54,500.00 22.24% 20.01%
$16,500.00 $49,000.00 39.20% 17.99%
$22,000.00 $33,326.54 74.06% 12.24%
$22,000.00 $28,292.52 113.17% 10.39%
$82,500.00 $165,119.06
60.63%
$1,040.00 $22,937.97
$0.00 $19,884.36
$0.00 $12,333.34
$0.00 $13,591.84
$435.00
$7,734.32
$520.00
$6,560.82
$0.00
$4,530.61
$310.00
$8,112.73
$500.00
$7,295.92
$0.00
$7,047.62
$2,805.00 $110,029.53
$866,000 $189,843.59 $85,305.00 $275,148.59
25.17%
25.17%
25.17%
25.17%
25.17%
25.17%
25.17%
25.17%
25.17%
25.17%
8.04%
7.30%
4.53%
4.99%
2.68%
2.22%
1.66%
2.87%
2.50%
2.59%
39.37%
100.00%
*Includes a 3% safe harbor non-elective contribution
**Calculations include 401(k) Deferrals for the favored family group.
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(Case #1 - Illustration B)
 By adding a 3% non-elective safe harbor
contribution, the situation is significantly
improved.
 The safe harbor contribution allows all family
members to maximize their 401(k) contributions.
 This step alone will increase the family’s share
of total company contributions (including their
own deferrals) to 60.63%.
 Note that because of the catch-up contribution,
the Father of the Owner is able to have in excess
of 100% of compensation contributed!
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CASE STUDY #1 - ILLUSTRATION C
INTEGRATED CONTRIBUTION ALLOCATION
Adding a Discretionary Match
Participant
Owner
Child of Owner
Spouse of Owner
Father of Owner
Sub-Total
Age
51
26
51
76
Salary
$245,000
$125,000
$45,000
$25,000
$440,000
Sales Manager
Sales Staff 1
Sales Staff 2
Office Manager
Office Staff 1
Office Staff 2
Office Staff 3
Warehouse Manager
Warehouse Staff 1
Warehouse Staff 2
Sub-Total
48
53
38
41
60
50
64
41
25
30
$87,000
$79,000
$49,000
$54,000
$29,000
$24,000
$18,000
$31,000
$27,000
$28,000
$426,000
Total
Profit
Total
Total Contribution
Sharing
Matching
Employer
401(k)
As % of As % of
Contribution* Contribution Contribution Deferrals Contribution Salary** Total**
$22,700.00
$9,800.00 $32,500.00 $22,000.00 $54,500.00 22.24% 23.36%
$22,700.00
$5,000.00 $27,700.00 $16,500.00 $44,200.00 35.36% 18.94%
$7,798.54
$1,800.00
$9,598.54 $22,000.00 $31,598.54 70.22% 13.54%
$4,332.52
$1,000.00
$5,332.52 $22,000.00 $27,332.52 109.33% 11.71%
$57,531.06 $17,600.00 $75,131.06 $82,500.00 $157,631.06
67.56%
$15,077.17
$13,690.76
$8,491.74
$9,358.24
$5,025.72
$4,159.22
$3,119.41
$5,372.33
$4,679.12
$4,852.42
$73,826.13
$866,000 $131,357.19
$693.33
$0.00
$0.00
$0.00
$290.00
$346.67
$0.00
$206.67
$333.33
$0.00
$1,870.00
$15,770.50
$13,690.76
$8,491.74
$9,358.24
$5,315.72
$4,505.89
$3,119.41
$5,579.00
$5,012.45
$4,852.42
$75,696.13
$1,040.00
$0.00
$0.00
$0.00
$435.00
$520.00
$0.00
$310.00
$500.00
$0.00
$2,805.00
$16,810.50
$13,690.76
$8,491.74
$9,358.24
$5,750.72
$5,025.89
$3,119.41
$5,889.00
$5,512.45
$4,852.42
$78,501.13
$19,470.00 $150,827.19 $85,305.00 $236,132.19
18.13%
17.33%
17.33%
17.33%
18.33%
18.77%
17.33%
18.00%
18.56%
17.33%
6.76%
5.87%
3.64%
4.01%
2.28%
1.93%
1.34%
2.39%
2.15%
2.08%
32.44%
100.00%
*Includes a 3% safe harbor non-elective contribution.
