View
219
Download
1
Category
Tags:
Preview:
Citation preview
The MandMarblestone Group LLC2929 Arch Street, Suite 600
Philadelphia, PA 19104-2889Phone: (215) 222-5000
Fax: (215) 222-5522Web: 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
www.mand.com
4
What Do Your Clients Want
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
Ad
din
g V
alu
e T
hro
ug
h P
lan
D
esig
n
www.mand.com
5
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?
www.mand.com
6
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)
What does 3% of Participants’ Compensation Buy for Owner?
3% of Participants’ Comp Buys Owner $44,050
Objectives
www.mand.com
7
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)
What is Minimum Participants’ Contribution Expense to Maximize Owner’s Contribution?
Owner Maximum of $54,500 costs 4.42% of Participants’ Compensation
Objectives
www.mand.com
8
What is OCPP® ?
“One Category Per Participant” Defined Contribution (DC) Plan
Ad
din
g V
alu
e T
hro
ug
h P
lan
D
esig
n
www.mand.com
9
How OCPP® Satisfies Clients’ Wants 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 non-favored employees
Flexible to changing business conditions and demographics
Ad
din
g V
alu
e T
hro
ug
h P
lan
D
esig
n
www.mand.com
10
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
Ad
din
g V
alu
e T
hro
ug
h P
lan
D
esig
n
www.mand.com
11
Defined Contribution (Profit Sharing) Plan Types “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
Ad
din
g V
alu
e T
hro
ug
h P
lan
D
esig
n
www.mand.com
12
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
Ad
din
g V
alu
e T
hro
ug
h P
lan
D
esig
n
www.mand.com
13
MMG OCPP® Plan Document
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
Ad
din
g V
alu
e T
hro
ug
h P
lan
D
esig
n
The MandMarblestone Group LLC
Case Studies
www.mand.com
15
CASE STUDY #1 - ILLUSTRATION A
INTEGRATED CONTRIBUTION ALLOCATION
Total ContributionEmployer 401(k) As % of As % of
Participant Age Salary Contribution Deferrals* Contribution Salary** Total**Owner 51 $245,000 $32,500.00 $4,600.00 $37,100.00 15.14% 18.59%Child of Owner 26 $125,000 $32,500.00 $2,600.00 $35,100.00 28.08% 17.59%Spouse of Owner 51 $45,000 $11,326.54 $2,500.00 $13,826.54 30.73% 6.93%Father of Owner 76 $25,000 $6,292.52 $0.00 $6,292.52 25.17% 3.15%
Sub-Total $440,000 $82,619.06 $9,700.00 $92,319.06 46.27%
Sales Manager 48 $87,000 $21,897.97 $1,040.00 $22,937.97 25.17% 10.97%Sales Staff 1 53 $79,000 $19,884.36 $0.00 $19,884.36 25.17% 9.96%Sales Staff 2 38 $49,000 $12,333.34 $0.00 $12,333.34 25.17% 6.18%Office Manager 41 $54,000 $13,591.84 $0.00 $13,591.84 25.17% 6.81%Office Staff 1 60 $29,000 $7,299.32 $435.00 $7,734.32 25.17% 3.66%Office Staff 2 50 $24,000 $6,040.82 $520.00 $6,560.82 25.17% 3.03%Office Staff 3 64 $18,000 $4,530.61 $0.00 $4,530.61 25.17% 2.27%Warehouse Manager 41 $31,000 $7,802.73 $310.00 $8,112.73 25.17% 3.91%Warehouse Staff 1 25 $27,000 $6,795.92 $500.00 $7,295.92 25.17% 3.41%Warehouse Staff 2 30 $28,000 $7,047.62 $0.00 $7,047.62 25.17% 3.53%
Sub-Total $426,000 $107,224.53 $2,805.00 $110,029.53 53.73%
Total $866,000 $189,843.59 $12,505.00 $202,348.59 100.00%
*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.
www.mand.com
16
(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).
