1 Retirement Planning for Financial Planners Chapter 3: Qualified Plan Overview

2 Defined Benefit vs. Defined Contribution CharacteristicsDefined BenefitDefined Contribution What is the Annual Contribution Limit? Not less than the unfunded current liability 25% of Covered Compensation Who assumes the investment risk? EmployerEmployee How are forfeitures allocated?Reduce Plan Costs Reduce plan costs or allocate to other participants Is the plan subject to Pension Benefit Guaranty Corporation (PBGC) coverage? Yes (except professional firms with less than 25 employees) No Does the plan have separate investment accounts? No, they are commingled Yes, they are usually separate Can credit be given for prior service? YesNo

3 Pension Plans vs. Profit Sharing Plans CharacteristicPension PlanProfit Sharing Plan Legal Promise of the Plan Paying a pension at retirement Deferral of Compensation In-Service Withdrawals? No*Yes (after two years) Mandatory Funding?Yes**No Investment in Employer Securities 10%100% QJSA & QPSA?YesNo

4 Qualified Plans Pension Plans Profit Sharing Plans  Defined Benefit Pension Plans  Cash Balance Pension Plans  Profit Sharing Plans  Stock Bonus Plans  ESOPs  401(k) Plans  Money Purchase Pension Plans  Target Benefit Pension Plans  Thrift Plans  New Comparability Plans  Age-Based Profit Sharing Plans Defined Benefit Plans Defined Contribution Plans

5 Advantages of Qualified Plans  Taxation of Contributions to Plans Income Tax Deferred Payroll Taxes Avoided on Employer Contributions  No avoidance for employee elective deferrals.  Tax Deferral on Earnings and Income  ERISA Protection Anti-Alienation  Prohibits any action that may cause the plan assets to be assigned, garnished, levied, or subject to bankruptcy proceedings. Protection from Employers.

6 Qualification Requirements  Plan Document  Eligibility  Coverage  Vesting  Special Qualification Requirements apply to: Top-Heavy Plans Cash or Deferred Arrangements (CODAs)  Limitation on Benefits and Contributions

7 Eligibility  Age 21 and one year of service (1,000 hours worked during one plan year). Special election to require two years of service – 100% vesting requirement.  Plan Entrance Date Generally plans have two entrance dates during the year such as 1/1 and 7/1  Can’t make eligible employees wait more than six months to enter plan  Could also have quarterly or monthly entrance dates

8 Coverage (1 of 5)  Can exclude: Ineligible employees. Employees covered under a collective bargaining agreement. Nonresident alien employees that do not perform services in the U.S.

9 Coverage (2 of 5)  Plan must be nondiscriminatory All qualified plans must pass at least ONE of the following tests:  Exhibit 3.8 on page 104 Coverage TestRequired to Pass Safe Harbor Test  70% of NHC (peons) Covered Ratio % Test% of NHC (peons) Covered % of HC (top dogs) Covered Average Benefits TestAB % of NHC (peons) Covered AB % of HC (top dogs) Covered And Nondiscriminatory Test   70%

10 Coverage (3 of 5) Owner EmployeesNon-owner Employees Either An owner of >5%* Compensation in excess of $115,000 for 2014** Or Compensation in excess of $115,000 for 2014 ** *Anyone who owns more than 5% of a company’s stock or capital ** If elected, add “and in top 20% of employees ranked by salary” Who is a Highly Compensated Employee (top dog)?

11 Coverage (4 of 5)  5% Owner Defined Individually owned shares, plus Attribution of shares owned by:  Spouse  Children  Grandchildren  Parents

12 Coverage (5 of 5) 50/40 TestPlan must cover the lesser of:  50 employees  40% of employees Defined Benefit Plans must additionally pass the 50/40 Test See Exhibit 3.9 on page 105

13 Vesting  See Vesting Schedules, page 109.  May always be more beneficial towards employees  In general for defined contribution plans: 100% for employee contributions Employer contributions:  3 year cliff or  20% in years 2 to 6

14 Special Plan Requirements Top-Heavy Plans  Top heavy: >60% account balances or accrued benefits for key employees instead of peons  Key Employee A greater than five percent owner, or A greater than one percent owner with compensation in excess of $150,000 (not indexed), or An officer with compensation in excess of $170,000 for  Officer determined based on all facts

15 Special Plan Requirements Top-Heavy Plans  Required Vesting For plan years beginning after 2006, all qualified defined contribution plans will vest on a 3 year cliff or 2 to 6 year graduated schedule, without regard to the plan’s top-heavy status.  Funding Defined Contribution Plans  Employer must provide non-key employees with a contribution equal to at least 3% of employees compensation l Except if key employee’s contribution is less than 3%

16 Special Plan Requirements Top-Heavy Plans (3 of 3)  Defined Benefit Plans Employer must provide non-key employees with a benefit equal to 2% per years of service (limit 20%) times employees average annual compensation.

17 Plan Limitations on Benefits and Contributions  Covered Compensation $260,000 for 2014  Defined Benefit Plan Annual Benefits Lesser of  $210,000 for 2014  100% of the average of the employee’s three highest consecutive years salary

18 Plan Limitations on Benefits and Contributions (2 of 3)  Defined Contribution Plans Maximum contribution for the year  Lesser of: 100% of an employee’s compensation, or $52,000 for 2014 Limit consists of  Employer Contributions, and  Employee Contributions, and  Any forfeitures allocated to participant’s account

19 Plan Limitations on Benefits and Contributions  Multiple Plan Limitation An employer maintains both a defined benefit plan and a defined contribution plan  If contribute less than 25% of compensation to defined benefit plan, can contribute to defined contribution plan until combined balance is 25%