**Calculations include 401(k) Deferrals for the favored family group only.
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(Case #1 - Illustration C)
 Because staff deferral rates are not high, a
discretionary match should be considered.
 The non-elective safe harbor allows the
company to make a matching contribution of up
to 4% of compensation without regard to the
discrimination testing usually required for
matching contributions.
 The family receives nearly 90% of the matching
contribution.
 This in turn permits the company profit sharing
contribution rate to be reduced to 17.33%,
saving almost $40,000 in company expense.
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CASE STUDY #1 - ILLUSTRATION D
TWO-TIER NEW COMPARABILITY CONTRIBUTION ALLOCATION
Participant
Owner
Child of Owner
Spouse of Owner
Father of Owner
Sub-Total
Age
51
26
51
76
Salary
$245,000
$125,000
$45,000
$25,000
$440,000
Employer
Contribution*
$32,500.00
$16,581.63
$5,969.39
$3,316.33
$58,367.35
Sales Manager
Sales Staff 1
Sales Staff 2
Office Manager
Office Staff 1
Office Staff 2
Office Staff 3
Warehouse Manager
Warehouse Staff 1
Warehouse Staff 2
Sub-Total
48
53
38
41
60
50
64
41
25
30
$87,000
$79,000
$49,000
$54,000
$29,000
$24,000
$18,000
$31,000
$27,000
$28,000
$426,000
$15,993.99
$14,523.28
$9,008.11
$9,927.31
$5,331.33
$4,412.14
$3,309.10
$5,699.01
$4,963.65
$5,147.49
$78,315.41
Total
401(k)
Deferrals
$22,000.00
$16,500.00
$22,000.00
$22,000.00
$82,500.00
$1,040.00
$0.00
$0.00
$0.00
$435.00
$520.00
$0.00
$310.00
$500.00
$0.00
$2,805.00
Total Contribution
As % of As % of
Contribution Salary** Total**
$54,500.00 22.24% 24.87%
$33,081.63 26.47% 15.09%
$27,969.39 62.15% 12.76%
$25,316.33 101.27% 11.55%
$140,867.35
64.27%
$17,033.99
$14,523.28
$9,008.11
$9,927.31
$5,766.33
$4,932.14
$3,309.10
$6,009.01
$5,463.65
$5,147.49
$81,120.41
$866,000 $136,682.76 $85,305.00 $221,987.76
18.38%
18.38%
18.38%
18.38%
18.38%
18.38%
18.38%
18.38%
18.38%
18.38%
7.30%
6.63%
4.11%
4.53%
2.43%
2.01%
1.51%
2.60%
2.26%
2.35%
35.73%
100.00%
*Includes a 3% safe harbor non-elective contribution
**Calculations include 401(k) Deferrals for the favored family group.
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(Case #1 - Illustration D)
 With a new comparability profit sharing
allocation, the Child’s age causes the staff
contribution rate to increase to 18.17%
 This rate is higher than any family member
receives!
 The family’s share of the total contribution
(including family deferrals) drops to 62.98% of
the total.
 NEW COMPARABLITY DOES NOT WORK
WHERE THE FAVORED GROUP INCLUDES
YOUNG EMPLOYEES!
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CASE STUDY #1 - ILLUSTRATION E
MULTI-TIER NEW COMPARABILITY CONTRIBUTION ALLOCATION
AN IRC and ADEA VIOLATION?
