Basics of Retirement Plan Design. Dale Essenmacher Regional VP, Sales

Transcription

1 Basics of Retirement Plan Design Dale Essenmacher Regional VP, Sales

2 Agenda Marketplace Assessment The Power of Plan Design Technical Review Plans Testing Methods Allocation Methods Case Studies Questions 2

3 Retirement Plan Marketplace Assessment Bells and whistles have taken precedence over plan design The heart and soul of a retirement plan lies in its tax advantages plan design Recent surge in plan design requests post PPA legislation 3

4 Pension Protection Act of 2006 (PPA) Most significant retirement plan reform since ERISA became law in 1974 Plan design opportunities Auto enrollment easing, Auto Increases, Roth performance, and Qualified Default Investment Alternatives (QDIAs) Vote of confidence for cash balance plans, specifically authorized by Congress Significant DB and DC considerations - tax deductibility & funding limits increased Form 5500 disclosure requirements 4

5 The Power of Plan Design Use advanced plan design to achieve tax savings and create value for your clients Effective adoption agreement analysis and plan document design methods can have positive impact on overall success of the plan and the organization A consultative approach differentiates retirement plan service providers 5

6 The Power of Plan Design Business owners and executives need to make larger contributions and control costs to fund future retirement objectives Customized provisions can help owners maximize contributions and benefits while controlling costs of covering other eligible employees Most employers and employees will benefit from expense reductions and significant tax savings when implemented and operated correctly 6

7 Optimize Control Over Contribution Costs Contribution costs can be controlled while building a strategic employee reward program using: Eligibility rules Vesting schedules Allocation requirements 7

8 Defined Contribution Plans A defined contribution (DC) plan allocates contributions among participant accounts Benefits are adjusted to reflect investment performance, etc. Maximum Annual Addition = $53,000 in 2016 DC Plan Model Contribution Contribution Contribution Contribution Contribution Benefit Benefit Benefit Benefit Benefit Individual Account Returns 8

9 Safe Harbor Allocation Methods Allocate the profit sharing contribution in proportion to compensation (example-employee A compensation divided by total of all eligible employee compensations times the profit sharing contribution) Allocate the profit sharing contribution utilizing the social security taxable wage base ($118,500 is limit for 2016)-formula is base percentage times compensation plus base percentage (not to exceed 5.7%) times the difference of compensation minus the taxable wage base. The base percentage cannot be less than or equal to the excess percentage. Example- Employee A- compensation=$265,000-desired profit sharing contribution maximum $53,000- calculation= 16.85% times $265,000 plus 5.7% ($265,000-$118,500) Employee B who participates in the same plan with compensation of $50,000 would receive a contribution of $8,424. Calculation=16.85% times $50,000 plus 5.7%($50,000-$118,500) 9

10 Class-Based Plans Divide participants into two or more defined classes Employer makes different % of pay contributions to each class Everyone within a class receives same allocation Different % of pay allocations between groups Subject to special non-discrimination testing HCEs targeted for highest contribution rates must be older, on average, than non-hces 10

11 Cross-Tested Plans Non-discrimination testing method, not allocation method Applies to any plan using allocation methods that rely on DB principles for nondiscrimination testing purposes AKA New Comparability Started when IRS issued new non-discrimination testing requirements for crosstested plans about ten years ago Term still widely used but does not describe plan design, and is not new anymore 11

12 Defined Benefit Plans A defined benefit (DB) plan specifies benefits to be paid to participants Contributions are adjusted to reflect investment performance, etc. Maximum Annual Benefit Limit = $210,000 in 2016 DB Plan Model Contribution Benefit Benefit Benefit Benefit Pooled Account Returns 12

13 Traditional Defined Benefit Plans Benefit expressed as annuity payable at retirement Pays specified monthly income based on benefit formula Contributions subject to minimum funding requirements Contributions may exceed $53,000 per year per participant Example: Employee accrues 1% of final average pay per year of service up to 30 years Translates to a 30% of pay benefit per year after retirement 13

14 Cash Balance Plans Type of defined benefit plan Benefit expressed as a hypothetical account balance instead of a monthly annuity payment Benefit formula specifies both A pay credit for each participant An interest credit to participant s account 14

15 A Cash Balance Plan Is A Defined Benefit Plan That Looks Like A Defined Contribution Plan A Cash Balance plan allocates Contributions/Pay Credits to hypothetical account balances (HAB) CB Plan Model Pay Credit Pay Credit Pay Credit Pay Credit Pay Credit Hypothetical Account Balance Hypothetical Account Balance Hypothetical Account Balance Hypothetical Account Balance Hypothetical Account Balance Pooled Account Returns 15

