Workshop 4 Combination Design

Transcription

1 Workshop 4 Combination Design Sara DeFilippo Dunbar, Bender & Zapf Inc. Karen Smith Nova 401(k) Associates Why? 1

2 Agenda Employer match PBGC premiums Mortality changes (time permitting) Not on Agenda Issues related to cash balance interest crediting rates Larry is discussing in Workshop 6 Use of employer matches in combination plan design 2

3 Employer Match Hypothesis: Employer match is under utilized in cb combo designs. Employer Match - Why? Why look at employer match? Often does not cost much Employees irrationally love matches May incent NHCEs to defer more Employer Match - Why? Why look at employer match (cont)? Counts towards top heavy May reduce required gateway Primarily defined benefit in nature Withdrawn proposed 401(a)(4) regulations 3

4 Employer Match Gateway issues Primarily db in nature Triple stack match Employer Match Safe Harbor The free 4% For safe harbor 401(k) plans (non-elective or matching) may have a discretionary matching contribution that does not exceed 4.0% of compensation So this can be evaluated at year-end as you complete your 401(a)(4) testing Employer Match ACP Test For plans subject to ACP testing the employer match must satisfy the ACP test Remember that disproportionate NHCE employer matches must be excluded from ACP test BRF testing 4

5 Employer Match - Gateway Two ways employer match may help with the gateway: 1. Lower required gateway by lowering HCE equivalent allocation rate 2. Eliminate some NHCEs from needing to receive gateway Employer Match - Gateway Profit sharing and safe harbor nonelective contributions count toward Deferrals and employer match do not count toward allocation rate Shifting HCE profit sharing to employer match may lower required gateway Employer Match - Gateway Highest HCE Equivalent Allocation Rate Under 15% Minimum Gateway 1/3 of HCE rate 15-25% 5.0% 25-30% 6.0% 30-35% 7.0% 35% or more 7.5% 5

6 Employer Match Reduce Gateway Minimum Gateway HCE Equivalent Allocation in CB Plan 27% Profit Sharing Contribution 6% Total 33% Required Gateway 7% Employer Match Reduce Gateway HCE Equivalent Allocation in Cash Balance Plan Minimum Gateway 27% Profit Sharing Contribution 2% Employer Match 4% Total Equivalent Allocation Rate (disregard match) 29% Required Gateway 6% Employer Match Reduce Gateway Giving the additional employer match to the HCE will increase the match cost for the NHCEs (unless no NHCE defers) So, is total cost reduced? Depends on demographics, but sometimes yes. 6

7 Employer Match - Gateway Only NHCEs who benefit need to be provided the gateway. Who is benefiting? Safe harbor non-elective or QNEC Profit sharing DB allocation Top heavy minimum as non-elective contribution Not benefiting if only receive a match Employer Match - Gateway So, how does this help us? If we have a group of higher paid NHCEs who are not benefiting in the cash balance plan, maybe design with a generous safe harbor match instead of a safe harbor non-elective contribution. Case Study 1 Paraprofessionals (all non-key, NHCEs) are excluded from the cash balance plan and only participate in 401(k) plan. Does anyone disagree that the top heavy minimum for the paraprofessionals is 3% of compensation instead of 5% of compensation? 7

8 Case Study 1-No Match Design with a 3% non-elective safe harbor All NHCEs must receive gateway PS of 4.5% for paraprofessionals PS of 3.6% for clerical Total cost of staff contribution -$49,882 Total owner deferral - $432,000 Case Study 1-No Match Name Age HCE Comp 401k SHNE PS CB Total Owner 1 57 Y 265,000 24,000 7,950 12, , ,000 Owner 2 62 Y 265,000 24,000 7,950 12, , ,000 Owner 3 59 Y 265,000 24,000 7,950 12, , ,000 Para 1 47 N 115,000 8,000 3,450 5, ,625 Para 2 57 N 110,000 18,000 3,300 4, ,250 Para 3 52 N 100,000 7,500 3,000 4, ,000 Para 4 62 N 100, ,000 4, ,500 Para 5 42 N 95,000 7,500 2,850 4, ,625 Clerical 1 37 N 20, ,820 Clerical 2 32 N 22, ,952 Clerical 3 34 N 25, ,400 Clerical 4 41 N 30, , ,480 Clerical 5 47 N 30, , ,380 1,442, ,150 43,260 64, , ,032 Case Study 1-Match Re-design with a 100% on the first 4% of compensation deferred safe harbor For 4 of the 5 paraprofessionals, top heavy is satisfied with the employer match. Pick up a small additional cost for the clerical staff who deferred Total cost of staff contribution 36,332 8