Participant
Owner
Child of Owner
Spouse of Owner
Father of Owner
Sub-Total
Age
51
26
51
76
Sales Manager
Sales Staff 1
Sales Staff 2
Office Manager
Office Staff 1
Office Staff 2
Office Staff 3
Warehouse Manager
Warehouse Staff 1
Warehouse Staff 2
Sub-Total
48
53
38
41
60
50
64
41
25
30
Total
Employer
401(k)
Salary
Contribution* Deferrals
$245,000
$32,500.00 $22,000.00
$125,000
$32,500.00 $16,500.00
$45,000
$2,250.00 $22,000.00
$25,000
$1,250.00 $22,000.00
$440,000
$68,500.00 $82,500.00
$87,000
$79,000
$49,000
$54,000
$29,000
$24,000
$18,000
$31,000
$27,000
$28,000
$426,000
$4,350.00
$3,950.00
$2,450.00
$2,700.00
$1,450.00
$1,200.00
$900.00
$1,550.00
$11,864.99
$12,304.43
$42,719.42
$1,040.00
$0.00
$0.00
$0.00
$435.00
$520.00
$0.00
$310.00
$500.00
$0.00
$2,805.00
Total Contribution
As % of As % of
Contribution Salary** Total**
$54,500.00 22.24% 28.13%
$49,000.00 39.20% 25.29%
$24,250.00 53.89% 12.52%
$23,250.00 93.00% 12.00%
$151,000.00
77.95%
$5,390.00
$3,950.00
$2,450.00
$2,700.00
$1,885.00
$1,720.00
$900.00
$1,860.00
$12,364.99
$12,304.43
$45,524.42
$866,000 $111,219.42 $85,305.00 $196,524.42
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
43.94%
43.94%
2.25%
2.04%
1.26%
1.39%
0.75%
0.62%
0.46%
0.80%
6.12%
6.35%
22.05%
100.00%
*Includes a 3% safe harbor non-elective contribution
**Calculations include 401(k) Deferrals for the favored family group.
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(Case #1 - Illustration E)
 The only reason the two Warehouse Staff
are treated as “favored employees” is
because they are young.
 PROBLEM: This would appear to violate
the Age Discrimination in Employment
Act and Internal Revenue Code Section
411(b)(2)(A) which prohibits reduction to
allocation rates because of age.
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CASE STUDY #1 - ILLUSTRATION F
OCPP® ALLOCATION
Participant
Owner
Child of Owner
Spouse of Owner
Father of Owner
Sub-Total
Age
51
26
51
76
Salary
$245,000
$125,000
$45,000
$25,000
$440,000
Employer
Contribution*
$32,500.00
$32,500.00
$2,873.93
$2,418.30
$70,292.23
Sales Manager
Sales Staff 1
Sales Staff 2
Office Manager
Office Staff 1
Office Staff 2
Office Staff 3
Warehouse Manager
Warehouse Staff 1
Warehouse Staff 2
Sub-Total
48
53
38
41
60
50
64
41
25
30
$87,000
$79,000
$49,000
$54,000
$29,000
$24,000
$18,000
$31,000
$27,000
$28,000
$426,000
$4,350.00
$3,950.00
$2,450.00
$13,591.85
$1,450.00
$1,200.00
$900.00
$7,802.73
$1,350.00
$1,400.00
$38,444.59
Total
401(k)
Deferrals
$22,000.00
$16,500.00
$22,000.00
$22,000.00
$82,500.00
$1,040.00
$0.00
$0.00
$0.00
$435.00
$520.00
$0.00
$310.00
$500.00
$0.00
$2,805.00
Total Contribution
As % of As % of
Contribution Salary** Total**
$54,500.00 22.24% 28.50%
$49,000.00 39.20% 25.62%
$24,873.93 55.28% 13.01%
$24,418.30 97.67% 12.77%
$152,792.23
79.90%
$5,390.00
$3,950.00
$2,450.00
$13,591.85
$1,885.00
$1,720.00
$900.00
$8,112.73
$1,850.00
$1,400.00
$41,249.59
$866,000 $108,736.81 $85,305.00 $194,041.81
5.00%
5.00%
5.00%
25.17%
5.00%
5.00%
5.00%
25.17%
5.00%
5.00%
2.27%
2.07%
1.28%
7.11%
0.76%
0.63%
0.47%
4.08%
0.71%
0.73%
20.10%
100.00%
*Includes a 3% safe harbor non-elective contribution
**Calculations include 401(k) Deferrals for the favored family group.
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(Case #1 - Illustration F)
 With OCPP®, age is not a factor!
 The favored employees (Office Manager &
Warehouse Manager) are selected for a higher
contribution rate because they are valued.
 Using this “discretionary pre-tax bonus” for two
favored employees enables the other employees’
contributions to be minimized at 5% of
compensation.
 The family’s share of contributions (including
deferrals) increases to 79.90% of the total!
