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Retirement Planning for Financial Planners

Chapter 3 of the guide focuses on the types of qualified retirement plans, including Defined Benefit vs. Defined Contribution plans, Profit Sharing plans, and the advantages of qualified plans. It delves into taxation, eligibility, coverage, and vesting requirements, as well as plan entrance dates and coverage limitations.

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Retirement Planning for Financial Planners

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  1. Retirement Planning for Financial Planners Chapter 3: Qualified Plan Overview

  2. Defined Benefit vs. Defined Contribution

  3. Pension Plans vs. Profit Sharing Plans

  4. Qualified Plans Defined Benefit Plans Defined Contribution Plans Defined Contribution Plans

  5. Advantages of Qualified Plans • Taxation of Contributions to Plans • Income Tax Deferred • Payroll Taxes Avoided on Employer Contributions • No avoidance for employee elective deferrals. • Tax Deferral on Earnings and Income • ERISA Protection • Anti-Alienation • Prohibits any action that may cause the plan assets to be assigned, garnished, levied, or subject to bankruptcy proceedings. • Protection from Employers.

  6. Qualification Requirements • Plan Document • Eligibility • Coverage • Vesting • Special Qualification Requirements apply to: • Top-Heavy Plans • Cash or Deferred Arrangements (CODAs) • Limitation on Benefits and Contributions

  7. Eligibility • Age 21 and one year of service (1,000 hours worked during one plan year). • Special election to require two years of service – 100% vesting requirement. • Plan Entrance Date • Generally plans have two entrance dates during the year such as 1/1 and 7/1 • Can’t make eligible employees wait more than six months to enter plan • Could also have quarterly or monthly entrance dates

  8. Coverage (1 of 5) • Can exclude: • Ineligible employees. • Employees covered under a collective bargaining agreement. • Nonresident alien employees that do not perform services in the U.S.

  9. Coverage (2 of 5) • Plan must be nondiscriminatory • All qualified plans must pass at least ONE of the following tests: • Exhibit 3.8 on page 104  70%  70%

  10. Coverage (3 of 5) Who is a Highly Compensated Employee (top dog)? *Anyone who owns more than 5% of a company’s stock or capital ** If elected, add “and in top 20% of employees ranked by salary”

  11. Coverage (4 of 5) • 5% Owner Defined • Individually owned shares, plus • Attribution of shares owned by: • Spouse • Children • Grandchildren • Parents

  12. Coverage (5 of 5) See Exhibit 3.9 on page 105 Defined Benefit Plans must additionally pass the 50/40 Test

  13. Vesting • See Vesting Schedules, page 109. • May always be more beneficial towards employees • In general for defined contribution plans: • 100% for employee contributions • Employer contributions: • 3 year cliff or • 20% in years 2 to 6

  14. Special Plan RequirementsTop-Heavy Plans • Top heavy: >60% account balances or accrued benefits for key employees instead of peons • Key Employee • A greater than five percent owner, or • A greater than one percent owner with compensation in excess of $150,000 (not indexed), or • An officer with compensation in excess of $170,000 for 2014. • Officer determined based on all facts

  15. Special Plan RequirementsTop-Heavy Plans • Required Vesting • For plan years beginning after 2006, all qualified defined contribution plans will vest on a 3 year cliff or 2 to 6 year graduated schedule, without regard to the plan’s top-heavy status. • Funding • Defined Contribution Plans • Employer must provide non-key employees with a contribution equal to at least 3% of employees compensation • Except if key employee’s contribution is less than 3%

  16. Special Plan RequirementsTop-Heavy Plans (3 of 3) • Defined Benefit Plans • Employer must provide non-key employees with a benefit equal to 2% per years of service (limit 20%) times employees average annual compensation.

  17. Plan Limitations on Benefits and Contributions • Covered Compensation • $260,000 for 2014 • Defined Benefit Plan Annual Benefits • Lesser of • $210,000 for 2014 • 100% of the average of the employee’s three highest consecutive years salary

  18. Plan Limitations on Benefits and Contributions (2 of 3) • Defined Contribution Plans • Maximum contribution for the year • Lesser of: • 100% of an employee’s compensation, or • $52,000 for 2014 • Limit consists of • Employer Contributions, and • Employee Contributions, and • Any forfeitures allocated to participant’s account

  19. Plan Limitations on Benefits and Contributions • Multiple Plan Limitation • An employer maintains both a defined benefit plan and a defined contribution plan • If contribute less than 25% of compensation to defined benefit plan, can contribute to defined contribution plan until combined balance is 25%

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