9 Case Study 1-Match Name Age HCE Comp 401k Match PS CB Total Owner 1 57 Y 265,000 24,000 10,600 9, , ,000 Owner 2 62 Y 265,000 24,000 10,600 9, , ,000 Owner 3 59 Y 265,000 24,000 10,600 9, , ,000 Para 1 47 N 115,000 8,000 4, ,600 Para 2 57 N 110,000 18,000 4, ,400 Para 3 52 N 100,000 7,500 4, ,500 Para 4 62 N 100, , ,500 Para 5 42 N 95,000 7,500 3, ,300 Clerical 1 37 N 20, , ,820 Clerical 2 32 N 22, , ,952 Clerical 3 34 N 25, , ,650 Clerical 4 41 N 30, , ,480 Clerical 5 47 N 30, , ,280 1,442, ,150 49,750 44, , ,482 Case Study 1 - Summary Summary of Results Staff Contribution with SH 49,882 Non-Elective Staff Cost with SH Match 36,332 Savings 13,550 Case Study 1 Is it right that the paraprofessionals who deferred receive less than the paraprofessional who chose to defer nothing? 9

10 Match Primarily DB If a plan is primarily DB in nature, then the gateway is satisfied. If the DC equivalent accrual rate is less than the DB accrual rate for more than ½ of the NHCEs, then the plan is primarily db in nature. Employer match not included in accrual rate Match Primarily DB How do you make a plan primarily db? More in db Less in profit sharing Fewer people in dc More people in db Match Primarily DB How do you provide less in profit sharing? Satisfy top heavy through employer match It even helps if top heavy is only partly satisfied through employer match. 10

11 Case Study 2 No match Name Age HCE Comp 401k SHNE PS CB Total John Owner 62 Y 265,000 24,000 7,950 8, , ,500 Sally Wife 57 Y 150,000 24,000 4,500 12,000 75, ,500 Lucy Manager 52 N 75,000 5,000 2,250 2, ,783 Connie Colleague 41 N 60,000-1,800 2, ,776 Matt Employee 32 N 50,000-1,500 1, ,105 Judy Worker 39 N 50,000 1,500 1,500 1, ,605 Bee Bookkeeper 65 N 40,000 2,000 1,200 1, ,434 56,500 20,700 30, , ,703 Case Study 2 No match All NHCEs receive gateway of 6.71% Total deferral for owners is $331,000 Total staff contribution is $22,203 Case Study 2 SH match Redesign with SH matching formula- 200% on the first 3% deferred 11

12 Case Study 2 SH Match Name Age HCE Comp 401k SH Match PS CB Total John Owner 62 Y 265,000 24,000 15,900 16, , ,300 Sally Wife 57 Y 150,000 24,000 9,000-75, ,000 Lucy Manager 52 N 75,000 5,000 4, ,250 Connie Colleague 41 N 60, , ,750 Matt Employee 32 N 50, , ,250 Judy Worker 39 N 50,000 1,500 3, ,250 Bee Bookkeeper 65 N 40,000 2,000 2, ,150 56,500 34,800 21, , ,950 Case Study 2 SH Match Name Age HCE Comp 401k SH Match PS CB Total John Owner 62 Y 265,000 24,000 15,900 16, , ,300 Sally Wife 57 Y 150,000 24,000 9,000-75, ,000 Lucy Manager 52 N 75,000 5,000 4, ,250 Connie Colleague 41 N 60, , ,750 Matt Employee 32 N 50, , ,250 Judy Worker 39 N 50,000 1,500 3, ,250 Bee Bookkeeper 65 N 40,000 2,000 2, ,150 56,500 34,800 21, , ,950 Case Study 2 SH match Total deferral for owners is $339,300 (additional deferral of $8,300) Total staff contribution is $19,150 (savings of $3,053) 12