16 Why Is A Cash Balance Plan Different? A Defined Benefit plan specifies benefits to be paid to participants Maximum Annual Benefit Limit = $210,000 in This translates to a benefit amount at Normal Retirement Age of $17,500 per month payable for life» Contributions are adjusted to reflect investment performance, etc. Cash Balance Plans are a type of defined benefit plan Benefit Formulas for participants are expressed as a contribution amount equal to a percentage of pay or a flat dollar amount» Participants have virtual account balances instead of accrued benefits. Like accrued benefits of Defined Benefit Plans these account balances are guaranteed» Pay credits are generally based on current salary not average salary 16

17 Cash Balance Plans What You See Is What You Get Benefit Formula Employer contribution = 5% of pay per year A salary of $100,000 *.05 gets you a $5,000 contribution Interest crediting rate (defined in plan document) is applied to BOY account balances All assets for the plan are invested in one trust expressed as hypothetical account balances for each participant Plan sponsor essentially guarantees the participant account balances Investment risk is borne by the plan sponsor 17

18 The Participant Sees A Benefit That Means Something A defined benefit plan statement XYZ Defined Benefit Plan Personal Statement for Participant G As of 12/31/2016 Your Estimated Monthly Benefit at Normal Retirement Date From Your Pension Plan $17,500* Your Accrued Benefit Your Current Monthly Accrued Benefit $4,625.00* *Benefits are payable starting at your normal retirement date for the balance of your life. A cash balance plan statement XYZ Cash Balance Plan Participant G As of 12/31/2016 Account Balance 01/01/2016 $335, Additions Plan Contributions $164, Investment Earnings $15, Account Balance 12/31/2016 $514,

19 When Do Defined Benefit Plans Make Sense? Closely-held companies with fewer than 50 employees One owner or key employee for every employees Sponsor income is reasonably stable Large age gap between employees and owner/family members 19

20 When Does A Cash Balance Plan Make Sense? Small company or partnership such as a law firm or medical practice Desire to equalize benefits and contributions for partners Staff / Partner ratio is small Target employees are generally older than staff Partners are already contributing up to the profit sharing / 401(k) limit and want to contribute more. 20

21 Why Is Plan Design So Important? Unfortunately Traditional plan designs seem unaffordable because higher contributions for owners result in higher contribution costs to cover other eligible employees Fortunately Plan design leverages customized provisions that maximize contributions and benefits for owners, while controlling the cost of covering other eligible employees Often, the most successful plan design results for plan sponsors come from a DB/DC combo plan 21

22 CASE STUDIES For Various Company Sizes 22

23 DB/DC Combo Small Physician Group ABC Radiologists 30 employees and is consistently profitable Two main classes - Owners and Staff 3 Owners and 27 employees Owners want to increase own retirement plan contribution while controlling costs to staff 23

24 DB/DC Combo Small Physician Group Employees Traditional profit sharing plan % of pay Traditional profit sharing plan with 401(k)² % of pay¹ Class-based profit sharing plan and 401(k) % of pay¹ Dr. Adams $53,000 20% $59,000 20% $59, % Dr. Baker $53,000 20% $59,000 20% $59, % Dr. Cox $53,000 20% $53,000 20% $53, % Doctor total $159,000 $171,000 $171,000 Staff $165,400 20% $109, % $41,350 5% Total $324,400 $280,704 $212,350 ¹Excludes catch-up contributions ²Assumes safe harbor 401(k) with QNEC of 3% and profit sharing contribution of 10.21% 24

25 DB/DC Combo Small Physician Group Reduction in profit sharing costs through plan design Employees Traditional profit sharing plan % of pay Traditional profit sharing plan with 401(k)² % of pay¹ Class-based profit sharing plan and 401(k) % of pay¹ Dr. Adams $53,000 20% $59,000 20% $59, % Dr. Baker $53,000 20% $59,000 20% $59, % Dr. Cox $53,000 20% $53,000 20% $53, % Doctor total $159,000 $171,000 $171,000 Staff $165,400 20% $109, % $41,350 5% Total $324,400 $280,704 $212,350 ¹Excludes catch-up contributions ²Assumes safe harbor 401(k) with QNEC of 3% and profit sharing contribution of 10.21% 25