www.mand.com
17
CASE STUDY #1 - ILLUSTRATION B
INTEGRATED CONTRIBUTION ALLOCATIONAdding a 3% Non-Elective Safe Harbor
Total ContributionEmployer 401(k) As % of As % of
Participant Age Salary Contribution* Deferrals Contribution Salary** Total**Owner 51 $245,000 $32,500.00 $22,000.00 $54,500.00 22.24% 20.01%Child of Owner 26 $125,000 $32,500.00 $16,500.00 $49,000.00 39.20% 17.99%Spouse of Owner 51 $45,000 $11,326.54 $22,000.00 $33,326.54 74.06% 12.24%Father of Owner 76 $25,000 $6,292.52 $22,000.00 $28,292.52 113.17% 10.39%
Sub-Total $440,000 $82,619.06 $82,500.00 $165,119.06 60.63%
Sales Manager 48 $87,000 $21,897.97 $1,040.00 $22,937.97 25.17% 8.04%Sales Staff 1 53 $79,000 $19,884.36 $0.00 $19,884.36 25.17% 7.30%Sales Staff 2 38 $49,000 $12,333.34 $0.00 $12,333.34 25.17% 4.53%Office Manager 41 $54,000 $13,591.84 $0.00 $13,591.84 25.17% 4.99%Office Staff 1 60 $29,000 $7,299.32 $435.00 $7,734.32 25.17% 2.68%Office Staff 2 50 $24,000 $6,040.82 $520.00 $6,560.82 25.17% 2.22%Office Staff 3 64 $18,000 $4,530.61 $0.00 $4,530.61 25.17% 1.66%Warehouse Manager 41 $31,000 $7,802.73 $310.00 $8,112.73 25.17% 2.87%Warehouse Staff 1 25 $27,000 $6,795.92 $500.00 $7,295.92 25.17% 2.50%Warehouse Staff 2 30 $28,000 $7,047.62 $0.00 $7,047.62 25.17% 2.59%
Sub-Total $426,000 $107,224.53 $2,805.00 $110,029.53 39.37%
Total $866,000 $189,843.59 $85,305.00 $275,148.59 100.00%
*Includes a 3% safe harbor non-elective contribution**Calculations include 401(k) Deferrals for the favored family group.
www.mand.com
18
(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!
www.mand.com
19
CASE STUDY #1 - ILLUSTRATION C
INTEGRATED CONTRIBUTION ALLOCATIONAdding a Discretionary Match
Profit Total Total ContributionSharing Matching Employer 401(k) As % of As % of
Participant Age Salary Contribution* Contribution Contribution Deferrals Contribution Salary** Total**Owner 51 $245,000 $22,700.00 $9,800.00 $32,500.00 $22,000.00 $54,500.00 22.24% 23.36%Child of Owner 26 $125,000 $22,700.00 $5,000.00 $27,700.00 $16,500.00 $44,200.00 35.36% 18.94%Spouse of Owner 51 $45,000 $7,798.54 $1,800.00 $9,598.54 $22,000.00 $31,598.54 70.22% 13.54%Father of Owner 76 $25,000 $4,332.52 $1,000.00 $5,332.52 $22,000.00 $27,332.52 109.33% 11.71%
Sub-Total $440,000 $57,531.06 $17,600.00 $75,131.06 $82,500.00 $157,631.06 67.56%
Sales Manager 48 $87,000 $15,077.17 $693.33 $15,770.50 $1,040.00 $16,810.50 18.13% 6.76%Sales Staff 1 53 $79,000 $13,690.76 $0.00 $13,690.76 $0.00 $13,690.76 17.33% 5.87%Sales Staff 2 38 $49,000 $8,491.74 $0.00 $8,491.74 $0.00 $8,491.74 17.33% 3.64%Office Manager 41 $54,000 $9,358.24 $0.00 $9,358.24 $0.00 $9,358.24 17.33% 4.01%Office Staff 1 60 $29,000 $5,025.72 $290.00 $5,315.72 $435.00 $5,750.72 18.33% 2.28%Office Staff 2 50 $24,000 $4,159.22 $346.67 $4,505.89 $520.00 $5,025.89 18.77% 1.93%Office Staff 3 64 $18,000 $3,119.41 $0.00 $3,119.41 $0.00 $3,119.41 17.33% 1.34%Warehouse Manager 41 $31,000 $5,372.33 $206.67 $5,579.00 $310.00 $5,889.00 18.00% 2.39%Warehouse Staff 1 25 $27,000 $4,679.12 $333.33 $5,012.45 $500.00 $5,512.45 18.56% 2.15%Warehouse Staff 2 30 $28,000 $4,852.42 $0.00 $4,852.42 $0.00 $4,852.42 17.33% 2.08%
Sub-Total $426,000 $73,826.13 $1,870.00 $75,696.13 $2,805.00 $78,501.13 32.44%
Total $866,000 $131,357.19 $19,470.00 $150,827.19 $85,305.00 $236,132.19 100.00%
*Includes a 3% safe harbor non-elective contribution.**Calculations include 401(k) Deferrals for the favored family group only.