13 Case Study 2 SH match Was it worth it to save $3,053? Maybe Close to top heavy minimum Triple Stack Match Satisfy entire or large portion of the DC Section 415 limit using triple stack match Safe harbor match Fixed match Discretionary match Case Study 3 With PS Name Age HCE Comp 401k SHNE PS CB Total Owner 1 57 Y 265,000 24,000 7,950 27,050 80, ,000 Owner 2 62 Y 265,000 24,000 7,950 27,050 80, ,000 Employee 1 49 N 35,000-1,050 1, ,739 Employee 2 39 N 33, , ,596 Employee 3 25 N 27, , ,205 Employee 4 32 N 26, , ,099 Employee 5 35 N 23, ,885 Employee 6 22 N 22, ,814 Employee 7 30 N 21, ,743 Employee 8 32 N 22, ,814 Employee 9 28 N 25, , ,028 Employee N 19, ,600 Employee N 18, ,530 48,000 24,045 65, , ,053 13

14 Case Study 3 -Triple Stack Match When $35,000 is provided to HCE as profit sharing contribution: Required gateway 7.5% Total HCE deferral - $278,000 Total staff cost - $22,053 Case Study 3 -Triple Stack Match Redesign with triple stack match Safe harbor match 100% on first 4% Fixed match 87% on first 6% Discretionary match 66.67% on first 6% Case Study 3 -Triple Stack Match Works out to be a total employer match of % on first 4% deferred % on next 2% deferred So, if an employee defers 6% of compensation, the employee receives an employer match of 13.21% of compensation 14

15 Case Study 3 With TSM Name Age HCE Comp 401k Match PS CB Total Owner 1 57 Y 265,000 24,000 35,000-80, ,000 Owner 2 62 Y 265,000 24,000 35,000-80, ,000 Employee 1 49 N 35, , ,000 Employee 2 39 N 33, , ,900 Employee 3 25 N 27, , ,625 Employee 4 32 N 26, , ,550 Employee 5 35 N 23, , ,400 Employee 6 22 N 22, , ,350 Employee 7 30 N 21, , ,300 Employee 8 32 N 22, , ,350 Employee 9 28 N 25, , ,500 Employee N 19, ,200 Employee N 18, ,150 48,000 70,000 13, , ,325 Case Study 3 -Triple Stack Match When $35,000 is provided to HCE as a triple stack match: Required gateway less than TH of 5% Total HCE deferral - $278,000 Total staff cost - $16,325 Case Study 3 -Triple Stack Match Cost % Subject to Vesting Schedule Owners receive ps 22,053 55% Owners receive match 16, % Savings 5,728 N/A 15

16 Spouse HCE Young Low paid Wants to defer ABPT failed Case Study 4 43 year old owner/23 year old wife Fail ABPT husband passes rate groups on ratio percentage test Use component plan to get wife small profit sharing Use employer match to get additional deferral 331% on first 4% Case Study 4 Safe harbor match 100% on first 4% Fixed match 131% on first 4% Discretionary match 100% on first 4% 16

17 Case Study 4 Name Age HCE Comp 401k Match PS CB Total Owner 43 Y 265,000 18,000 35, , ,000 Wife 23 Y 30,000 18,000 3,972 1, ,472 Employee 1 45 N 30, , ,750 Employee 2 35 N 33, , ,900 Employee 3 21 N 27, , ,625 Employee 4 28 N 26, , ,550 Employee 5 31 N 23, , ,400 Employee 6 18 N 22, , ,350 Employee 7 26 N 21, , ,300 Employee 8 28 N 22, , ,350 Employee 9 24 N 25, , ,500 Employee N 19, ,200 Employee N 18, ,150 36,000 38,972 14, , ,547 Case Study 4 Live on the Edge Redesign to get wife to DC 415 limit Safe harbor match 100% on first 4% Fixed match 450% on first 6% Discretionary match 66.67% on first 6% Case Study 4 Name Age HCE Comp 401k Match PS CB Total Owner 43 Y 265,000 18,000 35, , ,000 Wife 23 Y 30,000 18,000 10,500 1, ,000 Employee 1 45 N 30, , ,750 Employee 2 35 N 33, , ,900 Employee 3 21 N 27, , ,625 Employee 4 28 N 26, , ,550 Employee 5 31 N 23, , ,400 Employee 6 18 N 22, , ,350 Employee 7 26 N 21, , ,300 Employee 8 28 N 22, , ,350 Employee 9 24 N 25, , ,500 Employee N 19, ,200 Employee N 18, ,150 36,000 45,500 14, , ,075 17