26 DB/DC Combo Small Physician Group Reduction in profit sharing costs through plan design Employees Traditional profit sharing plan % of pay Traditional profit sharing plan with 401(k)² % of pay¹ Class-based profit sharing plan and 401(k) % of pay¹ Dr. Adams $53,000 20% $59,000 20% $59, % Dr. Baker $53,000 20% $59,000 20% $59, % Dr. Cox $53,000 20% $53,000 20% $53, % Doctor total $159,000 $171,000 $171,000 Staff $165,400 20% $109, % $41,350 5% Total $324,400 $280,704 $212,350 ¹Excludes catch-up contributions ²Assumes safe harbor 401(k) with QNEC of 3% and profit sharing contribution of 10.14% 26

27 DB/DC Combo Small Physician Group Reduction in profit sharing costs through plan design Employees Traditional profit sharing plan % of pay Traditional profit sharing plan with 401(k) % of pay¹ CB/DC Combo Plan³ % of pay¹ Dr. Adams $53,000 20% $59,000 20% $233, % Dr. Baker $53,000 20% $59,000 20% $198, % Dr. Cox $53,000 20% $53,000 20% $124, % Doctor total $159,000 $171,000 $557,280 Staff $165,400 20% $109, % $82,700 10% Total $324,400 $280,704 $639,980 1 Excludes catch up contributions 2 Assumes safe harbor 401(k) with QNEC of 3% and profit sharing contribution of 10.21% 3 Cash Balance Plan with Benefits Payable at 62 and Safe Harbor 401(k) with a Cross Tested Profit Sharing Plan 27

28 DB/DC Combo Small Entrepreneur AAA Widget Makers 4 employees and consistently profitable 1 Owner, 1 Executive and 2 Staff Three main classes Owner, Executive, & Staff Owner wants to increase retirement plan contributions and keep important nonowner executive benefits, while controlling overall costs 28

29 DB/DC Combo Small Entrepreneur Separate employees into three different classes Owner: $204,000 Cash Balance contribution $ 59,000 Profit Sharing and 401(k) contributions $263,000 Annual contributions Non-Owner: $95,000 Cash Balance contribution $39,849 Profit Sharing and 401(k) contributions Staff: $1,800 Cash Balance contribution $4,200 Profit Sharing contribution 401(k) contributions also available 29

30 DB/DC Combo Small Entrepreneur Cash Balance Pay Credit Profit Profit Sharing Total First Year Name Age Salary Pay Credit % of Pay Sharing % of Pay 401(k) Contribution Owner #1* , , % 35, % 24, ,000 Executive* ,000 95, % 15, % 24, ,849 Employee 27 60,000 1, % 4, % 0 6,000 Employee 25 60,000 1, % 4, % 0 6,000 Cash Profit Total First Year Salary Balance Sharing 401(k) Contribution Total Target Employees 385, ,000 50,849 48, ,849 Total Others 120,000 3,600 8, ,000 Total 505, , % 59, % 48, ,849 Portion to Target employees 76% 98.8% 85.8% 100.0% 97.1% Total Qualified Retirement Plan Contributions 409,849 Estimated tax rate 39.6% Tax Savings on First Year Company Contributions 162,300 Total Others - Contributions for Staff 12,000 Net (Cost)/Benefit of Proposed Plan Design for the First Year 150,300 30

31 31 Questions?