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CASE STUDY #1 - ILLUSTRATION G
OCPP® ALLOCATION
Lowest Cost
Participant
Owner
Child of Owner
Spouse of Owner
Father of Owner
Sub-Total
Age
51
26
51
76
Sales Manager
Sales Staff 1
Sales Staff 2
Office Manager
Office Staff 1
Office Staff 2
Office Staff 3
Warehouse Manager
Warehouse Staff 1
Warehouse Staff 2
Sub-Total
48
53
38
41
60
50
64
41
25
30
Total
Employer
401(k)
Salary
Contribution* Deferrals
$245,000 $32,500.00 $22,000.00
$125,000 $32,500.00 $16,500.00
$45,000
$5,087.25 $22,000.00
$25,000
$3,636.28 $22,000.00
$440,000 $73,723.53 $82,500.00
$87,000
$79,000
$49,000
$54,000
$29,000
$24,000
$18,000
$31,000
$27,000
$28,000
$426,000
$4,350.00
$3,950.00
$2,450.00
$2,700.00
$1,450.00
$6,040.82
$4,530.62
$1,550.00
$1,350.00
$1,400.00
$29,771.44
$1,040.00
$0.00
$0.00
$0.00
$435.00
$520.00
$0.00
$310.00
$500.00
$0.00
$2,805.00
Total Contribution
As % of As % of
Contribution Salary** Total**
$54,500.00 22.24% 29.30%
$49,000.00 39.20% 26.34%
$27,087.25 60.19% 14.56%
$25,636.28 102.55% 13.78%
$156,223.53
83.99%
$5,390.00
$3,950.00
$2,450.00
$2,700.00
$1,885.00
$6,560.82
$4,530.62
$1,860.00
$1,850.00
$1,400.00
$32,576.44
$866,000 $103,494.97 $85,305.00 $188,799.97
5.00%
5.00%
5.00%
5.00%
5.00%
25.17%
25.17%
5.00%
5.00%
5.00%
2.34%
2.12%
1.32%
1.45%
0.78%
3.25%
2.44%
0.83%
0.73%
0.75%
16.01%
100.00%
*Includes a 3% safe harbor non-elective contribution
**Calculations include 401(k) Deferrals for the favored family group.
26
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(Case #1 - Illustration G)
 Under this OCPP® allocation, the goal is to
maximize the family at the least cost for
employees.
 The two “favored” individuals are those with the
lowest compensation.
 Age discrimination is not an issue – the two
favored employees are among the oldest.
 The family’s share of the total company
contributions (including their deferrals)
increases to 83.99%.
27
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CASE STUDY #2 - ILLUSTRATION A
TWO-TIER NEW COMPARABILITY CONTRIBUTION ALLOCATION
Same as Case Study #1but the 25 year old participant teminated during the year
Participant
Owner
Child of Owner
Spouse of Owner
Father of Owner
Sub-Total
Age
51
26
51
76
Sales Manager
Sales Staff 1
Sales Staff 2
Office Manager
Office Staff 1
Office Staff 2
Office Staff 3
Warehouse Manager
Warehouse Staff 1
Warehouse Staff 2
Sub-Total
48
53
38
41
60
50
64
41
25
30
Total
Salary
$245,000
$125,000
$45,000
$25,000
$440,000
Employer
Contribution*
$32,500.00
$16,581.63
$5,969.39
$3,316.33
$58,367.35
$87,000 $30,718.05
$79,000 $27,893.40
$49,000 $17,300.97
$54,000 $19,066.37
$29,000 $10,239.35
$24,000
$8,473.94
$18,000
$6,355.46
$31,000 $10,945.51
$5,000
$221.09
$28,000
$9,886.27
$404,000 $141,100.41
Total Contribution
401(k)
As % of As % of
Deferrals Contribution Salary** Total**
$22,000.00 $54,500.00 22.24% 19.33%
$16,500.00 $33,081.63 26.47% 11.73%
$22,000.00 $27,969.39 62.15%
9.92%
$22,000.00 $25,316.33 101.27%
8.98%
$82,500.00 $140,867.35
49.96%
$1,040.00 $31,758.05
$0.00 $27,893.40
$0.00 $17,300.97
$0.00 $19,066.37
$435.00 $10,674.35
$520.00
$8,993.94
$0.00
$6,355.46
$310.00 $11,255.51
$100.00
$321.09
$0.00
$9,886.27
$2,405.00 $143,505.41
$844,000 $199,467.75 $84,905.00 $284,372.75
35.31%
35.31%
35.31%
35.31%
35.31%
35.31%
35.31%
35.31%
4.42%
35.31%
10.89%
9.89%
6.14%
6.76%
3.63%
3.01%
2.25%
3.88%
0.08%
3.51%
50.04%
100.00%
*Includes a 3% safe harbor non-elective contribution
**Calculations include 401(k) Deferrals for the favored family group.
28
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(Case #2 - Illustration A)
 If the youngest employee terminated
employment during the current plan year,
the new comparability formula becomes a
disaster.