18 Case Study 4 Live on the Edge What happens if Employee 1 defers 6% of compensation? Wahoo! She will get the employer match of $10,500. Tiny reduction in PS Most of it subject to vesting schedule PBGC Premiums PBGC Premiums OMG! PBGC premiums are up a lot! How might this affect combination plan design? Fixed per participant premium increasing from $64 in 2016 to $80 in 2019 Variable premium rate increasing from 3% in 2016 to 4.1% in

19 PBGC Premiums Possible design implications?? Lower interest crediting rates Push benefits to profit sharing plan More carve-outs from defined benefit plans More 11g amendments for defined benefit plans More traditional defined benefit plans More floor offset plans Other? PBGC Premiums PBGC whipsaw No HATFA relief for PBGC premiums If using an interest crediting rate of 6.0% and discounting back at a lower rate for vested liability for PBGC premiums can end up with a variable premium on a well-funded plan Lower interest crediting rate? PBGC Premiums PS Benefits In many small plans, almost all of the liability is for the principal. So, to bring down the liabilities, the most impact comes from reducing the principal liability. Maybe actuaries will start by having ps maxed out and design smaller benefits for principals in db plan 19

20 PBGC Premiums Carve-outs Unless the plan document is written with surgical accuracy, there are always some NHCEs included in the plan who do not contribute to passing testing or even the plan sponsor s objectives. Including all employees is a positive from an employee communication and policy perspective. PBGC Premiums Carve-outs With the carrying costs for these individuals increasing so much due to the higher PBGC premiums, will we see increased use of very targeted carve-outs to truly minimize the number of NHCEs covered? Will carve-out use increase to keep professional groups under 25 active participants? PBGC Premiums 11g amendments Will actuaries risk the cost of an 11g amendment to prevent covering too many NHCEs? 20

21 PBGC Premiums Traditional DB The PBGC variable premium is based upon vested benefit liabilities. Congress has been pushing vesting periods shorter and shorter in DC plans and cash balance plans. PBGC Premiums Traditional DB A cash balance plan must be 100% vested after 3 years. A traditional defined benefit plan can still have a graded vested schedule of 2/6 if top heavy or 3/7 if not top heavy. A non top heavy traditional defined benefit plan can still have a five year cliff vesting schedule. PBGC Premiums Floor Offsets A $80 annual premium seems disproportionate for a NHCE who is receiving a $500ish cash balance allocation to satisfy for IRC 401(a)(26). Other than carve-outs what can you do? 21

22 PBGC Premiums Floor Offsets A participant is included in PBGC participant counts if the plan has benefit liabilities for that person Per 2001 Enrolled Actuaries Blue Book, a participant does not need to be included in the PBGC participant count if the participant s floor benefit is fully offset. PBGC Premiums Floor Offsets To satisfy 401(a)(26) on a gross basis: DB and DC plan are maintained by the same employer. The offset must have accrued under the defined contribution plan. The DC offset benefit must be provided on a reasonable and uniform basis. The DC offset benefit cannot be used to reduce any other formula. PBGC Premiums Floor Offsets Do floor offset plans provide the holy grail? Get credit for 401(a)(26) and No PBGC premium 22

23 PBGC Premiums Floor Offsets PBGC Premiums Other aspects Exclude vesting service prior to plan effective date No past service If using pre-retirement decrements, reduce ancillary benefits. Mortality Changes 23

24 Mortality Changes Expecting mortality table changes. How will this impact design and testing? Mortality Changes Cash Balance Plan If designed to be under 415 limit in past, may be able to amend plan to increase owner benefits. Traditional Defined Benefit Plan Cost will automatically increase. Mortality Changes Standard mortality table includes the applicable table under IRC 417(e) Applicable table may (?) produce bigger annuity factors than 1983 IAM F Greater offsets to gateway Easier to be primarily db 24