The MandMarblestone Group LLC 2929 Arch Street, Suite 600 Philadelphia, PA 19104-2889 Phone: (215) 222-5000 Fax: (215) 222-5522 Web:

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.


Adding Value Through Plan Design

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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

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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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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

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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

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What is OCPP® ?

“One Category Per Participant” Defined Contribution (DC) Plan

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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

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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 “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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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

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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Case Studies

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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.

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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 ALLOCATIONAdding a 3% Non-Elective Safe Harbor


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%


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.

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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 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.

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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



Sub-Total $440,000 $58,367.35 $82,500.00 $140,867.35 64.27%


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%


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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 ALLOCATIONAN IRC and ADEA VIOLATION?



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%


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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



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%


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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® ALLOCATIONLowest Cost



Sub-Total $440,000 $73,723.53 $82,500.00 $156,223.53 83.99%


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%


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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%.

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TWO-TIER NEW COMPARABILITY CONTRIBUTION ALLOCATIONSame as Case Study #1but the 25 year old participant teminated during the year



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%


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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.

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INTEGRATED CONTRIBUTION ALLOCATION



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%


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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!

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OCPP® ALLOCATION



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%


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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.

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CASE STUDY #2 - ILLUSTRATION D

OCPP® ALLOCATIONLowest Cost



Sub-Total $440,000 $70,292.23 $82,500.00 $152,792.23 86.02%


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%


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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%.

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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.

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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.

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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.

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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.

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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.

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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.

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Questions?


Cash Balance Plans

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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.

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Cash Balance Plans

Used for Owners who want to contribute more than $49,000

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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. Contributioncan be larger at earlier retirement ages.

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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

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Participant Accounts

Annual Benefit Accrual is easy to determine and be understood by participants

Pooled investments

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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%

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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

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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

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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


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.