A Financial Planners Guide to. Cash Balance Plans. Presented by: Charles Munsell.

Transcription

1 A Financial Planners Guide to Cash Balance Plans Presented by: Charles Munsell

2 Agenda Historical perspective What are cash balance plans? How do the plans work? What is the role of the planner? Real-world examples

3 Historical Perspective

4 Early 80 s a defined benefit plan was the clear solution for small professional corps Historical Perspective Legislation almost killed them overnight Subsequent law changes have brought them back Often not thought of as a solution, lost generation plus

5 What is a cash balance plan?

6 A hybrid defined benefit plan What is a Cash Balance Plan? Looks and acts like a 401(k) plan from a benefits perspective More robust from a funding perspective

7 Why a Cash Balance Plan?

8 A defined benefit plan Can be leveraged with 401(k) plan Why a Cash Balance Plan? Combined plans tested as one Much larger deductions available Easy to understand

9 How do they work?

10 Takes advantage of defined benefit nature of plan How do they work? Takes advantage of nondiscrimination testing rules Typically designed with owner focus

11 Why Defined Benefit? Limit is on the benefit, not the contribution Can fund towards target in excess of $2.5 million dollars for principal

12 How do we not discriminate? Plan must be nondiscriminatory IRS provides framework for testing Take advantage of the miracle of compound interest

13 Pros & Cons Large contributions are allowed Investing for a pool Benefits are fixed and guaranteed Favorable Determination letter issued by IRS Contributions are mandatory under law Contributions could be volatile, based upon asset performance and interest rates Government insurance depending upon size and structure

14 Who is an ideal candidate for a cash balance plan?

15 WHO TO TARGET? Doctors, dentists, lawyers, business owners and other high income professionals Entities with strong cash flow Entities looking for tax deductions and willing to save for retirement Owners who are older rather than younger

16 Why would a client want a cash balance plan?

17 REASONS Why a client wants a cash balance plan: 1. The contributions are tax deductible. 2. The contributions are tax deductible. 3. The contributions are tax deductible.

18 Cash Balance Plan 415 Dollar Limits for 2015 Age Limit Age Limit Age Limit 35 $68, $71, $117, $194, $75, $123, $203, $79, $130, $214, $83, $136, $225, $87, $143, $236, $92, $151, $249, $96, $158, $261, $101, $167, $256, $106, $175, $250, $112, $184, $244,579

19 This is a Qualified Plan as defined by the IRS Any other reasons? Assets protected from creditors Rollover and continued deferral of taxes available upon distribution from plan Provides a significant retirement benefit

20 Handle investments What is the planner s role? Fiduciary consulting Plan sponsor education (but no participant education) Estate planning considerations

21 No participant direction of investments How are the investments different? Investments are in a pool and invested for the pool Goal is not necessarily maximum return Many plans are structured to reduce volatility Plans tend to be conservatively invested

22 Case Study LET S LOOK AT A COUPLE OF SCENARIOS 22

23 CASE STUDY Dr. Martin makes $500,000/yr Staff of 3 employees, total payroll = $129,927 Maximum 401(k) limitation is $53k for 2015 Typical design would be a 401k safe harbor and new comparability design ($53k max)

24 CASE STUDY Name Salary 401k DC Cash Balance Total *Tax Savings Dr. Martin $500,000 $24,000 $7,950 $205,800 $237,750 $95,100 Employee1 $61,154 $0 $4,113 $1,500 $5,613 $2,245 Employee 2 $29,023 $0 $4,975 $726 $5,701 $2,280 Employee 3 $39,750 $0 $2,674 $994 $3,667 $1,467 Total Staff $129,927 $0 $11,762 $3,220 $14,981 $5,992 Grand Total $252,731 $101,092 Percent To Target 94% *Assuming a 40% tax rate; taxes are deferred only.

25 CASE STUDY Interpretation Dr. Martin receives $237,750 contribution rather than a maximum $53,000 contribution to a 401k plan 94% of total contribution went to owner Tax savings of $101,092 more than paid for employee cost to get there Design choices can skinny costs further depending upon circumstances

26 CASE STUDY Physician group with 13 partners Staff of 10 employees Maximum 401(k) limitation is $53k for 2015 Typical design would be a 401k safe harbor and new comparability design ($53k max)

27 CASE STUDY Name 401k DC Each Partner $18,000 - $24,000 Cash Balance $35,000 $51,000 - $250,000 Total $104,000 - $309,000 *Tax Savings Total Partners $237,000 $440,500 $1,460,700 $2,138,200 $855,280 Total Staff $0 $88,480 $6,300 $94,780 $37,912 Grand Total $237,000 $528,980 $1,467,000 $2,232,980 $893,192 Percent To Target 96% *Assuming a 40% tax rate; taxes are deferred only.

28 CASE STUDY Interpretation 12 of 13 partners receive maximum contribution based upon their age with cash balance plan rather than a maximum $53,000 contribution to a 401k plan 96% of total contribution went to the physician group Tax savings of $893,192 more than paid for employee cost to get there

29 In Conclusion Cash balance plans provide large tax benefits to owners Cash balance plans provide large retirement accounts Qualified plan with the IRS Receives a determination letter from the IRS

30 This concludes our discussion ANY QUESTIONS? Charles Munsell (317)