1. Copyright © 2006, The American College. All rights reserved. Used with permission. Copyright © 2007, The American College. All rights reserved. Used with permission. Planning for Retirement Needs SEPs, SIMPLEs, and 403(b) Plans Chapter 6

2. Copyright © 2006, The American College. All rights reserved. Used with permission. Copyright © 2007, The American College. All rights reserved. Used with permission. Chapter 6: SEP, SIMPLE, 403(b) SEP SIMPLE 403(b) plan

3. Copyright © 2006, The American College. All rights reserved. Used with permission. Copyright © 2007, The American College. All rights reserved. Used with permission. SEP Eligibility 21 3 years of service in last five with $500 (2007) Full and immediate vesting Discretionary contributions Allocation as level percent of compensation or integrated with Social Security (no other choices)

4. Copyright © 2006, The American College. All rights reserved. Used with permission. Copyright © 2007, The American College. All rights reserved. Used with permission. SEP Salary deferrals (only in grandfathered- pre ’97 plans) Simple document (IRS form available) and no reporting Funded with IRAs (no loans, life insurance)

5. Copyright © 2006, The American College. All rights reserved. Used with permission. Copyright © 2007, The American College. All rights reserved. Used with permission. SIMPLE Employer cannot maintain any other tax- advantaged plan Employer has 100 or fewer employees Eligibility—must cover those who earn $5,000 in two prior years Defer $10,500 (for 2007) Additional $2,500 deferral for those over age 50

6. Copyright © 2006, The American College. All rights reserved. Used with permission. Copyright © 2007, The American College. All rights reserved. Used with permission. SIMPLE Employer contribution must be either –100 percent match on first 3 percent deferral (reduce to 1 percent) –2 percent nonelective for all eligible employees Funded with IRAs –no loans –no life insurance

7. Copyright © 2006, The American College. All rights reserved. Used with permission. Copyright © 2007, The American College. All rights reserved. Used with permission. Comparison between Profit-Sharing and SEP Plans FeatureProfit-SharingSEP CoverageMust satisfy the coverage requirements of 410(b)—which allow some exclusions Must cover all employees that have earned $500 in any three of the five previous years. VestingProfit-sharing contributions can use statutory vesting schedules. Immediate and full vesting on all accounts. Contribution Limits 415(c) limit ($45,000 in 2007). 25% deduction limit FlexibilityDiscretionary contributions.Discretionary contributions Participant loans YesNo Withdrawal restrictions Plan can allow for liberal withdrawals. Withdrawals at any time Investment limitations Only limited by fiduciary rules including prohibited transaction rules. Limited by prohibited transaction rules and IRA prohibitions on life insurance and collectibles

8. Copyright © 2006, The American College. All rights reserved. Used with permission. Copyright © 2007, The American College. All rights reserved. Used with permission. 401(k) vs SIMPLE Feature401(k)SIMPLE CoverageMust satisfy the coverage requirements of 410(b)—which allow some exclusions Must cover employees that have earned $5,000 in any two previous years. VestingEmployee full vesting. Profit-sharing statutory vesting. Matching top-heavy. Immediate and full vesting on all accounts. Deferral limits$15,500 (as indexed for 2007) $5,000 catch-up contribution (2007) $10,500 (as indexed for 2007 $2,500 catch-up contribution (2007) Contribution flexibility Matching contributions and/or non-elective profit-sharing contributions. Choice between a stated matching contribution or a non-elective contribution. Total contributionsSalary deferrals plus employer contributions total $45,000 (limit of 2007) Total contribution can equal salary deferral plus the stated employer contribution. Nondiscrimination testing. ADP test applies to salary deferrals. ACP applies to matching contributions. Profit- sharing satisfy 401(a)(4) No nondiscrimination testing required. Employer contributions are subject to very specific limits. Participant loansYesNo Withdrawal restrictions Hardship withdrawals on the salary deferral account. More liberal on the profit- sharing and matching Withdrawals at any time. However, as with any distribution they subject to income tax consequences. Investment restrictions Only limited by fiduciary rules including prohibited transaction rules. Limited by prohibited transaction rules and IRA prohibitions on life insurance and collectibles