32 Thank you for your time. Contact Information: Dale, Essenmacher Regional VP, Sales

33 Appendix - Common Frequently Asked Questions Verisight, Inc.

34 Question 1 What is a DB plan? 2 What is the difference between a DB plan and a Cash Balance DB plan? 3 Can hypothetical contributions be changed each year? Can a plan sponsor stop contributing to a DB if financial conditions change at the firm? What options do they have? How long does a DB plan need to be in existence before it can be terminated? Can participants control their own investments in a DB plan? Or how are investments handled in a DB plan? Are there any types of investments that are NOT allowed in a DB plan? 8 Are there other investment considerations. Answer A plan that is sponsored by the employer with the promise to provide a monthly benefit to plan participants either as a percentage of compensation or a stated dollar amount upon reaching normal retirement age as defined in the plan document. Nothing other than the presentation of the plan. A traditional defined benefit plan shows monthly benefits and the costs associated to provide the benefit. Whereas, a cash balance plan illustrates hypothetical contributions and interest credits that are allocated to an account (beginning balance, contribution, interest ending balance); both plans are subject to minimum funding requirements. Hypothetical contributions could change each year if the formula to determine these hypothetical contributions is pay related in terms of a % of compensation. The percentage doesn t change only the amount of the hypothetical contribution. Otherwise, the hypothetical contributions cannot change each year. Generally no, you could possibly reduce the amount of contributions by taking steps to freeze benefit accruals. However, you must complete all steps necessary to freeze the plan before the participants accrue benefits for the plan year. There are Notices that must be given prior to freezing the Plan. The timelines for the advance Notice depends on the number of participants in the Plan. A condition for establishing any qualified plan is that the employer intends for it to be permanent. There is no set time limit for how long the plan must stay in place. Generally, the IRS is unlikely to challenge a plan s permanency if a qualified plan has been in existence more than 10 years. A challenge may occur when a qualified plan is in existence less than 10 years. It is important to note that when there are valid business issues for terminating the plan such as a change in ownership of the employer, the liquidation or dissolution of the employer; adverse business conditions; or the adoption of new plan are all permissible reasons to terminate a retirement plan. No. Investments in a defined benefit plan are in a pooled account that is trustee directed. Investments that are not traded on the open market are permitted but present a problem in that according to the Code, the plan assets for determining the funding requirements must have a fair market value. Yes. A plan must be careful avoid entering into a prohibited transaction with a party-in-interest to the plan. For example, awarding the plan s investment contract to a board member might be a prohibited transaction. This can be a facts and circumstances analysis that may require legal advice. 9 What rate do the DB plan assets need to achieve to remain fully (well) funded? Is that rate listed in the document? Can that be changed how often? The actuarially assumed investment return for Defined Benefit plans tends to range from 5% to 8%. The rate is not listed in the Plan document. The actuary has limited discretion under IRS guidelines with respect to determining the interest rate assumption Verisight, Inc.

35 10 Question What types of organizations should consider DB plans? Or DB plans work well for small companies only right? Answer Any type of organization can sponsor a Defined Benefit Plan. The decision to sponsor a plan is based on the employer s business objectives. However, the substantial tax deferred accumulation features of a defined benefit plan may be attractive to a smaller employer that wants to primarily benefit the owner and other key employees. Nonetheless, larger employers and other well-established and consistently profitable small to mid size employers may find the guaranteed benefit aspect of a defined benefit plan as a way to reward and retain all employees. 11 Can a traditional DB convert to a Cash Balance? How? Yes. There are regulations that outline the process to convert a traditional plan into a cash balance plan. 12 What is a Cash Balance plan and why use it over a DB plan? What if I have older employees, will a Cash Balance plan work for my business? What is the maximum amount that can be contributed to the business owner in a Cash Balance plan? If there are multiple partners can each partner pick how much they contribute to the Cash Balance plan? From Partner based group: what if one of the partners becomes ill and his/her specific income drops dramatically? From Partner based group: what if one of the partners decides they no longer want to fund as much as they had been funding for example, going from $100,000 in the CB/DB to $50,000 or $25,000. A Cash Balance plan is a type of Defined Benefit plan that provides employers a much larger benefit than what they could receive from a Defined Contribution plan while providing more flexibility than a traditional DB plan. Two main advantages are that the employees can all receive the same percentage of pay and the benefits look and feel like a profit sharing plan. This makes the plan much more understandable and easier to communicate to the plan sponsor and the employees. Using a cash balance plan can provide a solution when there are some older employees. This is dependent on the business owner s age and pay and isn t any different from a traditional DB plan. A general guide would be: Age 35 - $50,000 Age 45 - $100,000 Age 55 - $150,000 Age 65 -$200,000 A Cash Balance plan does allow different groups of employees to receive different percentages of pay. You cannot change the percentage from year to year, but each owner can specify a contribution level they are comfortable with contributing for a couple of years. If the plan design has different rate groups for the plan participants and the partner has not been credited with a year of accrual service during the plan year, the plan could be amended to change this particular plan participant s benefit which could reduce the amount of required contribution to fund the benefit. See question 16 for answer. 18 From partner based group: if a 40 year old is not receiving a very large contribution in the CB/DB, will the contributions automatically increase as he/she ages? If not, what does it take to receive a sizable increase? Yes. Unless the benefit is limited by plan design Verisight, Inc.

