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Cash balance workshop 11 12

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Brad wexler

This document summarizes a presentation about cash balance pension plans. It describes how cash balance plans work, their key features and advantages compared to 401(k) plans. It provides examples showing how a cash balance plan could allow a business owner named Joe Smith to contribute over $180,000 to his retirement plan in one year by combining a 401(k) plan with a cash balance plan. The document concludes by identifying common candidates for cash balance plans and encouraging attendees to contact the presenter if interested in establishing a plan before the end of 2012.

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CASH BALANCE PLAN WORKSHOP THE RETIREMENT PLAN OF THE FUTURE Presented by: Brad Wexler, MBA,QKA,QPA, QPFC The Tycor Companies Novemeber 28, 2012 (610) 251-0670
Qualified Retirement Plans Defined Contribution Plans 401(k) Plans Profit Sharing Plans Defined Benefit Plans Traditional Defined Benefit Plans Cash Balance Plans
401(k) Plans Most popular Has limitations for the highly compensated employee/owner Maximum deferral for 2012=$17,000 ($22,500 if age 50 or older) Maximum all contributions for 2012=$50,000/$55,500 (if 50 or older)
Solution Add a Cash Balance Plan Can be used as an additional retirement plan option For companies with high income earners For companies with consistent profits.
Cash Balance Plan A Defined Benefit Plan Has features that resemble a 401(k) Plan Participants have hypothetical account balances Account increases by employer contribution and guaranteed interest rate (2.98% in 2012) Not dependent on plans investment performance
Key Features Combines maximum benefit under a Defined Benefit Plan with some flexibility/portability of 401(k)/profit sharing plan Individual Hypothetical Account Balance for participant Funded entirely by employer contributions Interest rate guaranteed Trustee-directed pooled investment account Benefits are portable
Advantages Larger contributions/tax deductions Acceleration of retirement savings for older employees Easy for participant to understand since benefits are account balances More predictable cost than traditional Defined Benefit Plan Competitive Advantage in Recruiting/Retaining key executives Asset Protection
2012 Combined Contributions Limits (salary > $250k) AGE 401(k) Profit Sharing Cash Balance Total * Tax Savings 60-65 $55,500 $242.451 $297,951 $119,180 55-59 $55,500 $175,672 $231,172 $92,469 50-54 $55,500 $127,386 $182,886 $73,154 45-49 $50,000 $92,447 $142,447 $56,979 40-44 $50,000 $64,922 $114,922 $45,969 35-39 $50,000 $46,838 $96,838 $38,735 30-34 $50,000 $33,834 $83,834 $33,534 *assuming 40% state/federal taxes
Case Study Joe Smith, age 53, is a business owner of a distribution company and is having a good year. He has 4 employees. He wants to contribute as much as possible to a retirement plan on behalf of himself and wants to reduce taxes.
Case Study, continued Salary 401(k) / PS % of Pay Joe $250,000 $55,500 22% Employee 1 $30,000 $1,500 5% Employee 2 $30,000 $1,500 5% Employee 3 $30,000 $1,500 5% Employee 4 $30,000 $1,500 5% Start with a 401(k) comparability profit sharing plan It costs Joe $6,000 to save $55,500
More???? How can we make the plan more valuable for Joe? Increase Joes contribution Joe can have both a 401(k) Profit Sharing Plan And a Cash Balance Plan
It Now Looks Like This!!! Age Salary 401(k) /PS Cash Balance Total Joe 53 $250,000 $55,500 $127,386 $182,886 Employee 1 25 $30,000 $1,500 $2,400 $3,900 Employee 2 30 $30,000 $1,500 $2,400 $3,900 Employee 3 33 $30,000 $1,500 $2,400 $3,900 Employee 4 40 $30,000 $1,500 $2,400 $3,900 Totals $60,500 $133,801 $198,486 Over 92% of the contribution goes to Joe
Investments Assets are pooled and invested by trustee If investment earnings exceed guaranteed rate-reduces future employer contribution If investment earnings are less than guaranteed rate- must make up difference over seven years
FAQ Can Contributions change? Is Funding Status an issue? Must everyone participate equally? Is it subject to IRS nondiscrimination testing? How do design/administration costs compare with 401(k) Plans
Most Common Cash Balance Candidates Medical groups, Law firms, other professional firms Highly profitable companies Principals / senior executives earning > $250,000 (alternative to non-qualified plans) Company willing to make employer contributions (5% - 10% + of pay)
Where to Go From Here 2012 maybe a great opportunity to get a jump start on saving for your retirement and reducing your taxes. Any plan established by 12/31/2012 can retroactively be effective 1/1/2012. Retirement will not happen without proper planning. Tycor can plan and do analysis for you.
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Cash balance workshop 11 12

