Enhanced Safe Harbor Plan Designs

Transcription

1 Enhanced Safe Harbor Plan Designs Robert M. Kaplan, CFP, CPC, QPA, APA Los Angeles Benefits Conference 2015 Workshop #24 Agenda I. Compensation Issues II. Creative Use of Match III. Top Heavy Exemption IV. After Tax Contributions V. Triple Use of Nonelectives VI. Questions? 2 1

2 Important Information Any insurance products, annuities and funding arrangements that you may have purchased are sold as securities and are issued by Voya Life Insurance and Annuity Company ( VLIAC ). Fixed Annuities are issued by VLIAC. VLIAC is solely responsible for meeting its obligations. Plan Administrative services are provided by VLIAC or Voya Institutional Plan Services, LLC ( VIPS ). Nothing herein constitutes an offer for sale, or solicitation of any offer to purchase, any security. Securities distributed by Voya Financial Advisers, LLC (member SIPC) or other broker dealers with which it has a selling agreement. 3 Important Information This material highlights key issues of legislative initiatives. Currently lawmakers and industry organizations are giving serious attention to a number of bills. Any or all of these proposals could die in committee, change radically or pass after the session ends. This information is provided as guidance. It is not intended to be legal or tax advice. 4 2

3 Client Profile Palindrome Inc. 2 HCEs; 4 s Wants a SH plan (afraid will not pass any testing) Wants to know options Wants to know watch outs Looking to maximize benefits 5 Client Profile Palindrome, Inc Participant Salary Age Dad HCE $265, Mom HCE $265, Ada $100, Bob $ 80, Otto $ 40, Nan $ 25,

4 Compensation Issues Client pays bonuses to all employees and some OT to the s Client asks if those forms of compensation can be excluded to save some on employer contributions Can you do this? 7 Compensation Issues Cont d Answer = Maybe Notice that I did not say It depends But if testing fails, then you do not have a 414(s) definition of compensation SH rules require that compensation meets 414(s) 8 4

5 Client Profile Compensation Issues Participant Salary Bonus and OT Inclusion % Dad HCE $265,000 $20, % Mom HCE $265,000 $20, % Ada $100,000 $10,000 90% Bob $ 80,000 $4,000 95% Otto $ 40,000 $2,000 95% Nan $ 25,000 $1,000 96% Inclusion Test HCE = 92.5% = 94% Test passes 9 Client Profile Comp. Issues What If? Participant Salary Bonus and OT Inclusion % Dad HCE $265,000 $15, % Mom HCE $265,000 $10, % Ada $100,000 $10,000 90% Bob $ 80,000 $ 8,000 90% Otto $ 40,000 $ 4,000 90% Nan $ 25,000 $ 2,500 90% Inclusion Test HCE = 95.25% = 90% Test fails now what 10 5

6 Two Notes on Compensation Testing If $ amount is above 401(a)(17) limit $265,000 for 2015 then subtract exclusions THEN apply limit If Compensation is $300,000 and bonus is $30,000, then net is $270,000 then limited to $265,000. Thus inclusion is 100% (most conservative option) If Compensation Test is failed then a different definition of compensation must be used that satisfies 414(s) SH Contribution Options At least 3% nonelective to all eligible (fixed or flexible) Why would they ever choose fixed Basic Match Dollar for Dollar on the first 3% and 50 cents on the dollar for the next two percent (total of 4% on 5% deferred) Enhanced Match any formula that gets you to the 4% match sooner (such as dollar for dollar on the first 4%) 6

7 To Avoid ACP test Do not match deferrals in excess of 6% Do not provide a discretionary match in excess of 4% Do not provide a match to HCEs that is a higher rate than to the s Do not increase rate of match as the deferrals increase May want to consider Disaggregate SH groups Immediate eligibility Those with 21 and 1 get SH Those without get tested (but probably all s) you cannot just carve out the s; you must carve out all employees (both and HCE, if there are any) Note: This approach would eliminate use of the Top Heavy Exemption (to be discussed later) 7

8 Key Question to Consider How much does client want to budget Who should benefit (those deferring or all) Let s look at some options SH 3% Nonelective Participant Salary Deferrals Match Nonelectiv e Dad HCE $265,000 $18,000 $ 0 $7,950 Mom HCE $265,000 $18,000 $ 0 $7,950 Ada $100,000 $ 5,000 $ 0 $3,000 Bob $ 80,000 $ 4,000 $ 0 $2,400 Otto $ 40,000 $ 0 $ 0 $1,200 Nan $ 25,000 $ 0 $ 0 $ 750 $23,

9 Nonelective plus 4% Discretionary Match Participant Salary Deferrals Match Nonelectiv e Dad HCE $265,000 $18,000 $ 10,600 $7,950 Mom HCE $265,000 $18,000 $ 10,600 $7,950 Ada $100,000 $ 5,000 $ 4,000 $3,000 Bob $ 80,000 $ 4,000 $ 3,200 $2,400 Otto $ 40,000 $ 0 $ 0 $1,200 Nan $ 25,000 $ 0 $ 0 $ 750 $28,400 $23, SH Match plus 4% Discretionary Match Participant Salary Deferrals SH Match Discretiona ry Dad HCE $265,000 $18,000 $ 10,600 $10,600 Mom HCE $265,000 $18,000 $ 10,600 $10,600 Ada $100,000 $ 5,000 $ 4,000 $4,000 Bob $ 80,000 $ 4,000 $ 3,200 $3,200 Otto $ 40,000 $ 0 $ 0 $ 0 Nan $ 25,000 $ 0 $ 0 $ 0 $28,400 $28,

10 Triple Stack Match Participa nt Dad HCE Mom HCE Ada Bob Otto Salary Deferrals SH Match Fixed 6% Match Discretion ary 3.21% $265,000 $18,000 $10,600 $ 15,900 $ 8,500 $265,000 $18,000 $10,600 $ 15,900 $ 8,500 $100,000 $ 5,000 $ 4,000 $ 5,000 $ 3,210 $ 80,000 $ 4,000 $ 3,200 $ 4,000 $ 2,568 $ 40,000 $ 0 $ 0 $ 0 $ 0 19 Top Heavy Exemption Plans that allow only elective deferrals and contributions that satisfy the safe harbor are exempt from TH 10

11 Top Heavy Exemption Exemption does NOT apply if: Forfeitures are allocated to the accounts Nonelective discretionary contributions are allocated Longer eligibility is required for the SH contribution than for elective deferrals Disaggregation technique is used Top Heavy Exemption If the plan is not exempt from TH rules, remember that the SH contributions can be applied to satisfy TH Example if an employee defers 2% and receives a 2% match; then only an additional 1% is needed to satisfy TH 11

12 After Tax Contributions Really??? Many recent articles for wealth management have suggested HCEs consider using after tax to max out Can then convert to Roth or roll to a Roth without proration under new rules (under certain circumstances) After Tax Contributions Really??? But in a SH plan you must test after tax contributions in an ACP test (even if all other SH criteria is met) When required to run an ACP test in a SH plan you can run on only those amounts that fail SH or all match See next two examples WATCH OUT 12

13 SH Match plus After Tax (no room) Participant Salary Deferrals SH Match After Tax Dad HCE $265,000 $18,000 $ 10,600 $ 0 Mom HCE $265,000 $18,000 $ 10,600 $ 0 Ada $100,000 $ 5,000 $ 4,000 $0 Bob $ 80,000 $ 4,000 $ 3,200 $0 Otto $ 40,000 $ 0 $ 0 $ 0 Nan $ 25,000 $ 0 $ 0 $ 0 All Match in test 25 ACP = 2% HCE ACP = 4% SH Match plus 4% Disc.Match plus After Tax Participa nt Dad HCE Mom HCE Ada Bob Otto Salary Deferrals SH Match Discretion ary $265,000 $18,000 $ 10,600 $10,600 $265,000 $18,000 $ 10,600 $10,600 $100,000 $ 5,000 $ 4,000 $4,000 $ 80,000 $ 4,000 $ 3,200 $3,200 $ 40,000 $ 0 $ 0 $ 0 Nan $ $ 0 $ 0 $ 0 26 After Tax 13

14 Triple Use of Nonelectives 3% SH (Fixed or Flexible) Top Heavy (if not exempt) Gateway (5%) Triple Use Nonelective if pass testing Participant Salary Deferrals Nonelectiv e Dad HCE $265,000 $18,000 $35,000 Mom HCE $265,000 $18,000 $35,000 Ada $100,000 $ 5,000 $5,000 Bob $ 80,000 $ 4,000 $4,000 Otto $ 40,000 $ 0 $2,000 Nan $ 25,000 $ 0 $ 1,250 $82,

15 What if Client wants to make changes Mid year amendments clearly allowable Add Roth Deferral Add Hardship beneficiary provisions Terminate or suspend SH What if Client wants to make changes Mid year amendments non binding verbal guidance 2012 ASPPA Annual Q & As Change Investment provider Change trustee Change PY (as long as following 12 month is a SH) Coverage correction 11(g) amendment Add employees not previously covered 15

16 Two Other Watch Outs Don t fund SH with forfeitures What if missed or late notices First check facts and circumstances How late is it Nonelective or match plan Questions I will be happy to answer any questions on Legislative, Regulatory or compliance issues. Thank You. For financial professional training use only CN