©2015, College for Financial Planning, all rights reserved. Session 13 Plan Selection CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits

Session Details Module7 Chapter(s)6 LOs7-7 Analyze and choose the best retirement plan for a given scenario. 13-2

Plan Selection Qualified & Nonqualified Plans Qualified PlansNonqualified Plans Pension Plans Profit Sharing Plans (DC) Tax-Advantaged Plans Other Nonqualified Plans Defined Benefit (DB)Profit SharingTraditional IRASection 457 Plans Cash Balance (DB)Thrift PlanRoth IRA Stock BonusSIMPLE IRAISO Money Purchase (DC)ESOP (LESOP)SEPESPP Target Benefit (DC)Age-Weighted(SARSEP)NQSO Cross-Tested (Comparability) 401(k) Plan403(b) (TSA)Deferred Compensation Plans SIMPLE 401(k) 13-3

Retirement Plan Selection Process: Business Environment Determine how best to meet owner’s retirement savings through a qualified plan (Personal Objectives, Business Objectives, Altruistic Objectives) Yes Owner will commit to a retirement plan and owner has a savings need? Stable cash flow and owner will make annual commitment? Select discretionary plan. Is owner’s savings need <=25% of compensation? Reassess retirement objectives/ alternate savings Is owner’s savings need >25% of compensation? Profit sharing plan (age- weighted if over 45) Is owner oldest and owner’s age >=45? DB plan Reassess SEP, profit sharing, stock bonus or ESOP plan. Share ownership? Reassess Select profit sharing or P/S 401(k) Select stock bonus or ESOP Yes No 13-4

Qualified Plan Characteristics (1) Basic Statutory Characteristic Defined Contribution PlansDefined Benefit Plans Profit Sharing/ Stock Bonus Money Purchase Pension Target BenefitCash Balance Defined Benefit Cont. TypeFlexible contribution Fixed annual contribution to meet minimum funding requirement Fixed % of comp.; annual actuarial adjustment Annual actuarial determination Maximum Employer Deduction 25% of covered payroll Amount necessary to fund benefit up to IRS limits 13-5

Qualified Plan Characteristics (2) Basic Statutory Characteristic Defined Contribution PlansDefined Benefit Plans Profit Sharing/ Stock Bonus Money Purchase Pension Target BenefitCash Balance Defined Benefit Minimum funding standard Generally noYes Employee Contribution 401(k) provisions allowed May permit voluntary after-tax N/A May permit voluntary after- tax ForfeituresGenerally reallocated Reallocated or applied to reduce employer contribution Must be applied to reduce employer contribution 13-6

Qualified Plan Characteristics (3) Basic Statutory Characteristic Defined Contribution PlansDefined Benefit Plans Profit Sharing/ Stock Bonus Money Purchase Pension Target BenefitCash Balance Defined Benefit Annual additions limit (415 limit) Annual additions to a participant’s account may not exceed the lesser of 100% of compensation or $53,000 in 2015 N/A Annual benefit limit (415 limit) N/A Participant’s annual benefit may not exceed lesser of $210,000 or 100% of compensation in

Other Qualified Plan Characteristics Basic Statutory Characteristic Defined Contribution PlansDefined Benefit Plans Profit Sharing/ Stock Bonus Money Purchase Pension Target BenefitCash Balance Defined Benefit Most favored age group Younger OlderYoungerOlder Investment riskEmployeeEmployer Maintenance of plan funds Individual AccountsPooled Funds Certainty of retirement benefits UncertainGuaranteed minimum return on fund 1 Specific annual benefit 1 1 PBGC insured 13-8

IRA Hybrid Retirement Benefits Type of Plan Limits on Employer Contribution Limits on Employee Deferrals Allocation of Employer’s Contributions Administrative Costs/Burden Simplified Employee Pensions (SEPs) 25% deduction limit SARSEPs can no longer be established Allocation formula used—can include integration with Social Security Low—employer has full discretion re: future contributions within the 25% limitation SIMPLE IRA3% dollar-for- dollar or 1% in 2 out of 5 years matching or 2% non-elective $12,500 (2015) plus $3,000 age 50 catch- up if eligible Percentage of compensation Low—no ADP or ACP testing; employer may reduce matching contribution to 1% in 2 out of 5 years SIMPLE 401(k) 3% dollar-for- dollar matching or 2% non- elective $12,500 (2015) plus $3,000 age 50 catch- up if eligible Percentage of compensation Low—no ADP or ACP testing 13-9

Points to Consider in Selection of Most Appropriate Plan Seeks maximum tax shelter Owner usually 45 or older and oldest or one of oldest employees, only one or two older Rewards long-term employees, and favors older employees Stable cash flow Willing and able to make annual financial commitment in excess of 25% of compensation Willing to accept investment risk Allows owner to meet his/her retirement Defined Benefit Plan Business has stable cash flow; owner is willing to make annual financial commitment, but unwilling or unable to commit more than 25% of compensation Shift investment risk to employees Easier to communicate plan to employees, and reduce administrative costs Younger employees benefit from years of contributions and compounding Money Purchase or Target Benefit Plan (to provide age-weighted plan) 13-10

Points to Consider in Selection of Most Appropriate Plan Business cash flow fluctuates Shift investment risk to employees Desire plan that will motivate employees Younger employees benefit from years of contributions and compounding Profit Sharing, SEP, or Tandem Plan No other qualified plan or 403(b) No more than 100 employees earning $5,000 or more Owner willing to make minimal contribution— 2% or 3% of compensation Desire to provide tax-deferred savings for employees Desire very low administrative cost SIMPLE IRA or SIMPLE 401(k) 13-11

Practice Problem 1 Plan or categoryCharacteristic 1. Money purchaseA. Must be established by October 1 of plan year 2. Stock bonusB. Can no longer be established, older plans are grandfathered 3. Cash balanceC. One of the two defined contribution pension plans 4. ESOPD. Must be established by calendar year end 5. SEPE. Subject to the ACP test, but not the ADP test 6. SARSEPF. Employer guarantees a certain return on plan assets (b) planG. Employer stock is limited to 10% of plan assets 8. Qualified plansH. Can be established until tax due date, including extensions 9. SIMPLE IRAI. Has diversification requirement at age 55 & 10 years of service 10. Pension plansJ. If company is publicly traded, must be able to diversify out after three years Match the following characteristics with the item that matches it best (one match each)

Practice Problem 2 TestHCEKey Employee 50/40 Test (DB Plans) Ratio % (DB & DC Plans) Average Benefits (DB & DC Plans) ADP (401(k) Plans) ACP (401(k) Plans) Top-heavy (DB & DC Plans) Indicate which type of employee is used for each test

Practice Problem 3 What is the maximum vesting schedule allowed for each of the types of plans indicated? Defined benefit_________________________ Cash balance__________________________ Defined contribution_____________________ 13-14

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©2015, College for Financial Planning, all rights reserved. Session 13 End of Slides CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits