NEW DYNAMICS IN QUALIFIED PLANS Post PPA 2006 The Super 401k Plan Design featuring IRC 401h Benefits A Post-retirement Individual Medical Expense

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1 NEW DYNAMICS IN QUALIFIED PLANS Post PPA 2006 The Super 401k Plan Design featuring IRC 401h Benefits A Post-retirement Individual Medical Expense Reimbursement Benefit 2015 NASBA CPA CE COURSE Advanced Qualified Plan Designs Presented by Fox Lalonde & Kenne, Enrolled Pension Actuaries 2015 All Rights Reserved

2 Fox Lalonde & Kenne NEW DYNAMICS IN QUALIFIED PLANS Post PPA 2006 Continuing Education Course Random Polling 2015 NASBA CPA CE COURSE Advanced Qualified Plan Designs REMINDER: You can type in questions at any time. We will provide: legal briefs; fiduciary summaries; IRS on point audit manuals and third party support from CCH, TRI Pension Services, Tax Certification from NASBA member etc. all available upon request. The Super 401K Plan Design trademarks an actuarial methodology NOT a Product i.e. this is NOT an IRC 412(e)(3) plan. FL&K does not sell any form of investment or insurance product nor do we give investment advice. These are self-trusteed plans by choice; assets can be invested solely at the trustees discretion; 99.9% of the trustees are the business owners. Frequently, the 1 st question we get: What can we invest in? It s a good question. That decision should be made by the client, the plan trustee. RIAs have every investment tool available to them. Time permitting, we will look at the Investment Powers and Duties of the Trustee at the end of this session. Our plan documents are specific in all regards.

3 Fox Lalonde & Kenne NEW DYNAMICS IN QUALIFIED PLANS Post PPA 2006 The Super 401k Plan Design featuring IRC 401h Benefits 2015 NASBA CPA CE COURSE Advanced Qualified Plan Designs Who is FL&K? What do we do? Why are you here? Who is Fox Lalonde & Kenne (FL&K)? Enrolled Pension Actuaries & TPAs Independent, Fee Only, National, Actuarial & Administrative Practice: 36 states with service offices in OH, IN, IL and CA; Professional & Experienced. FL&K wrote it s own Proposal & Valuation System; FL&K has acquired it s own customized recordkeeping and Plan document systems. The IRS and DOL consider FL&K to be experts. Advanced Pension Plan Designs: the IRS requires an ANNUAL actuarial certification The ONLY requirement for tax deductibility other than the above is a timely contribution and full disclosure (census and operations). The IRS relies on our actuarial certification. FL&K partners with the CPA, financial advisors and their clients using Qualified Plans to address: Tax Reduction Deferral & Exempt Income Retirement Planning Income & Medical Expense Business Succession Buy Sell and Stock Redemption

4 Fox Lalonde & Kenne NEW DYNAMICS IN QUALIFIED PLANS Post PPA 2006 The Super 401k Plan Design featuring IRC 401h Benefits 2015 NASBA CPA CE COURSE Advanced Qualified Plan Designs NY CPA Firm CPAs Know Tax & Accounting Rules Q. Why are you here? 1. You want to Help Your Clients Succeed; 2. You want to Retain and Grow Your Practice, and 3. Give Your Practice a Huge Competitive Advantage. KNOWING QUALIFIED PLAN RULES DOES ALL THREE WHO PAYS OUR FEES? OUR CLIENTS DESERVE A PLAN DESIGN FOR THEM! 93.8% of all Qualified Plans = Regulatory, Fiduciary, Contributory Bias to EEs TODAY YOU WILL LEARN THE DIFFERENCE BETWEEN A PLAN AND A PLAN DESIGN A Design that Combines the BEST Attributes of Both DC + DB Plans + Incidentals & Balances Contributions and Benefits on a Non-Discriminatory Basis, the Super 401K Plan Design The Golden Rules of Plan Design 1. Easy to Understand (Vested Accrued Benefit; Units, Offsets vs Cash) 2. Keep it Simple but NOT Stupid (Custom vs Boilerplate) Communicate the results i.e. Owner, Trustee Friendly, CONTRIBUTIONS MAKE SENSE!!! 3. Design to the CLIENT s Priority? It s the Client s Plan!!! Sneak Preview