www.mand.com
20
(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.
www.mand.com
21
CASE STUDY #1 - ILLUSTRATION D
TWO-TIER NEW COMPARABILITY CONTRIBUTION ALLOCATION
Total ContributionEmployer 401(k) As % of As % of
Participant Age Salary Contribution* Deferrals Contribution Salary** Total**Owner 51 $245,000 $32,500.00 $22,000.00 $54,500.00 22.24% 24.87%Child of Owner 26 $125,000 $16,581.63 $16,500.00 $33,081.63 26.47% 15.09%Spouse of Owner 51 $45,000 $5,969.39 $22,000.00 $27,969.39 62.15% 12.76%Father of Owner 76 $25,000 $3,316.33 $22,000.00 $25,316.33 101.27% 11.55%
Sub-Total $440,000 $58,367.35 $82,500.00 $140,867.35 64.27%
Sales Manager 48 $87,000 $15,993.99 $1,040.00 $17,033.99 18.38% 7.30%Sales Staff 1 53 $79,000 $14,523.28 $0.00 $14,523.28 18.38% 6.63%Sales Staff 2 38 $49,000 $9,008.11 $0.00 $9,008.11 18.38% 4.11%Office Manager 41 $54,000 $9,927.31 $0.00 $9,927.31 18.38% 4.53%Office Staff 1 60 $29,000 $5,331.33 $435.00 $5,766.33 18.38% 2.43%Office Staff 2 50 $24,000 $4,412.14 $520.00 $4,932.14 18.38% 2.01%Office Staff 3 64 $18,000 $3,309.10 $0.00 $3,309.10 18.38% 1.51%Warehouse Manager 41 $31,000 $5,699.01 $310.00 $6,009.01 18.38% 2.60%Warehouse Staff 1 25 $27,000 $4,963.65 $500.00 $5,463.65 18.38% 2.26%Warehouse Staff 2 30 $28,000 $5,147.49 $0.00 $5,147.49 18.38% 2.35%
Sub-Total $426,000 $78,315.41 $2,805.00 $81,120.41 35.73%
Total $866,000 $136,682.76 $85,305.00 $221,987.76 100.00%
*Includes a 3% safe harbor non-elective contribution**Calculations include 401(k) Deferrals for the favored family group.
www.mand.com
22
(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!
www.mand.com
23
CASE STUDY #1 - ILLUSTRATION E
MULTI-TIER NEW COMPARABILITY CONTRIBUTION ALLOCATIONAN IRC and ADEA VIOLATION?
