Cash Balance Plans Maximizing Retirement Assets and Minimizing Your Tax Burden

Cash Balance Plans Maximizing Retirement Assets and Minimizing Your Tax Burden August 20, 2014 Presented by: Jason Casey, Senior Vice President Larry Butcher, EA, Actuary Principal

Cash Balance Plans Maximizing Retirement Assets and Minimizing Your Tax Burden August 20, 2014 Presented by: Jason Casey, Senior Vice President Larry Butcher, EA, Actuary Principal

Agenda The Issue: Saving for Retirement (beyond the traditional 401(k) or IRA) A Solution: Cash Balance Plans Overview Case Studies Questions 4

American Taxpayer Relief Act (ATRA) What a Relief! The Facts Taxes are increasing in three different areas and are slightly different depending on your income threshold. Below is a general summary of tax increases by category at the highest income bracket: Tax Increase Categories: 1. Federal Income Tax (from 35.0% to 39.6%) 2. Medicare Tax (from 2.9% to 3.8%) 3. Capital Gains Tax (from 15% to 23.8%) 5

Who is Most Impacted by the Passage of ATRA? High-earning individuals (those making in excess of $250,000) have seen a significant increase in their overall tax liability: Small business owners Professional services (doctor s, lawyers, etc.) These individuals and families are going to be faced with a tax bill that is $10,000 or $20,000 (or more) in additional taxes 6

Option One Pay Uncle Sam an additional $20,000 a year Option Two Invest $20,000 a year in a taxdeferred cash balance plan Result after 20 years: $0.00 Result after 20 years: $700,000.00* * Assuming a 5.5% annual rate of return 7

Retirement Plan Contribution Limits* $149,000 $206,500 $52,000 $57,500 Profit Sharing 401(k) Cash Balance Cash Balance + 401(k) * 2014 plan maximum contributions for a 53 year-old including catch-up contributions. 8

More Than Just a Tax Strategy Cash balance plans combined with a 401(k) or profit sharing plans offer the highest allowable contributions to a qualified plan. Individuals are able to save, on a tax deferred basis, in excess of $2,000,000+ in a matter of 7-10 years! 9

Growth Rate of Cash Balance Plans Compared to 401(k) Plans Annual Growth Rate of Plan Implementations Cash Balance: 401(k): +12% -3% (Sustained year-over-year double digit growth) Source: public available 5500 data; 2011 most recent available year 10

Top 5 States and Growth Trends Rank State % of National Total: Cash Balance Plans 1 CA 12% 2 NY 11% 3 OH 7% 4 IL 7% 5 NJ 6% Top 5 States Rank State (national rank) % Annual Increase: Cash Balance Plans 1 MA (10) 20% 2 IL (4) 16% 3 TX (6) 16% Top Growth States 11

Why are Cash Balance Plans Increasing in Popularity? 1. PPA Legislation Passed in 2006 Added clarity and simplified administration 2. Retirement Savings Crisis Average 401k balance in 2013: ~$88,000 Medicare-eligible married couple retiring at age 65 should plan for $360,000 in retirement savings to cover medical costs (2013 study by the Employee Benefits Research Institute) 3. Tax Climate The American Taxpayer Relief Act Federal income tax rates for the highest wage earners increased from 35% to 39.4% Higher Medicare tax (0.9%) and Medicare surcharge (3.8%) on capital gains for high wage earners Higher capital gains tax (increase to 20% from 15%) for highest wage earners Cash Balance Plans now make up over 25% of all DB plans in place today, compared to <10% as recently as 2007 12

Who are Implementing Cash Balance Plans and Why? About 85% of current cash balance plans are with small businesses (<100 employees) Why so appealing? Fastest way to catch-up on retirement savings Ideal for small business owners who have sunk most of their assets into their business and are behind on their retirement savings plan Tax efficiency Significant tax savings that can far outweigh the increased compensation cost of staff Attraction and retention of key employees Asset protection ERISA protects all qualified plan assets from creditors in the event of bankruptcy or lawsuit 13

A DC plan allocates contributions to accounts. Maximum Annual Contribution = $52,000 in 2014 for Participant at any age. A DB (Traditional) plan specifies benefits to be paid to participants. Estimated Annual Contribution required to fund maximum benefit at 65 for a participant age 55 is $127,500 (using 5.5% interest) Contributions are adjusted to reflect investment performance. DC Plan Model DB Plan Model Contribution Account Balance Benefit Contribution Account Balance Benefit Contribution Account Balance Contribution Benefit Contribution Account Balance Benefit Contribution Account Balance Benefit Individual Account Returns Pooled Account Returns 14

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

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 2014. This translates to a benefit amount at Normal Retirement Age of $17,500.00 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

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

The Participant sees a benefit that means something A defined benefit plan statement. XYZ Defined Benefit Plan Personal Statement for Participant G As of 12/31/2014 Your Estimated Monthly Benefit at Normal Retirement Date From Your Pension Plan $17,500.00* 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 12/31/2014 Account Balance 01/01/2014 $335,412.80 Additions Plan Contributions $164,000.00 Investment Earnings $15,160.66 Account Balance 12/31/2014 $514,573.46 18

When does a Cash Balance Plan make sense? Any size 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/owners are already contributing up to the profit sharing / 401(k) limit and want to contribute more. Works best for individuals over the age of 45 Cannot have a normal retirement age under 62 unless the industry norm is earlier; For example - actors, entertainers, professional athletes, health issue of owner 19

Cash Balance Drawbacks More costly to set up. Just became eligible for volume submitter. Form 5300 and higher user fee if filing for a Favorable Determination Letter. More costly to maintain than DC plan-need annual actuarial certification and possible financial disclosure (ASC 715) Staff costs can be high for stand alone plans. Using combined plan design can shift costs to the DC plan. Minimum Funding with Required Contributions. Not best design for sponsor who needs flexibility. Accelerated vesting required (3 year minimum) 20

Non PBGC Covered Plans Professional service employers - means any proprietorship, partnership, corporation, or other association or organization (i) owned or controlled by professional individuals or by executors or administrators of professional individuals, (ii) the principal business of which is the performance of professional services Professional individuals includes but is not limited to, physicians, dentists, chiropractors, osteopaths, optometrists, other licensed practitioners of the healing arts, attorneys at law, public accountants, public engineers, architects, draftsmen, actuaries, psychologists, social or physical scientist, and performing artists. Also, if you are a professional service employer as defined above and have no more than 25 active participants, then you are not a PBGC covered plan. 21

Pros vs. Cons of PBGC Covered Plan Pros No 404 deduction limits for DB/DC employer sponsored plans (25/6) Larger deduction could outweigh additional administrative costs and PBGC costs Cons Premium of $49 per participant with an undistributed benefit in the plan plus a variable amount (difference between liabilities and assets in the plan multiplied by.0014)-map 21 law increasing premiums each year (2016 premium will be $64 per participant) Must file DB plan termination with the PBGC-additional cost Additional filings/notice to PBGC if plan not well funded 22

Estimated first year maximum cash balance credits for 2014, rounded to nearest $100 Age NRA 65 NRA 62 Age NRA 65 NRA 62 64 $232,400 $ 50 $117,400 $145,000 63 $221.400 $ 49 $111,800 $138,100 62 $210,800 $ 48 $106,500 $131,500 61 $200,800 $248,000 47 $101,400 $125,200 60 $191,200 $236,200 46 $96,600 $116,400 59 $182,100 $224,900 45 $92,000 $119,300 58 $173,400 $214,200 44 $87,600 $108,200 57 $165,200 $204,000 43 $83,400 $103,000 56 $157,300 $194,300 42 $79,400 $98,100 55 $149,800 $185,000 41 $75,600 $93,400 54 $142,700 $176,200 40 $72,000 $89,000 53 $135,900 $167,800 39 $68,600 $84,700 52 $129,400 $159,800 38 $65,300 $80,700 51 $123,200 $152,200 37 $62,200 $76,900 23