5 Fox Lalonde & Kenne New Dynamics in Qualified Plans Post PPA Estimated Maximum Contributions* SIMPLY COMPARE the VALUE of a GREAT DESIGN *Using IRC 415 (b)(1)(a) and IRC 415 (c)(1)(a) Limits MAXIMUM OWNER CONTRIBUTIONS Employee Plan Owner Combined Where Most Plans Are Where They Can Be!!! Age 401k only 401k P/S Super 401k Plan Designs $24,000 $59,000 6X- 10X $375,000 - $500,000+* $24,000 $59,000 $305,000 - $375, $24,000 $59,000 $260,000 - $305, $18,000 $53,000 $225,000 - $260, $18,000 $53,000 3X - 5X $165,000 - $225,000+ Average Percent to Owners <40% Average Percent to Owners >90%+ $4.4 Trillion 650K Plans and 100 MM+ Participants $3.2 Trillion 43K Plans 40 MM Participants (42%) 93.8% of All QPs 100 MM Decision Makers 43K Decision Makers * Allowable spousal benefits/contributions, where applicable, may double the otherwise maximum plan contributions e.g. 2 age 60 = $800K+; 401h /dependent + Super 401k contributions can double 1 st yr w/o spousal benefits (double up); 150% thereafter e.g. 1 st yr. max age = $1MM; subsequent year $600k+ (plan year overlap).

6 Fox Lalonde & Kenne 2015 NASBA CPA CE COURSE Advanced Qualified Plan Designs THE IMPACT OF KNOWING THE RULES Post PPA 2006 WHAT THE HECK HAPPENED? WHAT CHANGED? NOTE: RETAINING BUSINESS & ATTRACTING NEW BUSINESS = REVENUES The PENSION PROTECTION ACT of 2006 Removed IRC 404(a)(7) Prior to the passage of PPA 2006 IRC 404(a)(7) limited COMBINED Qualified Plan Contributions to 25% of Eligible/Covered Compensation - IRC 404(a)(7) is GONE!!! How does PPA 2006 IMPACT Your Client s Business? The Client s Family? Unless the changes are used, it does NOTHING!!! If used, it can Reduce Current & Future Tax Liability (Income & Estate) Materially Impact Retirement Allowable Owner Contributions = 4X to 20X Increased Income/Assets for Retirement Purposes Tax Free Medical Expense Reimbursement Funds Reduces Financial Liability (LaRue; Fiduciary; Warranties; Plan Bond) Succession Planning/Sale of the Business (Step-up in Basis) THE ADD ON VALUE OF AN ENROLLED PENSION ACTUARY: Advanced Designs: the IRS requires and relies on the annual actuarial certification for tax deduction purposes. Plan designs with emphasis on the owner from every perspective: Contributory, Fiduciary and Regulatory Remember: A 401k Plan = Employee Plan; The Super 401K Plan = Owner s Design Let s Look at the Super 401K Plan Design Components

7 Fox Lalonde & Kenne NEW DYNAMICS IN QUALIFIED PLANS Post PPA 2006 The Super 401k Plan Design featuring IRC 401h Benefits ALL THE PLAN COMPONENTS/OPTIONS WORK TOGETHER PPA 2006 removed the 25%limitation of IRC 404(a)(7) All with one exception: Non-PBGC Profit Sharing Plans 2015 Fox Lalonde & Kenne All Rights Reserved What are the 4 Major Super 401K Plan Design Components? 1. The 401(k) Profit Sharing Plan Primarily An Employee s Plan 2. The Pension Plan Basis for Owner s Plan Design Any Pension? IRC 412(e)(3), Traditional or Cash Balance 3. The Aggregated Benefit IRC 401(h) Incidental Add-ons How is it calculated? Limits? What is IRC 401(h)? Remember the History? Optional/Allowable Pre-COLA Accounts 4. A 2 nd Profit Sharing Plan (Add-on Owner s Carve Out) How does this work with the pension? Testing? A 5 th component: 5. The Tax Reserve a Contra-Account (Owner s Option) OK, WE VE EXAMINED SPECIFIC 401K ISSUES (SH, Hardship, Loans); LOOKED AT A BASIC SUPER 401K DESIGN AND THE 4 OR 5 COMPONENTS OF THE SUPER 401K NOTE: THE 401H ACCOUNT MUST BE PART OF A PENSION; A 401K PS IS NOT A PENSION Let s Break Down the Components