Total ContributionEmployer 401(k) As % of As % of
Participant Age Salary Contribution* Deferrals Contribution Salary** Total**Owner 51 $245,000 $32,500.00 $22,000.00 $54,500.00 22.24% 28.13%Child of Owner 26 $125,000 $32,500.00 $16,500.00 $49,000.00 39.20% 25.29%Spouse of Owner 51 $45,000 $2,250.00 $22,000.00 $24,250.00 53.89% 12.52%Father of Owner 76 $25,000 $1,250.00 $22,000.00 $23,250.00 93.00% 12.00%
Sub-Total $440,000 $68,500.00 $82,500.00 $151,000.00 77.95%
Sales Manager 48 $87,000 $4,350.00 $1,040.00 $5,390.00 5.00% 2.25%Sales Staff 1 53 $79,000 $3,950.00 $0.00 $3,950.00 5.00% 2.04%Sales Staff 2 38 $49,000 $2,450.00 $0.00 $2,450.00 5.00% 1.26%Office Manager 41 $54,000 $2,700.00 $0.00 $2,700.00 5.00% 1.39%Office Staff 1 60 $29,000 $1,450.00 $435.00 $1,885.00 5.00% 0.75%Office Staff 2 50 $24,000 $1,200.00 $520.00 $1,720.00 5.00% 0.62%Office Staff 3 64 $18,000 $900.00 $0.00 $900.00 5.00% 0.46%Warehouse Manager 41 $31,000 $1,550.00 $310.00 $1,860.00 5.00% 0.80%Warehouse Staff 1 25 $27,000 $11,864.99 $500.00 $12,364.99 43.94% 6.12%Warehouse Staff 2 30 $28,000 $12,304.43 $0.00 $12,304.43 43.94% 6.35%
Sub-Total $426,000 $42,719.42 $2,805.00 $45,524.42 22.05%
Total $866,000 $111,219.42 $85,305.00 $196,524.42 100.00%
*Includes a 3% safe harbor non-elective contribution**Calculations include 401(k) Deferrals for the favored family group.
www.mand.com
24
(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.
www.mand.com
25
CASE STUDY #1 - ILLUSTRATION F
OCPP® ALLOCATION
Total ContributionEmployer 401(k) As % of As % of
Participant Age Salary Contribution* Deferrals Contribution Salary** Total**Owner 51 $245,000 $32,500.00 $22,000.00 $54,500.00 22.24% 28.50%Child of Owner 26 $125,000 $32,500.00 $16,500.00 $49,000.00 39.20% 25.62%Spouse of Owner 51 $45,000 $2,873.93 $22,000.00 $24,873.93 55.28% 13.01%Father of Owner 76 $25,000 $2,418.30 $22,000.00 $24,418.30 97.67% 12.77%
Sub-Total $440,000 $70,292.23 $82,500.00 $152,792.23 79.90%
Sales Manager 48 $87,000 $4,350.00 $1,040.00 $5,390.00 5.00% 2.27%Sales Staff 1 53 $79,000 $3,950.00 $0.00 $3,950.00 5.00% 2.07%Sales Staff 2 38 $49,000 $2,450.00 $0.00 $2,450.00 5.00% 1.28%Office Manager 41 $54,000 $13,591.85 $0.00 $13,591.85 25.17% 7.11%Office Staff 1 60 $29,000 $1,450.00 $435.00 $1,885.00 5.00% 0.76%Office Staff 2 50 $24,000 $1,200.00 $520.00 $1,720.00 5.00% 0.63%Office Staff 3 64 $18,000 $900.00 $0.00 $900.00 5.00% 0.47%Warehouse Manager 41 $31,000 $7,802.73 $310.00 $8,112.73 25.17% 4.08%Warehouse Staff 1 25 $27,000 $1,350.00 $500.00 $1,850.00 5.00% 0.71%Warehouse Staff 2 30 $28,000 $1,400.00 $0.00 $1,400.00 5.00% 0.73%
Sub-Total $426,000 $38,444.59 $2,805.00 $41,249.59 20.10%
Total $866,000 $108,736.81 $85,305.00 $194,041.81 100.00%
*Includes a 3% safe harbor non-elective contribution**Calculations include 401(k) Deferrals for the favored family group.
www.mand.com
26
(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!