 The third-party administrator typically
does not learn about the demographic
changes until after the end of the plan
year, where any changes to the benefit
formula may be a prohibited reduction in
accrued benefits of the participants.
29
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CASE STUDY #2 - ILLUSTRATION B
INTEGRATED CONTRIBUTION ALLOCATION
Participant
Owner
Child of Owner
Spouse of Owner
Father of Owner
Sub-Total
Age
51
26
51
76
Sales Manager
Sales Staff 1
Sales Staff 2
Office Manager
Office Staff 1
Office Staff 2
Office Staff 3
Warehouse Manager
Warehouse Staff 1
Warehouse Staff 2
Sub-Total
48
53
38
41
60
50
64
41
25
30
Total
Salary
$245,000
$125,000
$45,000
$25,000
$440,000
Employer
Contribution*
$32,500.00
$32,500.00
$11,326.54
$6,292.52
$82,619.06
$87,000 $21,897.97
$79,000 $19,884.36
$49,000 $12,333.34
$54,000 $13,591.84
$7,299.32
$29,000
$6,040.82
$24,000
$4,530.61
$18,000
$7,802.73
$31,000
$150.00
$5,000
$7,047.62
$28,000
$404,000 $100,578.61
401(k)
Deferrals
$22,000.00
$16,500.00
$22,000.00
$22,000.00
$82,500.00
Total Contribution
As % of As % of
Contribution Salary** Total**
$54,500.00 22.24% 20.51%
$49,000.00 39.20% 18.44%
$33,326.54 74.06% 12.54%
$28,292.52 113.17% 10.65%
62.15%
$165,119.06
$1,040.00 $22,937.97
$0.00 $19,884.36
$0.00 $12,333.34
$0.00 $13,591.84
$7,734.32
$435.00
$6,560.82
$520.00
$4,530.61
$0.00
$8,112.73
$310.00
$250.00
$100.00
$7,047.62
$0.00
$2,405.00 $102,983.61
$844,000 $183,197.67 $84,905.00 $268,102.67
25.17%
25.17%
25.17%
25.17%
25.17%
25.17%
25.17%
25.17%
3.00%
25.17%
8.24%
7.48%
4.64%
5.12%
2.75%
2.27%
1.71%
2.94%
0.06%
2.65%
37.85%
100.00%
*Includes a 3% safe harbor non-elective contribution
**Calculations include 401(k) Deferrals for the favored family group.
30
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(Case #2 - Illustration B)
 Without the youngest employee, even the
integrated allocation is superior to the
new comparability allocation.
 But it is too late to restore this type of
formula if the plan year has already
ended!
31
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CASE STUDY #2 - ILLUSTRATION C
OCPP® ALLOCATION
Participant
Owner
Child of Owner
Spouse of Owner
Father of Owner
Sub-Total
Age
51
26
51
76
Salary
$245,000
$125,000
$45,000
$25,000
$440,000
Employer
Contribution*
$32,500.00
$32,500.00
$2,873.93
$2,418.30
$70,292.23
Sales Manager
Sales Staff 1
Sales Staff 2
Office Manager
Office Staff 1
Office Staff 2
Office Staff 3
Warehouse Manager
Warehouse Staff 1
Warehouse Staff 2
Sub-Total
48
53
38
41
60
50
64
41
25
30
$87,000
$79,000
$49,000
$54,000
$29,000
$24,000
$18,000
$31,000
$5,000
$28,000
$404,000
$4,350.00
$3,950.00
$2,450.00
$13,591.85
$1,450.00
$1,200.00
$900.00
$7,802.73
$250.00
$1,400.00
$37,344.59
Total
401(k)