8 Fox Lalonde & Kenne NEW DYNAMICS IN QUALIFIED PLANS Post PPA 2006 The Super 401k Plan Design featuring IRC 401h Benefits 2015 NASBA CPA CE COURSE Advanced Qualified Plan Designs Learn the Rules. Competitive Advantage. The Basics: Random Polling THERE ARE TWO BASIC PLAN COMPONENTS THE REST BUILD ON THEM 1. DEFINED CONTRIBUTION (DC Plans): Profit Sharing (PS), 401K Plans, SEPs, etc. All have one thing in common: the annual contribution is DEFINED as a PERCENTAGE of comp e.g. 3%, 6%, 25%, etc. PS contributions are made by the Employer (ER); 401K by the Employee (EE) 401(k) EE Elective Salary Deferrals can be up to 100% of compensation (k) Contribution Limit = $18,000 < 50 years old; $24,000 > $50 years old 2015 PS + 401K Contribution Limit = $53,000 < 50 years old; $59,000 > $50 years old IRC 415(c)(1)(A) Limits: COLA ($30K in 2000 to $53K in 2015; 12 increases in 16 years) The FINAL Retirement Value = Plan Contributions + Earnings; there is NO CEILING! 2. DEFINED BENEFIT (DB Plans): Pension Plans, all traditional types, CB and 412(e)(3) All have one thing in common: the annual contribution is expressed by DEFINING the BENEFIT to be received at the Normal Retirement Date (NRD) i.e. Age (5 years) Defined Benefit Limit = 100% of Comp up to $17,500 Per Month Retirement Benefit IRC 415(b)(1)(A) Limits: COLA ($17,500/mo.; $10K in 1996; 14 increases in 19 years) The FINAL Retirement Value = the cost of a monthly Life Annuity of $X; the CEILING? PLUS AGGREGATED BENEFITS, 401h + Pre-COLAs $2.5 MM to $3.5 MM, PLUS 401(h) PRIME Benefits can be added to any DB Plan; cannot add to DC Plans (Ann Add Limits) Begin In-Service Age 62 Now Let s Look at Aggregated Benefits in more Detail

9 THE AGGREGATED BENEFIT Optional/Allowable Add-on Only Incidental Benefits: Only Two: 401h and/or Pre-COLA SIMPLE CALC: THE MAXIMUM RETIREMENT CONTRIBUTION/3 TWO EQUALLY TALENTED ACTUARIES = YOU WIN! 2 Credit Hours Random Polling IRC 401(h) = Post Retirement Individual Medical Expense Reimbursement A 401(h) account is an account in a pension plan that is to be used exclusively for post-retirement retiree health benefits for the participant and ANY tax dependent. 401(h) Tax Trifecta: 401(h) benefits are tax deductible; fully tax deferred and payouts are tax free under IRC 105 or (h) tax deductible contributions are subject to the annual addition limit of $53,000 in 2015; unused 401h contributions carry forward indefinitely. 401(h) benefits vest at the NRD for employees who go on pay status; Golden Handcuffs : employee/participants leaving prior to NRD forfeit 100% of their benefit TESTING ISSUES: Benefits, Rights & Features; Policies & Procedures The IRS s Larry Isaacs & Linda Marshall; FL&K s Zak Kenne CASH is the UNIVERSAL EQUIVALENT; AB = CASH (A Mini Cafeteria Plan) Individual Participants choose the Aggregated Benefit that best suits their needs subject to BRFs and Policies & Procedures; the default is IRC 401(h). Pre-COLA = IRC 415(b)(1)(A) States the Maximum Benefit; prefund COLAs, how? A Premium Account: No Minimum Death Benefit; Maximum 100X Monthly Benefit OK, LET S LOOK AT SPECIFIC 401K ISSUES YOUR COMPETITORS DON T KNOW THE RULES. COMPETITOR S MISTAKES = YOUR OPPORTUNITY!!! LET S STEP BACK AND LOOK AT A 401K

10 Fox Lalonde & Kenne The Basic 401K NEW DYNAMICS IN QUALIFIED PLANS Post PPA 2006 The Super 401k Plan Design featuring IRC 401h Benefits 2015 NASBA CPA CE COURSE Advanced Qualified Plan Designs 600, K PLANS w 90 to 100 MM 401K Participants $4.4 Trillion+ Assets Thank You to the Mutual Fund Industry and Banks nuts 2015 Max 401K PS Contributions MF & Banks Fully Invested Age 401k only 401k P/S Routine Plan Provisions $24,000 $59,000 Safe Harbor (Unconditional) $24,000 $59,000 Loans (% Not Deductible) $24,000 $59,000 Hardship (Gov t Benefits) $18,000 $53,000 Recordkeeping (Extra Cost) $18,000 $53,000 Provisions = Fees, Fees, Fees Max Percent of Covered Comp 25% Actual 20% Annual Comp Limit IRC 415(c)(1)(A) $265,000 $53K-$59K Highly Compensated Employee (HCEs) $120,000 Social Security Wage Base $118, % + 2.9% = 15.3% 15.3% of $18K/$24K $2,754/$3,672 Key Employee (includes spouse/children; not siblings) 1% Owner $150,000 Officer $170,000 Over 5% Owner (No Comp Requirement) The Heart Surgeon > 600K Plans where owners need HELP NOW!!!

11 KNOWING ALL THE RULES MAX OWNERS $$$ AND %; MIN REQUIRED TO OTHERS CASE STUDY #1: ProServe Business OWNER S TARGET = $400K; LETS EXAMINE THE DESIGN RESULTS EARNED CASH 401K AGGREGATED BENEFIT QP INCOME BALANCE PS 401h Pre-COLA TOTAL (W-2/SE) $0 to $7,950 to $0 to $0 to $7,950 to Owner $265,000 $275,000 $38,900 $20,100 $66,000 $400,000 HCE 120, , ,500 EE1 30, , ,750 EE2 25, , ,375 EE3 25, , ,375 EE4 50, , ,250 S/T 0 15,750 2, ,250 Totals: $515,000 $275,000 $54,650 $22,100 $66,500 $418,250 % To Owner 100% 71.2% 91% 99.25% 95.6% to 78.9% A PBGC Plan; NOT MAXED OUT; MAX TO OWNER 1 ST YR = $1 MM; thereafter $550K+ per Year Historical Notes: 16 th Amendment gave us the Income tax in 1913; 1926 QP Tax Sheltered %; 676K QPs; $7.6 Trillion; 633K DCs = $59K limit; 43K DBs (6%) = 42% Assets OK, THESE DESIGN RESULTS GAVE THE CLIENT EXACTLY WHAT HE ASKED FOR. NOW WE WANT YOU TO UNDERSTAND THE OPTIONS; HOW THINGS WORK; COMBINING PLANS

12 PUTTING IT ALL TOGETHER CASE STUDY #1: ProServe Business A PBGC Plan (NOT MAXED OUT; MAX TO OWNER 1 ST YR = $937K+; thereafter $550K per Year*) 2 Credit Hours Random Polling COMP CB P/S 401(k) AGGREGATED BENEFIT TOTAL $0 to $7,950 to 401h Pre-COLA Owner $265,000 $275,000 $38,900 $20,100 $66,000 $400,000 HCE 120, , ,500 EE1 30, , ,750 EE2 25, , ,375 EE3 25, , ,375 EE4 50, , ,250 S/T 0 15,750 2, ,250 Totals: $515,000 $275,000 $54,650 $22,100 $69,567 $418,250 % To Owner 100% 71.2% 91% 99.3% 95.7% *Spousal $150,000 $0 to $4,500 to $40,250 $29,750 $298,750 Add-on $210,000 $18, % Totals $717,000 Owners $698,750

13 The DOUBLE-UP IRC 404(a)(6);IRC 446(e) CASE STUDY #1: ProServe Business A PBGC Plan (NOT MAXED OUT; MAX TO OWNER 1 ST YR = $937K+; thereafter $550K per Year*) Aggregated Benefits Carryfwd COMP CB P/S 401(k) 401h Pre-COLA TOTAL 401h $0 to $7,950 Owner PYE $265,000 $275,000 $38,900 $20,100 $ 66,000 $ 400,000 $ 57,100 Owner PYB $265,000 $375,100 $35,000 $24,000 $100,900 $ 535,000 $ 53,200 Owner Tax $265,000 $650,100 $73,900 $44,100 $166,900 $ 935,000 $110,300 Employees $250,000 $ -0- $15,750 $ 2,000 $ 500 $ 18,250 $ -0-2bl-Up Totals: $515,000 $650,100 $89,650 $46,100 $167,400 $ 953,250 % To Owner 100% 82.4% 95.7% 99.7% 98.09% Spousal $150,000 $0 to $9,000 to Add-on $500,000 $28,800 $77,200 $ 89,000 $ 695,000 Owner + Spouse Yr.1 $1,175,000 $111,400 $121,300 $242,767 $1,630,000 % To Owner 98.89% Max Income Tax Savings to Owners: 50% = $824,125 Employee After-tax Cost (50% Combined State & Fed) = $9,125 (Before Forfeitures)

14 NEW DYNAMICS IN QUALIFIED PLANS Post PPA 2006 The Super 401k Plan Design featuring IRC 401h Benefits Who should consider a Super 401(k) Plan Design? The ideal candidates are summarized as follows: Ideal Candidates for a Super 401k Plan Immediate 2015 Tax Benefits Reduce Quarterly Estimates 1. Owners/professionals seeking a higher contribution/tax deduction than the traditional 401k profit sharing maximum of $53,000 to $59, CPA and law firms, medical groups, all professional services firms. 3. Highly profitable companies of all types and sizes. 4. Successful family businesses and closely-held businesses. 5. Older owners needing to squeeze 20 yrs. of retirement saving into 5 to 10 yrs. 6. Owners/partners looking for a way to fund stock redemption or buy-sell agreements on a tax deductible basis. 7. Wealthy owners and professionals with charitable giving intentions stymied by the limitations on tax deductibility. No AGI Limitations.

15 Review Fox Lalonde & Kenne NEW DYNAMICS IN QUALIFIED PLANS Post PPA 2006 The Super 401k Plan Design featuring IRC 401h Benefits 2015 NASBA CPA CE COURSE Advanced Qualified Plan Designs 2 Credit Hours Random Polling Two Questions: Q. WHERE ARE MOST PLAN SPONSORS AT WITH REGARD TO QPs? Q. WHERE DO OWNERS WANT TO BE? SHOULD OWNERS BE? A1. The 401K = A GREAT BENEFIT PLAN FOR EMPLOYEES (1980) Regulatory, Contributory and Fiduciary Complexities Definitive bias toward non-owners (80-90 MM EEs) A2. The SUPER 401K = A GREAT PLAN DESIGN FOR ALL EMPLOYEES Brings Regulatory, Contributory and Fiduciary Balance to the Plans PPA 2006 = Material Increases to Owners (Keys/HCEs) Maximizes Tax Deductible Owner Contributions and Retirement Benefits Minimizes Plan Costs, Including Employee Required Contributions Designs emphasizes a Reward Based Employee Plan vs. an Entitlement The KEY Word here is DESIGN; the SUPER 401K PLAN Design: IS NOT A SINGLE PLAN OR PRODUCT;aa IS A QUALIFIED PLAN DESIGN THAT COMBINES: Multiple Qualified Plans (QPs); Specific Actuarial Methods; Comprehensive Benefit & Contribution Testing Requirements, and Multiple Sets of Customized Qualified Plan Documents Every SUPER 401K PLAN Design is a custom plan design with custom plan documents. The client owns the plan documents. There is no Adoption Agreement.

