1. A Financial Planners Guide to Cash Balance Plans www.nyhart.com Presented by: Charles Munsell

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

3. Historical Perspective

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

5. What is a cash balance plan?

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

7. Why a Cash Balance Plan?

8. A defined benefit plan Can be leveraged with 401(k) plan Combined plans tested as one Much larger deductions available Easy to understand

9. How do they work?

10. Takes advantage of defined benefit nature of plan Takes advantage of nondiscrimination testing rules Typically designed with owner focus

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

12. How do we not discriminate? Plan must be non- discriminatory IRS provides framework for testing Take advantage of the “miracle” of compound interest

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

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

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

16. Why would a client want a cash balance plan?

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

18. Cash Balance Plan 415 Dollar Limits for 2015 AgeLimitAgeLimitAgeLimit 35$68,369 36$71,83846$117,96256$194,048 37$75,48447$123,97357$203,968 38$79,31748$130,29258$214,397 39$83,34649$136,93659$225,362 40$87,58150$143,92160$236,891 41$92,03451$151,26561$249,013 42$96,71452$158,98762$261,757 43$101,63453$167,10563$256,128 44$106,80754$175,64064$250,416 45$112,24555$184,61365$244,579

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

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

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

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

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

24. NameSalary401kDC Cash BalanceTotal *Tax Savings Dr. Martin $500,000$24,000$7,950$205,800$237,750$95,100 Employee1 $61,154$0$4,113$1,500$5,613$2,245 Employee 2 $29,023$0$4,975$726$5,701$2,280 Employee 3 $39,750$0$2,674$994$3,667$1,467 Total Staff $129,927$0$11,762$3,220$14,981$5,992 Grand Total $252,731$101,092 Percent To Target94% *Assuming a 40% tax rate; taxes are deferred only.

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

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

27. Name401kDC Cash BalanceTotal *Tax Savings Each Partner $18,000 - $24,000 $35,000$51,000 - $250,000 $104,000 - $309,000 Total Partners $237,000$440,500$1,460,700$2,138,200$855,280 Total Staff $0$88,480$6,300$94,780$37,912 Grand Total $237,000$528,980$1,467,000$2,232,980$893,192 Percent To Target96% *Assuming a 40% tax rate; taxes are deferred only.

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

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

30. ANY QUESTIONS? This concludes our discussion Charles Munsell charles.munsell@nyhart.com (317) 845-3570