Cash Balance Plan Design Considerations We can reduce number of participants in Cash Balance Plan by classification (owners, nurses, administrative staff, CEO etc.) Must meet minimum coverage under Code Section-lesser of 40% of eligible staff or 50 participants Must provide meaningful benefits Eligibility-age 21 and 1 year of service Normal Retirement Age- later of age 62 and 5 years of participation in Plan Provide for in service distribution at age 62 3 year cliff vesting schedule-new plans can exclude past service for vesting (everyone starts at 0%) 5% interest crediting rate on hypothetical contributions Hypothetical contributions can be flat dollar amount ($5,000) or Percentage of Compensation 1000 hours needed to receive hypothetical contribution No loans-use 401k for this option Uniform definition of compensation-can exclude bonuses, overtime etc. but must pass compensation non-discrimination test 24

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 25

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 $52,000 20% $57,500 20% $57,500 20.0% Dr. Baker $52,000 20% $57,500 20% $57,500 20.0% Dr. Cox $52,000 20% $52,000 20% $52,000 20.0% Doctor total $156,000 $167,000 $167,000 Staff $165,400 20% $109,704 13.20% $41,350 5% Total $321,400 $276,704 $208,350 ¹Excludes catch-up contributions ²Assumes safe harbor 401(k) with QNEC of 3% and profit sharing contribution of 10.27% 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 $52,000 20% $57,500 20% $57,500 20.0% Dr. Baker $52,000 20% $57,500 20% $57,500 20.0% Dr. Cox $52,000 20% $52,000 20% $52,000 20.0% Doctor total $156,000 $167,000 $167,000 Staff $165,400 20% $109,704 13.14% $41,350 5% Total $321,400 $276,704 $208,350 ¹Excludes catch-up contributions ²Assumes safe harbor 401(k) with QNEC of 3% and profit sharing contribution of 10.27% 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)² % of pay¹ Class-based profit sharing plan and 401(k) % of pay¹ Dr. Adams $52,000 20% $57,500 20% $57,500 20.0% Dr. Baker $52,000 20% $57,500 20% $57,500 20.0% Dr. Cox $52,000 20% $52,000 20% $52,000 20.0% Doctor total $156,000 $167,000 $167,000 Staff $165,400 20% $109,704 13.20% $41,350 5% Total $321,400 $276,704 $208,350 ¹Excludes catch-up contributions ²Assumes safe harbor 401(k) with QNEC of 3% and profit sharing contribution of 10.27% 28

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 DB/DC Combo Plan³ % of pay¹ Dr. Adams $52,000 20% $57,500 20% $234,760 90.3% Dr. Baker $52,000 20% $57,500 20% $199,760 76.8% Dr. Cox $52,000 20% $52,000 20% $125,760 48.4% Doctor total $156,000 $167,000 $560,280 Staff $165,400 20% $109,704 13.14% $82,700 10% Total $321,400 $276,704 $642,980 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 29

Thank you for your time! Questions? Contact us: Info@verisightgroup.com 855-751-2127 30

Appendix - Common Frequently Asked Questions 31

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? 4 5 6 7 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. 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? 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. 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.

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? 13 14 15 16 17 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.

19 20 21 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 5. 23 What happens if there is a shortfall in the assets? What happens if the investments earn more than what is expected? 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.

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 $17,500 (or $23,000 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 $57,500 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.

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 414. 33 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? 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. 34 So what types of businesses are good candidates for the Cash Balance combo 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 10 15 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. 35 When does the plan need to be set up by? How long does it take to draft a 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.

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 VERISIGHT, Inc. 135 South. LaSalle Street, Suite 2225, Chicago, IL 60603-4185 Phone: 312-488-6756 Fax: 312-488-6756 Cell: 630-640-0818 email: Larry.Butcher@verisightgroup.com www.verisightgroup.com