Deferrals
$22,000.00
$16,500.00
$22,000.00
$22,000.00
$82,500.00
$1,040.00
$0.00
$0.00
$0.00
$435.00
$520.00
$0.00
$310.00
$100.00
$0.00
$2,405.00
Total Contribution
As % of As % of
Contribution Salary** Total**
$54,500.00 22.24% 28.66%
$49,000.00 39.20% 25.77%
$24,873.93 55.28% 13.08%
$24,418.30 97.67% 12.84%
$152,792.23
80.36%
$5,390.00
$3,950.00
$2,450.00
$13,591.85
$1,885.00
$1,720.00
$900.00
$8,112.73
$350.00
$1,400.00
$39,749.59
$844,000 $107,636.81 $84,905.00 $192,541.81
5.00%
5.00%
5.00%
25.17%
5.00%
5.00%
5.00%
25.17%
5.00%
5.00%
2.29%
2.08%
1.29%
7.15%
0.76%
0.63%
0.47%
4.10%
0.13%
0.74%
19.64%
100.00%
*Includes a 3% safe harbor non-elective contribution
**Calculations include 401(k) Deferrals for the favored family group.
32
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(Case #2 - Illustration C)
 Using the OCPP® allocation, the effect of
the youngest employee’s termination is
negligible.
 The family’s share of the total
contribution (including family deferrals)
increases to 80.36%.
 Age continues to be a non-factor.
33
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CASE STUDY #2 - ILLUSTRATION D
OCPP® ALLOCATION
Lowest Cost
Participant
Owner
Child of Owner
Spouse of Owner
Father of Owner
Sub-Total
Age
51
26
51
76
Salary
$245,000
$125,000
$45,000
$25,000
$440,000
Employer
Contribution*
$32,500.00
$32,500.00
$2,873.93
$2,418.30
$70,292.23
Sales Manager
Sales Staff 1
Sales Staff 2
Office Manager
Office Staff 1
Office Staff 2
Office Staff 3
Warehouse Manager
Warehouse Staff 1
Warehouse Staff 2
Sub-Total
48
53
38
41
60
50
64
41
25
30
$87,000
$79,000
$49,000
$54,000
$29,000
$24,000
$18,000
$31,000
$5,000
$28,000
$404,000
$4,350.00
$3,950.00
$2,450.00
$2,700.00
$1,450.00
$1,200.00
$4,530.62
$1,550.00
$1,258.51
$1,400.00
$24,839.12
$844,000
$95,131.35 $84,905.00 $180,036.35
Total
401(k)
Deferrals
$22,000.00
$16,500.00
$22,000.00
$22,000.00
$82,500.00
$1,040.00
$0.00
$0.00
$0.00
$435.00
$520.00
$0.00
$310.00
$100.00
$0.00
$2,405.00
Total Contribution
As % of As % of
Contribution Salary** Total**
$54,500.00 22.24% 30.68%
$49,000.00 39.20% 27.59%
$24,873.93 55.28% 14.00%
$24,418.30 97.67% 13.75%
$152,792.23
86.02%
$5,390.00
$3,950.00
$2,450.00
$2,700.00
$1,885.00
$1,720.00
$4,530.62
$1,860.00
$1,358.51
$1,400.00
$27,244.12
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
25.17%
5.00%
25.17%
5.00%
2.45%
2.22%
1.38%
1.52%
0.82%
0.68%
2.55%
0.87%
0.71%
0.79%
13.98%
100.00%
*Includes a 3% safe harbor non-elective contribution
**Calculations include 401(k) Deferrals for the favored family group.
34
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(Case #2 - Illustration D)
 Under the lowest-cost OCPP® scenario,
the termination of the youngest employee
is not a factor.
 The family’s share of the total
contribution (including family deferrals)
increases to 86.02%.
35
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CASE STUDY #3 - ILLUSTRATION A
THE NON TOP HEAVY "OWNER-CENTRIC/PRE-TAX BONUS PLAN"
Participant
Age
37
Founder
Sub-Total
Chief Executive Officer
Chief Financial Officer
Chief Operating Officer
Director of IT
Director of Marketing
Director of HR
Sub-Total
3 Lowest Paid Participants
60 Other Participants
Sub-Total
Total
42
51
46
43
36
53
Employer
Matching
Salary
Contribution
$245,000
$7,350.00
$245,000
$7,350.00
Total Contribution
401(k)
As % of As % of
Deferrals
Contribution Salary*
Total*
$16,500.00 $23,850.00 9.73% 24.07%
$16,500.00 $23,850.00
24.07%
$245,000
$182,401
$178,810
$151,000
$142,949
$137,359
$1,037,519
$7,350.00
$0.00
$5,364.30
$1,996.48
$4,288.47
$0.00
$18,999.25
$16,500.00
$0.00
$16,500.00
$3,992.95
$16,500.00
$0.00
$53,492.95
$23,850.00 9.73%
$0.00 0.00%
$21,864.30 12.23%
$5,989.43 3.97%
$20,788.47 14.54%
$0.00 0.00%
$72,492.20
$72,255
$3,942,453
$4,014,708
$0.00
$56,249.78
$56,249.78
$0.00
$0.00
$56,249.78 $112,499.56
$56,249.78 $112,499.56
$5,297,227
$82,599.03 $126,242.73 $208,841.76
0.00%
1.43%
7.42%
0.00%
5.41%
2.01%
4.33%
0.00%
19.17%
0.00%
56.76%
56.76%
100.00%
*Calculations include 401(k) Salary Deferrals for the Founder only.