36 Question Do you have to cover all the employees in the Cash Balance plan? Can you carve out just the owner within a different entity and provide a benefit just for him or her? How come the majority of the employee contributions seem to be allocated to the 401(k) Profit Sharing portion of the combined plan design? Answer No. You have to cover the lesser of 40% or 50 employees with the Cash Balance plan or in any defined benefit plan. A typically plan design covers all of the eligible employees with some sort of benefit because it is easier to explain to the employees when all of them are receiving something as opposed to why some are not receiving a benefit. The amount allocated to the employees is usually the minimum amount allowable by law. No. There are control group and affiliated service group rules in place to prevent this from happening. The easiest way to think about this is that tax deductions are given to retirement plans because the government wants you to provide benefits to the employees. If it were possible to avoid providing benefits to employees by simply setting up a plan inside some other business entity then there would rarely be any employees covered by a retirement plan. The assets of the Cash Balance plan are managed in a pooled account and all the investment gains and losses are the responsibility of the plan sponsor. In other words, if the plan loses value, the plan sponsor must make up for that shortfall over a period of time. The plan sponsor does not have to make up for any shortfalls in the 401(k) Profit Sharing plan. By allocating the majority of the employees contribution to the 401(k) Profit Sharing side of the equation we are minimizing the plan sponsor s investment risk within the Cash Balance plan. 22 I understand that the IRS expects a Cash Balance DB plan (or any plan) to be permanent and I fully expect to operate this plan for at least 5 years. How-ever, what if my business suffers and my income drops dramatically before 5 years is up? See response to question What happens if there is a shortfall in the assets? What happens if the investments earn more than what is expected? Verisight, Inc. The Cash Balance plan has a stated interest credit rate within the plan document. This rate can be specified by the plan sponsor and cannot be a number less than zero. For example if the plan has an annual contribution of $100,000 and the stated credit rate is 4%, at the end of the year the balance in the Cash Balance account should be $104,000. If it turns out that there is only $50,000 in the account then the shortfall of $54,000 is amortized over a 7 year period. This helps smooth out investment losses so that the plan is funded in a more even manner. If the plan sponsor has to make up the entire $54,000 in the following year it may be that the market just had a dip at year end and then when the market bounces back the plan would be over funded. This 7 year smoothing period helps prevent the seesaw from occurring. If the plan s investment earn a better than assumed rate of return, then that can reduce future years contributions.

37 24 Question If investment returns are lower than expected, example; targeted 5% and earned 0% or lost money, does the 1 year shortfall need to be made up immediately? Will the business be allowed to deduct the additional contribution that is required? 25 What happens in reverse? Expect 5%, earn 10%. 26 When are contributions due? 27 With a combined defined benefit/defined contribution plan How much flexibility is there in the contribution amount? 28 Is there any access to the funds? 29 What happens when the plan is shut down? Answer No, the shortfalls are generally amortized over a period of at least 7 years. There are other options on this amortization period and would be analyzed at the time the actuarial valuation report is prepared to determine the funding requirement for the current plan year. Contributions that are deposited into the Plan are deductible as long as they do not exceed the deduction limit under Code Section 404. See discussion in 23 above, the contribution requirement could be reduced due to the favorable Plan asset performance. This is no different than any other retirement plan. The contribution must be deposited by the tax return due plus any valid extension of the time to file but in no event later than 8.5 months after the plan year end. You can fund the plan in advance of the plan year end, but smaller employers need to be careful with prefunding because of the possibility of overfunding and making a non deductible contribution. Because the Cash Balance combo design utilizes a 401(k) Profit Sharing plan as well as the cash balance plan, the plan sponsor can readily reduce or eliminate the 401(k) deferrals of $18,000 (or $24,000 if over 50) and the profit sharing contribution for key employees (owners and certain officers) on an annual basis. This could provide up to a $59,000 annual amount of flexibility to the plan on an annual basis. Eliminating or reducing the 401(k) and Profit Sharing contributions to the owner may provide some relief in employee costs as well. Otherwise the Cash Balance formula can be amended if changed prior to the participants accruing a benefit. In other words, you need to make these decisions on a prospective basis not on a retrospective basis. Also if the business is an S-Corp the owner may be able to adjust their salary downward and take more compensation in the form of a dividend. Dividends are not eligible for retirement plan benefits so this would have an effect of reducing the Cash Balance contribution for the owner without amending the plan s benefit formula. The 401(k) Profit Sharing plan could have participant loan, hardship, and in service withdrawal provisions. It is important to note that The Defined Benefit/Cash Balance plan would require a distributable event to occur in order to take funds from that account. Under both a 401(k) and defined benefit/cash balance plan, distributable events are, termination of employment, disability, death, and termination of the plan. A defined benefit plan can offer loans as well as provide for in service distributions (at age 62). The plan document would need to provide for these options. The plan assets are eligible for rollover to an IRA, or participants can request the plan sponsor to either purchase an annuity contract on their behalf or distribute their plan benefit in cash. Unless the distribution is an eligible Roth Distribution any cash distribution will be subject to income taxes and possibly an early withdrawal penalty Verisight, Inc.

