Preliminary Concerns Chapter 3

1. Planning for Retirement Needs Preliminary Concerns Chapter 3

2. Fact-finding Qualified versus other tax-sheltered plans Defined-benefit vs defined-contribution Pension versus profit-sharing Keogh plans Chapter 3: Preliminary Concerns

3. Determine company objectives Due diligence review Coordinate with other advisors Identify company budget Review employee census Identify affiliated companies Fact-Finding

4. Qualified Defined-benefit Cash-balance Money-purchase Target-benefit Profit-sharing 401(k) Stock bonus ESOP Other SEP SIMPLE 403(b) Qualified vs Other Tax-Sheltered

5. Complex documentation and reporting Complex yet flexible coverage Complex yet flexible vesting Complex yet flexible benefit structure Loans Qualified Plan Characteristics

6. SEP Profit-sharing look-alike Simple documentation, reporting Retains look and feel of profit-sharing SIMPLE 401(k) look-alike Simple documentation, reporting Incredibly inflexible 403(b) 401(k) for nonprofit and public schools Simple and flexible Other Tax-Sheltered Plans

7. Defined-benefit plans Defined-benefit PP Cash-balance PP Defined-contribution Money-purchase PP Target-benefit PP Profit sharing 401(k) Stock bonus ESOP DB/DC

8. What is defined? Money going in – Define Contribution Money going out – Define Benefit Define Contribution Define what goes in. Who knows what comes out Define benefit Define what the benefit is and do the math No one cares, except for the employer, what needs to go in! DB versus DC Approach

9. Defined-benefit Specifies benefit Assets not allocated Investment risk with employer Can count past service Costly to administer Difficult to understand Unpredictable costs Defined-contribution Contribution/allocation Individual accounts Investment risk with employees No past service Less costly Easy to understand Predictable costs DB versus DC Approach

10. Defined-benefit Maximum benefit $205,000 (2013) Deduction limited by actuarial cost Subject to PBGC Minimum participation rule Longer vesting Defined-contribution Maximum contribution $51,000 a year (2013) Deduction 25 percent of compensation Not subject to PBGC Not subject to minimum participation rule Shorter vesting DB versus DC Rule Differences

11. Life annuity at age 65 of the lesser of 100 percent of the highest consecutive 3-year average compensation or $205,000 (2013) No actuarial reductions 62-65 Reductions prior to age 62 Actuarial increases post age 65 415(b) Defined-Benefit Limits

12. Annual additions can not exceed the lesser of $51,000 (2013) or 100% of salary Include employer & employee contributions and forfeitures Exception: Age 50 catch up salary deferrals Compensation Taxable wage income Salary deferral contributions tax-sheltered plans, cafeteria plans and fringe benefit programs Compensation cap $245,000 (2009) 415(c) Defined-Contribution Limits

13. One-third of employees in mid-to-large companies covered by DB plan Less than 10% of small employers maintain DB plans (may still be tax shelter opportunity) More than 50 million covered in DC plans Most new plans are DC plans, in the small plan market most 401(k) and SIMPLE Today’s Market

14. Pension Defined benefit Cash balance Money purchase Target benefit Profit Sharing Profit sharing 401(k) Stock bonus ESOP Pension vs Profit-Sharing

15. Pension Required funding 10% of assets in sponsor’s stock Distribution requires termination of employment (exception at age 62) Profit-Sharing Discretionary funding 100 percent invested in sponsor’s stock In-service withdrawals 2 years after contribution is made 5 years of plan participation Pension vs Profit-Sharing

16. Not a type of plan Maximum deduction based on income after contribution Keogh

17. Pre-contribution salary ($100,000) Social Security deduction ($7,200) Contribution rate (.25/1.25=.2) Allowable contribution .2 x reduced salary ($92,800 x .2 = $18,560 Keogh Calculation

18. defined-benefit plan defined-contribution plan minimum-participation rule pension plan category profit-sharing plan category Keogh plans Vocabulary Review

19. True/False Questions 1. Using a fact finder provides a method for systematically gathering information necessary to make appropriate recommendations. 2. A thorough understanding of the ages and salary levels of employees who will be covered by the plan is essential to making the correct plan choice. 3. A fact finder can help the employer prioritize retirement plan objectives. 4. Understanding the ownership structure is important to ensure that controlled group problems do not exist. 5. SEPs and SIMPLEs will generally cost less to maintain than a qualified plan, but in exchange the employer will have fewer design options.

20. True/False Questions 6. A defined-benefit plan specifies the amount of contribution made annually to each employee’s account. 7. Defined-contribution plans can gear their retirement payments to salary levels used just prior to retirement. 8. Under a defined-contribution plan the employer bears the risk of preretirement inflation. 9. The maximum annual deductible employer contribution to a defined-contribution plan is 25 percent of aggregate participant payroll. 10. Individual accounts are established for each participant in a defined-benefit plan. 11. Defined contribution plans provide benefits based on a participant’s earnings each year.

21. True/False Questions 12. From the employer’s perspective, defined-benefit plans are more economically risky than defined-contribution plans. 13. From the employee’s perspective defined-benefit plans provide a more predictable benefit. 14. Defined-contribution plans can never base benefits on past service. 15. Plans from the pension category can invest up to 25 percent of their assets in employer stock. 16. Under a profit-sharing plan an organization is committed to making annual payments to the plan. 17. Joe, a sole proprietor has a profit-sharing plan. He has Schedule C earnings of $210,000 and a deduction on his tax return for Social Security of $10,000. Joe’s maximum contribution is $40,000.

22. Fact finding Objectives Budget Employee census Affiliation Coordinate professionals Due diligence 415(b) DB limit $195,000 life annuity No reduction age 62 415(c) DC limit 100% or $49,000 limit Annual additions Exception catchup 415 rules All comp or test for nondiscrimination Aggregate plans of related employers Chapter 3 Review

23. DB features Promised benefits Unallocated funds Past service Er financial risk Hard to explain DC features Predictable cost Individual accounts Uncertain benefits Easy administration Easy communication DB rules 415(b) PBGC Additional coverage rule Longer vesting Deduction tied to funding DC rules 415(c) Shorter vesting Max deduction 25% payroll Chapter 3 Review (Cont.)

24. Pension No in-service prior to 62 10% assets in er stock Required funding Profit-sharing In-service withdrawals 100% assets er stock Discretionary funding Keogh Unincorporated entity sponsoring plan Deduction limit for owner 20% not 25% Reduce Schedule C by social security deduction (1/2 of SS taxes) Chapter 3 Review (Cont.)