www.mand.com
27
CASE STUDY #1 - ILLUSTRATION G
OCPP® ALLOCATIONLowest Cost
Total ContributionEmployer 401(k) As % of As % of
Participant Age Salary Contribution* Deferrals Contribution Salary** Total**Owner 51 $245,000 $32,500.00 $22,000.00 $54,500.00 22.24% 29.30%Child of Owner 26 $125,000 $32,500.00 $16,500.00 $49,000.00 39.20% 26.34%Spouse of Owner 51 $45,000 $5,087.25 $22,000.00 $27,087.25 60.19% 14.56%Father of Owner 76 $25,000 $3,636.28 $22,000.00 $25,636.28 102.55% 13.78%
Sub-Total $440,000 $73,723.53 $82,500.00 $156,223.53 83.99%
Sales Manager 48 $87,000 $4,350.00 $1,040.00 $5,390.00 5.00% 2.34%Sales Staff 1 53 $79,000 $3,950.00 $0.00 $3,950.00 5.00% 2.12%Sales Staff 2 38 $49,000 $2,450.00 $0.00 $2,450.00 5.00% 1.32%Office Manager 41 $54,000 $2,700.00 $0.00 $2,700.00 5.00% 1.45%Office Staff 1 60 $29,000 $1,450.00 $435.00 $1,885.00 5.00% 0.78%Office Staff 2 50 $24,000 $6,040.82 $520.00 $6,560.82 25.17% 3.25%Office Staff 3 64 $18,000 $4,530.62 $0.00 $4,530.62 25.17% 2.44%Warehouse Manager 41 $31,000 $1,550.00 $310.00 $1,860.00 5.00% 0.83%Warehouse Staff 1 25 $27,000 $1,350.00 $500.00 $1,850.00 5.00% 0.73%Warehouse Staff 2 30 $28,000 $1,400.00 $0.00 $1,400.00 5.00% 0.75%
Sub-Total $426,000 $29,771.44 $2,805.00 $32,576.44 16.01%
Total $866,000 $103,494.97 $85,305.00 $188,799.97 100.00%
*Includes a 3% safe harbor non-elective contribution**Calculations include 401(k) Deferrals for the favored family group.
www.mand.com
28
(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%.
www.mand.com
29
CASE STUDY #2 - ILLUSTRATION A
TWO-TIER NEW COMPARABILITY CONTRIBUTION ALLOCATIONSame as Case Study #1but the 25 year old participant teminated during the year
Total ContributionEmployer 401(k) As % of As % of
Participant Age Salary Contribution* Deferrals Contribution Salary** Total**Owner 51 $245,000 $32,500.00 $22,000.00 $54,500.00 22.24% 19.33%Child of Owner 26 $125,000 $16,581.63 $16,500.00 $33,081.63 26.47% 11.73%Spouse of Owner 51 $45,000 $5,969.39 $22,000.00 $27,969.39 62.15% 9.92%Father of Owner 76 $25,000 $3,316.33 $22,000.00 $25,316.33 101.27% 8.98%
Sub-Total $440,000 $58,367.35 $82,500.00 $140,867.35 49.96%
Sales Manager 48 $87,000 $30,718.05 $1,040.00 $31,758.05 35.31% 10.89%Sales Staff 1 53 $79,000 $27,893.40 $0.00 $27,893.40 35.31% 9.89%Sales Staff 2 38 $49,000 $17,300.97 $0.00 $17,300.97 35.31% 6.14%Office Manager 41 $54,000 $19,066.37 $0.00 $19,066.37 35.31% 6.76%Office Staff 1 60 $29,000 $10,239.35 $435.00 $10,674.35 35.31% 3.63%Office Staff 2 50 $24,000 $8,473.94 $520.00 $8,993.94 35.31% 3.01%Office Staff 3 64 $18,000 $6,355.46 $0.00 $6,355.46 35.31% 2.25%Warehouse Manager 41 $31,000 $10,945.51 $310.00 $11,255.51 35.31% 3.88%Warehouse Staff 1 25 $5,000 $221.09 $100.00 $321.09 4.42% 0.08%Warehouse Staff 2 30 $28,000 $9,886.27 $0.00 $9,886.27 35.31% 3.51%
Sub-Total $404,000 $141,100.41 $2,405.00 $143,505.41 50.04%
Total $844,000 $199,467.75 $84,905.00 $284,372.75 100.00%
*Includes a 3% safe harbor non-elective contribution**Calculations include 401(k) Deferrals for the favored family group.
www.mand.com
30
(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.