38 Question 30 What are the Cash Balance assets normally invested in? 31 What is the tax treatment of the contributions? 32 If I pay bonuses to the employees does that increase the amount allocated to them within the Cash Balance combo plan? Answer That is up to the plan sponsor and investment advisor, but often times they are held in a brokerage account and managed with a conservative rate of return objective. A common target would be a 4% - 6% return with the focus being primarily on managing downside risk. The contributions are a deduction to the company and tax deferred to the plan participants. In the 401(k) portion of the plan an individual participant may elect to make ROTH contributions. There are no income limitations for ROTH within a company retirement plan. Using the ROTH provisions may be an appropriate way for an individual to diversify their tax situation at retirement. Individual plan participants should consult their advisors for a better understanding of tax deferred and ROTH accounts. Yes it would. Bonuses typically count towards the calculation of retirement plan benefits. As an alternative you could consider reducing your bonuses and providing higher retirement benefits instead. Bonuses paid to employees increase payroll taxes. Retirement plan benefits paid by the business are not subject to payroll taxes. If the bonuses were eliminated completely then the business would save payroll taxes they would otherwise have to pay (usually the savings will be 1.45% of pay Medicare tax) However, the plan document would have to allow for the exclusion of bonuses and the plan would need to pass the non discrimination compensation test since this definition of compensation does not meet a safe harbor definition as defined in Code Section You make it sound like the Cash Balance & 401(k) Profit Sharing combo design can work for plan sponsors with older employees, the market risk is minimized, the contributions can be sizeable, and that the plan still has a degree of flexibility. What is the downside? So what types of businesses are good candidates for the Cash Balance combo plan design? When does the plan need to be set up by? How long does it take to draft a plan? This type of plan design can be a very powerful tax planning tool for a plan sponsor, but this is a commitment. A Cash Balance plan is not suitable for companies that do not have a track record of profits to fund the plan. Businesses with unpredictable results on a year to year basis are usually not good candidates for this type of plan design. We typically look for companies that have high profits and can take advantage of the large deductible contributions. It is also best to look for companies with a ratio of 1 owner to every employees. The decision whether to implement the plan or not is usually a tax driven discussion. We know that the more employees there are in relation to the number of owners the tax benefits start to diminish because the cost of providing benefits to the employees increases with each additional person in the plan. The plan document must be signed before the end of the client s tax year. We ask that we have about a month to get all of the documentation in place Verisight, Inc.

39 Question Answer 36 How much do these plans cost to set up and run? All plans are priced on a case-by-case basis, but the largest factor is the number of plan participants. We will reduce the client s cost by any revenue sharing that is paid to Verisight from a Financial Institution that holds the assets of the plan. We have a typical turnaround time of 48 hours to provide quotes. 37 What types of distributions options are allowed for participants when they separate from service? Depending upon plan design, a participant might receive a lump sum rollover to IRA or another qualified plan; annuity purchase to provide periodic payments; or lump sum cash distribution less tax withholdings of Federal and possibly State taxes 38 What is a 412i plan and what are the benefits/issues with them? 412i is a Defined Benefit Plan that is funded with life insurance products; annuity investment or life insurance (universal, whole life, combination of both). The benefits are that there is no actuarial valuation report determining the minimum funding requirements, no variable premium owed to the PBGC, and the theoretical value of the product is the amount distributed to the plan participants. The main issue or cause for IRS scrutiny is that many of these plans have been designed in such a way there have been excessive amounts of product purchased that can exceed the minimum incidental death benefit rules as well as the 415 maximum benefit rules. The plan could be over funded due to a death of a key plan participant. 39 Who should I contact if I have more questions about DB Plans? Larry S. Butcher, EA Actuary Principal Newport Group, Inc. 135 South. LaSalle Street, Suite 2225, Chicago, IL Phone: Fax: Cell: Larry.Butcher@newportgroup.com Verisight, Inc.

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