9. Copyright © 2006, The American College. All rights reserved. Used with permission. Copyright © 2007, The American College. All rights reserved. Used with permission. 403(b) Plans Only established by 501(c)(3) and public schools Can’t cover independent contractors Funded with annuities and mutual funds

10. Copyright © 2006, The American College. All rights reserved. Used with permission. Copyright © 2007, The American College. All rights reserved. Used with permission. 403(b) Plans Loans In-service withdrawals upon financial hardship Must cover employees willing to defer $200

11. Copyright © 2006, The American College. All rights reserved. Used with permission. Copyright © 2007, The American College. All rights reserved. Used with permission. 403(b) Contribution Limits Same salary deferral limit as 401(k) Total contributions subject Code Sec. 415 dollar limit Additional catch for 15 years of service

12. Copyright © 2006, The American College. All rights reserved. Used with permission. Copyright © 2007, The American College. All rights reserved. Used with permission. 403(b) Plans Only with Employee Salary Deferrals Not covered by ERISA Relationship between employee and service provider

13. Copyright © 2006, The American College. All rights reserved. Used with permission. Copyright © 2007, The American College. All rights reserved. Used with permission. 403(b) Plans with Employer Contributions Covered under ERISA Must meet qualified plan coverage requirements

14. Copyright © 2006, The American College. All rights reserved. Used with permission. Copyright © 2007, The American College. All rights reserved. Used with permission. 403(b) Plans with Employer Contributions Covered under ERISA Must meet qualified plan coverage requirements

15. Copyright © 2006, The American College. All rights reserved. Used with permission. Copyright © 2007, The American College. All rights reserved. Used with permission. Which Plan is Best? Survey, Inc. wishes to establish a tax-advantaged plan for its employees. The company is relatively new, and profits fluctuate wildly. The employer would like to reward employees when the company does well, and is somewhat concerned that the company has no retirement plan at all, which might make it difficult to attract experienced people to work there. The company is concerned about the costs of maintaining the plan.

16. Copyright © 2006, The American College. All rights reserved. Used with permission. Copyright © 2007, The American College. All rights reserved. Used with permission. Which Plan is Best? Near Retirement, Inc. is a closely-held company whose original owners are about to retire. The company has a defined-benefit pension plan, which has already served the purpose of providing benefits for the current owners. Assume that the owners do not have family members interested in the business, the employees have worked for them for a long time, and that the employees are potential buyers of the company.

17. Copyright © 2006, The American College. All rights reserved. Used with permission. Copyright © 2007, The American College. All rights reserved. Used with permission. Which Plan is Best? Stable, Inc. has had a modest money- purchase pension plan for a long time. Participation in the plan precludes employees from participating in a tax- deferred IRA. The company realizes that the plan is not adequate but can’t afford additional retirement benefits.

18. Copyright © 2006, The American College. All rights reserved. Used with permission. Copyright © 2007, The American College. All rights reserved. Used with permission. Which Plan is Best? Teeny-tiny Corp. has four employees. The owner realizes that competing employers are sponsoring 401(k) plans. To compete with the other employers the owner would like a similar plan but is not willing to pay the administrative expenses associated with that type of plan.

19. Copyright © 2006, The American College. All rights reserved. Used with permission. Copyright © 2007, The American College. All rights reserved. Used with permission. True/False Questions A SEP may provide that participants only become fully vested after completion of 5 years of service. An employer does not have to make a contribution to a SEP for a part-time employee earning $5,000 with 4 years of employment. A sponsor of a SIMPLE can make contributions on a discretionary basis. The assets of a 403(b) plan may be invested in any type of investment option available to a qualified plan.

20. Copyright © 2006, The American College. All rights reserved. Used with permission. Copyright © 2007, The American College. All rights reserved. Used with permission. True/False Questions A sponsor of a SIMPLE can make contributions on a discretionary basis. The assets of a 403(b) plan may be invested in any type of investment option available to a qualified plan.