www.mand.com
31
CASE STUDY #2 - ILLUSTRATION B
INTEGRATED CONTRIBUTION ALLOCATION
Total ContributionEmployer 401(k) As % of As % of
Participant Age Salary Contribution* Deferrals Contribution Salary** Total**Owner 51 $245,000 $32,500.00 $22,000.00 $54,500.00 22.24% 20.51%Child of Owner 26 $125,000 $32,500.00 $16,500.00 $49,000.00 39.20% 18.44%Spouse of Owner 51 $45,000 $11,326.54 $22,000.00 $33,326.54 74.06% 12.54%Father of Owner 76 $25,000 $6,292.52 $22,000.00 $28,292.52 113.17% 10.65%
Sub-Total $440,000 $82,619.06 $82,500.00 $165,119.06 62.15%
Sales Manager 48 $87,000 $21,897.97 $1,040.00 $22,937.97 25.17% 8.24%Sales Staff 1 53 $79,000 $19,884.36 $0.00 $19,884.36 25.17% 7.48%Sales Staff 2 38 $49,000 $12,333.34 $0.00 $12,333.34 25.17% 4.64%Office Manager 41 $54,000 $13,591.84 $0.00 $13,591.84 25.17% 5.12%Office Staff 1 60 $29,000 $7,299.32 $435.00 $7,734.32 25.17% 2.75%Office Staff 2 50 $24,000 $6,040.82 $520.00 $6,560.82 25.17% 2.27%Office Staff 3 64 $18,000 $4,530.61 $0.00 $4,530.61 25.17% 1.71%Warehouse Manager 41 $31,000 $7,802.73 $310.00 $8,112.73 25.17% 2.94%Warehouse Staff 1 25 $5,000 $150.00 $100.00 $250.00 3.00% 0.06%Warehouse Staff 2 30 $28,000 $7,047.62 $0.00 $7,047.62 25.17% 2.65%
Sub-Total $404,000 $100,578.61 $2,405.00 $102,983.61 37.85%
Total $844,000 $183,197.67 $84,905.00 $268,102.67 100.00%
*Includes a 3% safe harbor non-elective contribution**Calculations include 401(k) Deferrals for the favored family group.
www.mand.com
32
(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!
www.mand.com
33
CASE STUDY #2 - ILLUSTRATION C
OCPP® ALLOCATION
Total ContributionEmployer 401(k) As % of As % of
Participant Age Salary Contribution* Deferrals Contribution Salary** Total**Owner 51 $245,000 $32,500.00 $22,000.00 $54,500.00 22.24% 28.66%Child of Owner 26 $125,000 $32,500.00 $16,500.00 $49,000.00 39.20% 25.77%Spouse of Owner 51 $45,000 $2,873.93 $22,000.00 $24,873.93 55.28% 13.08%Father of Owner 76 $25,000 $2,418.30 $22,000.00 $24,418.30 97.67% 12.84%
Sub-Total $440,000 $70,292.23 $82,500.00 $152,792.23 80.36%
Sales Manager 48 $87,000 $4,350.00 $1,040.00 $5,390.00 5.00% 2.29%Sales Staff 1 53 $79,000 $3,950.00 $0.00 $3,950.00 5.00% 2.08%Sales Staff 2 38 $49,000 $2,450.00 $0.00 $2,450.00 5.00% 1.29%Office Manager 41 $54,000 $13,591.85 $0.00 $13,591.85 25.17% 7.15%Office Staff 1 60 $29,000 $1,450.00 $435.00 $1,885.00 5.00% 0.76%Office Staff 2 50 $24,000 $1,200.00 $520.00 $1,720.00 5.00% 0.63%Office Staff 3 64 $18,000 $900.00 $0.00 $900.00 5.00% 0.47%Warehouse Manager 41 $31,000 $7,802.73 $310.00 $8,112.73 25.17% 4.10%Warehouse Staff 1 25 $5,000 $250.00 $100.00 $350.00 5.00% 0.13%Warehouse Staff 2 30 $28,000 $1,400.00 $0.00 $1,400.00 5.00% 0.74%
Sub-Total $404,000 $37,344.59 $2,405.00 $39,749.59 19.64%
Total $844,000 $107,636.81 $84,905.00 $192,541.81 100.00%
*Includes a 3% safe harbor non-elective contribution**Calculations include 401(k) Deferrals for the favored family group.
www.mand.com
34
(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.