36
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(Case #3 - Illustration A)
 This is a non-top heavy plan because key
employees do not represent more than 60% of
plan assets.
 The founder is young (37), so a new
comparability design will be of no use in
maximizing the benefits of Founder.
 With the plan providing for deferrals and match
only, Founder receives $7,350 out of a total
employer match of $82,599 split among 70
employees.
 Founder is able to maximize his 401(k)
contribution because of sufficient level of
employee deferrals.
37
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CASE STUDY #3 - ILLUSTRATION B
THE NON TOP HEAVY "OWNER-CENTRIC/PRE-TAX BONUS PLAN" WITH OCPP® PSP
Participant
Age
37
Founder
Sub-Total
Chief Executive Officer
Chief Financial Officer
Chief Operating Officer
Director of IT
Director of Marketing
Director of HR
Sub-Total
3 Lowest Paid Participants
60 Other Participants
Sub-Total
Total
42
51
46
43
36
53
Profit
Sharing
Salary
Contribution
$245,000
$32,500.00
$245,000
$32,500.00
Total Contribution
401(k)
As % of As % of
Deferrals
Contribution Salary*
Total*
$16,500.00 $49,000.00 20.00% 87.09%
$16,500.00 $49,000.00
87.09%
$245,000
$182,401
$178,810
$151,000
$142,949
$137,359
$1,037,519
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$16,500.00
$0.00
$16,500.00
$3,992.95
$16,500.00
$0.00
$53,492.95
$16,500.00 6.73%
$0.00 0.00%
$16,500.00 9.23%
$3,992.95 2.64%
$16,500.00 11.54%
$0.00 0.00%
$53,492.95
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
$72,255
$3,942,453
$4,014,708
$7,261.63
$0.00
$7,261.63
$0.00
$56,249.78
$56,249.78
$7,261.63 10.05%
$56,249.78 0.00%
$63,511.41
12.91%
0.00%
12.91%
$5,297,227
$39,761.63 $126,242.73 $166,004.36
100.00%
*Calculations include 401(k) Salary Deferrals for the Founder only.
38
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(Case #3 - Illustration B)
 With an OCPP® plan design, Founder can be
maximized ($32,500 profit sharing contribution +
$16,500 deferral) at a total company cost of
$7,262 for 69 other employees.
 No obligation to provide any contribution for
most employees because plan is not top-heavy.
 Contribution goes only to 3 lowest-paid
participants.
 Founder receives more than 87% of total
company contributions.
39
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CASE STUDY #3 - ILLUSTRATION C
THE NON TOP HEAVY "OWNER-CENTRIC/PRE-TAX BONUS PLAN" WITH OCPP® PSP
Participant
Founder
Chief Executive Officer
Sub-Total
Chief Financial Officer
Chief Operating Officer
Director of IT
Director of Marketing
Director of HR
Sub-Total
6 Lowest Paid Participants
57 Other Participants
Sub-Total
Total
Age
37
42
51
46
43
36
53
Profit
Sharing
Salary
Contribution
$245,000
$32,500.00
$245,000
$32,500.00
$490,000
$65,000.00
Total Contribution
401(k)
As % of As % of
Deferrals
Contribution Salary*
Total*
$16,500.00 $49,000.00 20.00% 42.47%
$16,500.00 $49,000.00 20.00% 42.47%
$33,000.00 $98,000.00
84.93%
$182,401
$178,810
$151,000
$142,949
$137,359
$792,519
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$16,500.00
$3,992.95
$16,500.00
$0.00
$36,992.95
$0.00 0.00%
$16,500.00 9.23%
$3,992.95 2.64%
$16,500.00 11.54%
$0.00 0.00%
$36,992.95
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
$173,019
$3,841,690
$4,014,708
$17,388.39
$0.00
$17,388.39
$0.00
$56,249.78
$56,249.78
$17,388.39 10.05%
$56,249.78 0.00%
$73,638.17
15.07%
0.00%
15.07%
$5,297,227
$82,388.39 $126,242.73 $208,631.12
100.00%
*Calculations include 401(k) Salary Deferrals for the Favored Group only.