16 INVESTMENT POWERS OF THE TRUSTEE What can the trustee invest in? (A Partial list ) The Trustee is a Fiduciary (Fiduciary Insurance, Warranties, Fidelity Bonds) To purchase to sell any securities or other property and to retain the same Mutual funds and ETFs; Put or call options registered under the Securities Exchange Act of 1934, as amended Insured savings accounts or certificates of deposit in banks or savings and loan associations; Cash or cash balances Treasury Bills and other forms of United States government obligations; Annuity(ies), group annuities, life insurance (on the life of any Participant) Precious metals IRC 408(m)(3), And, To cause any securities or other property to be registered in the name of the Trust in the Trustee's own name or in the name of a nominee (privacy). To pool all or any of the Trust Fund with assets belonging to any other qualified plan and trust created by the Employer PENSIONS HAVE FINITE ACCUMULATION LIMITS; PS PLANS HAVE NO CEILING 99.9% of getting the most out of a qualified plan is knowing the rules!!!

17 Fox Lalonde & Kenne CPA Continuing Education Course QUALIFIED PLAN HISTORY Qualified means Tax Deductible under IRC 401; Two Basic QPs Defined Benefit Pensions: define the benefit; IRC 415(b)(1)(A) Pensions were the 1 st Kid on the Block, the Plymouth Colony in 1636; the US Federal Government provided a pension for veterans in The American Express Co. established the first private pension plan in the US The Revenue Act of exempted income of qualified plans from current taxation. Standard Oil (1903); US Steel (1914); GE (1912); AT&T (1913); 400 Plans by million private plan participants; MM; MM 1970 Life Insurance Companies controlled the lion s share of all qualified plan assets The Defined Benefit Plan evolved with over 24 pieces of legislation between OBRA allowed the limited use of qualified transfers of excess pension assets to a 401(h) account to fund current retiree health benefits Pension Protection Act PPA 2006 changed the pension landscape Current estimates: $3.2 trillion in DB assets; 43K Plans; 40 MM participants (DOL) Defined Contribution Profit Sharing: define the contribution; IRC 415(c)(1)(A) The Revenue Act of 1978 was the precursor of IRC 401K Hughes Aircraft (1978); Johnson & Johnson (1979); within 2 years ½ had 401Ks Current estimates: $4.4 trillion+ Assets ; 633K Plans; 90 MM participants (DOL) 633K Company Owners with < $59,000 Plan Contribution Limit. WHY?

18 CASH BALANCE PLAN FUNDAMENTALS A Simple Plan Is it a Pension? YES, it is a DB Plan but expressed in DC language! It looks like an old fashioned savings account Accounts receive: Annual Contribution Credit e.g. $1,000 Annual Interest Credit e.g. 5% = $50 The Retirement Value is a Lump Sum, the Cash Balance! For Example, $1,000/ 5% over 40 years = $126, k is Incidental to a Profit Sharing Plan 401h is Incidental to an Underlying Pension (Examine Next)

19 ABOUT FOX LALONDE & KENNE FL&K is an independent, national, fee based third party administrator (TPA) providing consulting, design and administrative services to plan sponsors and their advisors across the United States. FL&K does not sell any form of investment or insurance product nor will it render any form of investment advice. FL&K has over 40 years of experience in plan design, actuarial and administrative services. FL&K plan designs are actuarially certified in house FL&K provides comprehensive legal documentation, trust accounting, recordkeeping, benefit statements, plan reporting and governmental filings thru highly qualified R Team professionals. FL&K are enrolled pension actuaries, members of the American Society of Pension Professionals & Actuaries (ASPPA); ASPPA College of Pension Actuaries and American Academy of Actuaries.

20 Fox Lalonde & Kenne Qualified Plan Consulting, Design, Actuarial & Administrative Services QUESTIONS & PROPOSALS CONTACT US For additional plan information call or All Proposals and Client Services: Deanna Hanks X3 Technical Questions, Webinars, Sales Assistance, Actuarial John Lalonde X1 Zak Kenne X Tax/Planning Tips for Clients & Advisors: Work with your CPA and professional team Consider doubling the otherwise maximum tax deduction for 2015 IRC 404(a)(6) allows a cash basis tax payer to set-up a Super 401k Plan and/or addon plan, now in 2015, and double the otherwise maximum contribution/tax deduction, as long as, the plan is funded on a timely basis. THANK YOU FOR SHARING YOUR TIME WITH US