www.mand.com
35
CASE STUDY #2 - ILLUSTRATION D
OCPP® ALLOCATIONLowest Cost
Total ContributionEmployer 401(k) As % of As % of
Participant Age Salary Contribution* Deferrals Contribution Salary** Total**Owner 51 $245,000 $32,500.00 $22,000.00 $54,500.00 22.24% 30.68%Child of Owner 26 $125,000 $32,500.00 $16,500.00 $49,000.00 39.20% 27.59%Spouse of Owner 51 $45,000 $2,873.93 $22,000.00 $24,873.93 55.28% 14.00%Father of Owner 76 $25,000 $2,418.30 $22,000.00 $24,418.30 97.67% 13.75%
Sub-Total $440,000 $70,292.23 $82,500.00 $152,792.23 86.02%
Sales Manager 48 $87,000 $4,350.00 $1,040.00 $5,390.00 5.00% 2.45%Sales Staff 1 53 $79,000 $3,950.00 $0.00 $3,950.00 5.00% 2.22%Sales Staff 2 38 $49,000 $2,450.00 $0.00 $2,450.00 5.00% 1.38%Office Manager 41 $54,000 $2,700.00 $0.00 $2,700.00 5.00% 1.52%Office Staff 1 60 $29,000 $1,450.00 $435.00 $1,885.00 5.00% 0.82%Office Staff 2 50 $24,000 $1,200.00 $520.00 $1,720.00 5.00% 0.68%Office Staff 3 64 $18,000 $4,530.62 $0.00 $4,530.62 25.17% 2.55%Warehouse Manager 41 $31,000 $1,550.00 $310.00 $1,860.00 5.00% 0.87%Warehouse Staff 1 25 $5,000 $1,258.51 $100.00 $1,358.51 25.17% 0.71%Warehouse Staff 2 30 $28,000 $1,400.00 $0.00 $1,400.00 5.00% 0.79%
Sub-Total $404,000 $24,839.12 $2,405.00 $27,244.12 13.98%
Total $844,000 $95,131.35 $84,905.00 $180,036.35 100.00%
*Includes a 3% safe harbor non-elective contribution**Calculations include 401(k) Deferrals for the favored family group.
www.mand.com
36
(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%.
www.mand.com
37
CASE STUDY #3 - ILLUSTRATION A
THE NON TOP HEAVY "OWNER-CENTRIC/PRE-TAX BONUS PLAN"
Employer Total ContributionMatching 401(k) As % of As % of
Participant Age Salary Contribution Deferrals Contribution Salary* Total*Founder 37 $245,000 $7,350.00 $16,500.00 $23,850.00 9.73% 24.07%
Sub-Total $245,000 $7,350.00 $16,500.00 $23,850.00 24.07%
Chief Executive Officer 42 $245,000 $7,350.00 $16,500.00 $23,850.00 9.73% 7.42%Chief Financial Officer 51 $182,401 $0.00 $0.00 $0.00 0.00% 0.00%Chief Operating Officer 46 $178,810 $5,364.30 $16,500.00 $21,864.30 12.23% 5.41%Director of IT 43 $151,000 $1,996.48 $3,992.95 $5,989.43 3.97% 2.01%Director of Marketing 36 $142,949 $4,288.47 $16,500.00 $20,788.47 14.54% 4.33%Director of HR 53 $137,359 $0.00 $0.00 $0.00 0.00% 0.00%
Sub-Total $1,037,519 $18,999.25 $53,492.95 $72,492.20 19.17%
3 Lowest Paid Participants $72,255 $0.00 $0.00 $0.00 0.00% 0.00%60 Other Participants $3,942,453 $56,249.78 $56,249.78 $112,499.56 1.43% 56.76%
Sub-Total $4,014,708 $56,249.78 $56,249.78 $112,499.56 56.76%
Total $5,297,227 $82,599.03 $126,242.73 $208,841.76 100.00%
*Calculations include 401(k) Salary Deferrals for the Founder only.
www.mand.com
38
(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.