40
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(Case #3 - Illustration C)
 If the Founder wants to maximize the
Chief Executive Officer as well, an
incremental $10,126 will be required for 3
additional low-paid employees.
 Founder and CEO receive more than 84%
of company contributions (and their own
deferrals) ($98,000) at a total cost of
$17,388.
41
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Questions?
42
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The MandMarblestone Group LLC
Cash Balance Plans
Cash Balance Plans
 Cash Balance plan is a type of Defined Benefit




plan
These plans had been under scrutiny by
Congress and the courts because of alleged age
discrimination.
The Pension Protection Act of 2006 and The
Seventh Circuit’s reversal of the lower court in
Cooper v. IBM has ratified the legitimacy of these
plans.
The Third Circuit (covering PA and NJ) has
followed the Seventh Circuit
IRS is issuing determination letters on new Cash
Balance plans as well as conversions of
44
traditional defined benefit plans.
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Cash Balance Plans
 Used for Owners who want to contribute
more than $49,000
45
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Cash Balance Plans
Illustration of Contributions at Various Ages
Age
Amount
35
$40,900
45
$69,900
55
$119,900
65
$204,100
Assumes that retirement at age 65. Contribution
can be larger at earlier retirement ages.
46
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Participant Accounts
 Participants have accounts
 Accounts increase
 Fixed Employer contribution



For example, 5% of pay per year
Different contribution tiers are possible for
different classes of participants – owners
contribution tier can be maximized
Guaranteed interest credit

For example, 30-year Treasury Rate
 Participants receive account on
termination
47
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Participant Accounts
 Annual Benefit Accrual is easy to
determine and be understood by
participants
 Pooled investments
48
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With 2 Contribution Tiers
It Looks Like This…
Physician
Age
53
Cash
Pay
Balance % of Pay
$200,000 $118,000
59%
Staff
25
$30,000
$6,000
20%
Staff
30
$30,000
$6,000
20%
Staff
33
$30,000
$6,000
20%
Staff
40
$30,000
$6,000
20%
83 % of contribution goes to Physician
49
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Combination Plans
 You can have both
 Cash Balance
 Profit Sharing
 General Rule – Aggregate tax deduction limit is
25% of pay or normal cash balance cost,
whichever is greater
 PPA – do not count the first 6% of pay for profit
sharing
 Beginning in 2008, cases subject to PBGC does
not have aggregate tax deduction limit
 401(k) deferrals do not count as part of
deduction limit
50
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It Looks Like This…
Age
Pay
401(k)
Profit
Sharing
Physician
53
$245,000
$22,000
$14,700
$118,000
$154,700
Staff
25
$30,000
0
$1,800
$1,500
$3,300
Staff
30
$30,000
0
$1,800
$1,500
$3,300
Staff
33
$30,000
0
$1,800
$1,500
$3,300
Staff
40
$30,000
0
$1,800
$1,500
$3,300
$365,000
$22,000
$21,900
Total
Cash
Balance
Total
$124,000 $167,900
92% of Contribution Goes to Physician
51
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Cash Balance Combo Deduction
 Deduction limitation is greater of cash balance
expense ($124,000) or 25% of aggregate
compensation ($365,000/4 = $91,250) but does
not count first 6% of pay contributed to profit
sharing ($21,900)
 Total company contributions:


$21,900 profit sharing + $124,000 cash balance =
$145,900
less $21,900 (6% profit sharing contribution) =
$124,000
 Deferrals do not count in total deduction
52
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The MandMarblestone Group LLC
IRS Circular 230 Disclosure
IRS regulations require us to notify you that this
communication was not intended or written to be used, and
cannot be used, by you or any taxpayer, for the purpose of
avoiding penalties that the IRS might impose on the
taxpayer.
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