  • 1. CASH BALANCE PLAN WORKSHOP THE RETIREMENT PLAN OF THE FUTURE Presented by: Brad Wexler, MBA,QKA,QPA, QPFC The Tycor Companies Novemeber 28, 2012 (610) 251-0670
  • 2. Qualified Retirement Plans Defined Contribution Plans 401(k) Plans Profit Sharing Plans Defined Benefit Plans Traditional Defined Benefit Plans Cash Balance Plans
  • 3. 401(k) Plans Most popular Has limitations for the highly compensated employee/owner Maximum deferral for 2012=$17,000 ($22,500 if age 50 or older) Maximum all contributions for 2012=$50,000/$55,500 (if 50 or older)
  • 4. Solution Add a Cash Balance Plan Can be used as an additional retirement plan option For companies with high income earners For companies with consistent profits.
  • 5. Cash Balance Plan A Defined Benefit Plan Has features that resemble a 401(k) Plan Participants have hypothetical account balances Account increases by employer contribution and guaranteed interest rate (2.98% in 2012) Not dependent on plans investment performance
  • 6. Key Features Combines maximum benefit under a Defined Benefit Plan with some flexibility/portability of 401(k)/profit sharing plan Individual Hypothetical Account Balance for participant Funded entirely by employer contributions Interest rate guaranteed Trustee-directed pooled investment account Benefits are portable
  • 7. Advantages Larger contributions/tax deductions Acceleration of retirement savings for older employees Easy for participant to understand since benefits are account balances More predictable cost than traditional Defined Benefit Plan Competitive Advantage in Recruiting/Retaining key executives Asset Protection
  • 8. 2012 Combined Contributions Limits (salary > $250k) AGE 401(k) Profit Sharing Cash Balance Total * Tax Savings 60-65 $55,500 $242.451 $297,951 $119,180 55-59 $55,500 $175,672 $231,172 $92,469 50-54 $55,500 $127,386 $182,886 $73,154 45-49 $50,000 $92,447 $142,447 $56,979 40-44 $50,000 $64,922 $114,922 $45,969 35-39 $50,000 $46,838 $96,838 $38,735 30-34 $50,000 $33,834 $83,834 $33,534 *assuming 40% state/federal taxes
  • 9. Case Study Joe Smith, age 53, is a business owner of a distribution company and is having a good year. He has 4 employees. He wants to contribute as much as possible to a retirement plan on behalf of himself and wants to reduce taxes.
  • 10. Case Study, continued Salary 401(k) / PS % of Pay Joe $250,000 $55,500 22% Employee 1 $30,000 $1,500 5% Employee 2 $30,000 $1,500 5% Employee 3 $30,000 $1,500 5% Employee 4 $30,000 $1,500 5% Start with a 401(k) comparability profit sharing plan It costs Joe $6,000 to save $55,500
  • 11. More???? How can we make the plan more valuable for Joe? Increase Joes contribution Joe can have both a 401(k) Profit Sharing Plan And a Cash Balance Plan
  • 12. It Now Looks Like This!!! Age Salary 401(k) /PS Cash Balance Total Joe 53 $250,000 $55,500 $127,386 $182,886 Employee 1 25 $30,000 $1,500 $2,400 $3,900 Employee 2 30 $30,000 $1,500 $2,400 $3,900 Employee 3 33 $30,000 $1,500 $2,400 $3,900 Employee 4 40 $30,000 $1,500 $2,400 $3,900 Totals $60,500 $133,801 $198,486 Over 92% of the contribution goes to Joe
  • 13. Investments Assets are pooled and invested by trustee If investment earnings exceed guaranteed rate-reduces future employer contribution If investment earnings are less than guaranteed rate- must make up difference over seven years
  • 14. FAQ Can Contributions change? Is Funding Status an issue? Must everyone participate equally? Is it subject to IRS nondiscrimination testing? How do design/administration costs compare with 401(k) Plans
  • 15. Most Common Cash Balance Candidates Medical groups, Law firms, other professional firms Highly profitable companies Principals / senior executives earning > $250,000 (alternative to non-qualified plans) Company willing to make employer contributions (5% - 10% + of pay)
  • 16. Where to Go From Here 2012 maybe a great opportunity to get a jump start on saving for your retirement and reducing your taxes. Any plan established by 12/31/2012 can retroactively be effective 1/1/2012. Retirement will not happen without proper planning. Tycor can plan and do analysis for you.