www.mand.com
39
CASE STUDY #3 - ILLUSTRATION B
THE NON TOP HEAVY "OWNER-CENTRIC/PRE-TAX BONUS PLAN" WITH OCPP® PSP
Profit Total ContributionSharing 401(k) As % of As % of
Participant Age Salary Contribution Deferrals Contribution Salary* Total*Founder 37 $245,000 $32,500.00 $16,500.00 $49,000.00 20.00% 87.09%
Sub-Total $245,000 $32,500.00 $16,500.00 $49,000.00 87.09%
Chief Executive Officer 42 $245,000 $0.00 $16,500.00 $16,500.00 6.73% 0.00%Chief Financial Officer 51 $182,401 $0.00 $0.00 $0.00 0.00% 0.00%Chief Operating Officer 46 $178,810 $0.00 $16,500.00 $16,500.00 9.23% 0.00%Director of IT 43 $151,000 $0.00 $3,992.95 $3,992.95 2.64% 0.00%Director of Marketing 36 $142,949 $0.00 $16,500.00 $16,500.00 11.54% 0.00%Director of HR 53 $137,359 $0.00 $0.00 $0.00 0.00% 0.00%
Sub-Total $1,037,519 $0.00 $53,492.95 $53,492.95 0.00%
3 Lowest Paid Participants $72,255 $7,261.63 $0.00 $7,261.63 10.05% 12.91%60 Other Participants $3,942,453 $0.00 $56,249.78 $56,249.78 0.00% 0.00%
Sub-Total $4,014,708 $7,261.63 $56,249.78 $63,511.41 12.91%
Total $5,297,227 $39,761.63 $126,242.73 $166,004.36 100.00%
*Calculations include 401(k) Salary Deferrals for the Founder only.
www.mand.com
40
(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.
www.mand.com
41
CASE STUDY #3 - ILLUSTRATION C
THE NON TOP HEAVY "OWNER-CENTRIC/PRE-TAX BONUS PLAN" WITH OCPP® PSP
Profit Total ContributionSharing 401(k) As % of As % of
Participant Age Salary Contribution Deferrals Contribution Salary* Total*Founder 37 $245,000 $32,500.00 $16,500.00 $49,000.00 20.00% 42.47%Chief Executive Officer 42 $245,000 $32,500.00 $16,500.00 $49,000.00 20.00% 42.47%
Sub-Total $490,000 $65,000.00 $33,000.00 $98,000.00 84.93%
Chief Financial Officer 51 $182,401 $0.00 $0.00 $0.00 0.00% 0.00%Chief Operating Officer 46 $178,810 $0.00 $16,500.00 $16,500.00 9.23% 0.00%Director of IT 43 $151,000 $0.00 $3,992.95 $3,992.95 2.64% 0.00%Director of Marketing 36 $142,949 $0.00 $16,500.00 $16,500.00 11.54% 0.00%Director of HR 53 $137,359 $0.00 $0.00 $0.00 0.00% 0.00%
Sub-Total $792,519 $0.00 $36,992.95 $36,992.95 0.00%
6 Lowest Paid Participants $173,019 $17,388.39 $0.00 $17,388.39 10.05% 15.07%57 Other Participants $3,841,690 $0.00 $56,249.78 $56,249.78 0.00% 0.00%
Sub-Total $4,014,708 $17,388.39 $56,249.78 $73,638.17 15.07%
Total $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.
www.mand.com
42
(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.
www.mand.com
43
Questions?
The MandMarblestone Group LLC
Cash Balance Plans
www.mand.com
45
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 traditional defined benefit plans.
www.mand.com
46
Cash Balance Plans
Used for Owners who want to contribute more than $49,000
www.mand.com
47
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. Contributioncan be larger at earlier retirement ages.
www.mand.com
48
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
www.mand.com
49
Participant Accounts
Annual Benefit Accrual is easy to determine and be understood by participants
Pooled investments
www.mand.com
50
With 2 Contribution Tiers It Looks Like This…
83 % of contribution goes to Physician
Age PayCash Balance % of Pay
Physician 53 $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%
www.mand.com
51
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
www.mand.com
52
It Looks Like This…
Age Pay 401(k)Profit
SharingCash
Balance Total
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
Total $365,000 $22,000 $21,900 $124,000 $167,900
92% of Contribution Goes to Physician
www.mand.com
53
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
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.
Recommended