For financial professional use only. Not for client presentation. OLA Life Insurance in Split-Funded Defined Benefit Plans Bill Schatz, Regional Marketing Director

For financial professional use only. Not for client presentation. 2 This material was not intended or written to be used, and cannot be used, to avoid penalties imposed under the Internal Revenue Code. This material was written to support the promotion or marketing of the products, services, and/or concepts addressed in this material. Anyone to whom this material is promoted, marketed, or recommended should be urged to consult with and rely solely on their own independent advisors regarding their particular situation and the concepts presented here.

For financial professional use only. Not for client presentation. 3 What Is a Qualified Retirement Plan?  Provides retirement benefits  Must meet specific IRC requirements  Qualifies for tax-favored treatment  Deductible contributions  Tax-deferred growth  Plan cannot discriminate

For financial professional use only. Not for client presentation. 4 Qualified Plan Comparison Defined BenefitDefined Contribution Retirement benefit defined in advance Retirement benefit based on contributions and performance of plan investments Employer bears investment risk Participant bears investment risk Life insurance as a plan asset may increase contributions Life insurance as a plan asset does not increase contributions

For financial professional use only. Not for client presentation. 5 Why Are Defined Benefit Plans Popular Again?  Favorable pension reform: EGTRRA 2001  Compensation/contribution limit increases  No family aggregation  Pension Protection Act of 2006  Deductibility limits for contributions to both defined contribution and defined benefit plans (covered by the PBGC) sponsored by the same employer repealed effective 1/1/2008  Transitional relief provided

For financial professional use only. Not for client presentation /2010 IRC Section 401(a)(17) Compensation $210,000$220,000$225,000 $230,000 $245,000 IRC Section 415 Annual Benefit 100% of pay not to exceed $170,000. Reduced if benefit starts before age % of pay not to exceed $175,000. Reduced if benefit starts before age % of pay not to exceed $180,000. Reduced if benefit starts before age % of pay not to exceed $185,000. Reduced if benefit starts before age % of pay not to exceed $195,000. Reduced if benefit starts before age 62. EGTRRA Increases Compensation and Benefit Limitations Defined Benefit Plan

For financial professional use only. Not for client presentation. 7 Traditional Defined Benefit Plans vs. 412(e)(3) Plans  Both are defined benefit plans  Similar client profiles  Large tax-deductible contributions  Differences:  Investment flexibility vs. product guarantees  Minimum funding standard  “Actuarial Certification”

What is a "Split-Funded" Defined Benefit Plan?  A traditional defined benefit plan that includes both:  Investments  Life insurance For financial professional use only. Not for client presentation. 8

9 What About the Plan Benefit Options?  Taken as retirement distributions  IRA rollover  Rollover to another qualified plan

For financial professional use only. Not for client presentation. 10 Types of Investments  Stocks  Bonds  Mutual funds  Annuities (fixed or variable)

For financial professional use only. Not for client presentation. 11 Types of Life Insurance Used  Whole life  Term  Universal life  Variable universal life  No definite ruling on VUL use in DB plan

For financial professional use only. Not for client presentation. 12 How Much Life Insurance Can Be Used?  Incidental benefit limitations  100 times test  50% of annual contribution for whole life  25% of annual contribution for universal life or term  Defined contribution plans  “Seasoned money”  Potentially, all employer funds that have been in the plan over two years can be used to purchase life insurance

For financial professional use only. Not for client presentation. 13 Why Buy Life Insurance Inside Qualified Plan?  Self-completion  Pre-tax dollars  Portability

For financial professional use only. Not for client presentation. 14 What if Life Insurance Is Still Needed at Retirement?  Receive policy as plan distribution  Purchase policy from the plan  Roll policy to profit sharing plan  New plan must allow for the purchase of life insurance

For financial professional use only. Not for client presentation. 15 Tax Implications  Employer contribution is tax-deductible  Death benefit in excess of cash value is received federal income tax–free  Participant recognizes economic benefit  Generally, policy proceeds are includable in the gross estate

For financial professional use only. Not for client presentation. 16 Valuing the Life Insurance Policy  Rev. Proc  Guidance on fair market value  Two safe harbor formulas

For financial professional use only. Not for client presentation. 17 Who Might Benefit from a Split-funded Defined Benefit Plan? Ideal candidates include:  Highly paid business owners  Companies with few or no employees  Companies with many employees and multiple owners/partners  Companies with existing 401(k)/profit sharing plans

For financial professional use only. Not for client presentation. 18 Role of the Third-Party Administrator  Develops suitable defined benefit plan proposal  Assists in preparation of plan documents  Performs annual administration  Calculates plan contributions (including Actuarial Certification)  Prepares required reports  Handles distributions  Performs incidental benefits testing

For financial professional use only. Not for client presentation. 19 Hypothetical Example #1: Surgical Practice  Doctor – $700k salary  Wife – $100k salary  10 employees – $627k total salary  Existing Profit Sharing Plan:  Doctor – $45k contribution  Wife – $25k contribution  10 Employees – $151k contribution  PROBLEM: The employee cost is twice that of the owner

For financial professional use only. Not for client presentation. 20 Example #1 (continued)  Solution:  Layer “split-funded” defined benefit plan on top of profit sharing plan  New contributions:  Doctor: $256k  Wife: $92k  10 Employees: $151k – NO CHANGE  $125k of contribution used to purchase Life Insurance Calculations provided by Pension Quote

For financial professional use only. Not for client presentation. 21 Example #1 (continued)  How?  Comparability Testing  Performed by TPA actuaries  25% of salary for 10 employees was already being contributed  Percentage of salary required for contributions on behalf of rank and file employees can be different within limits Calculations provided by Pension Quote

For financial professional use only. Not for client presentation. 22 Example #2: Legal Eagle  Multi-partner law firm:  24 partners  30 associates  108 staff  Total contribution to existing profit sharing/401(k) plan: $1,712,000  Total contributions for associates/staff: $632,000 (8% of company’s associates/staff payroll)  Total contributions for partners: $1,080,000 Calculations provided by Pension Quote  63% of total contribution benefits the partners

For financial professional use only. Not for client presentation. 23 Example # 2 (continued)  Solution:  Layer “split-funded” DB plan on existing plan  New contributions:  Partners: $3,552, $2,472,000 increase  Employee contribution $632, no increase Calculations provided by Pension Quote

For financial professional use only. Not for client presentation. 24 Split-Funded DB Plans—Summary  Retirement income  Life insurance protection  Large tax-deductible contributions  Customizable

For financial professional use only. Not for client presentation. 25 Transamerica Insurance & Investment Group (“Transamerica”) and its representatives do not give tax or legal advice. This presentation is for informational purposes only and should not be construed as tax or legal advice. Clients and other interested parties must be urged to consult with and rely solely on their own independent advisors regarding the information and interpretations contained herein. The information presented here does not take into consideration the applicable state laws of clients and prospects. Although care has been taken in preparing this material and presenting it accurately, Transamerica disclaims any implied or actual warranties as to the accuracy of any material contained herein and any liability with respect to it. The information in this presentation is current as of March Transamerica Insurance & Investment Group is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be addressed to the National Registry of CPE Sponsors, 150 Fourth Avenue North, Nashville, TN Telephone: Web site: In the state of New York, Transamerica Life Insurance Company is an approved provider of continuing education courses (Provider Organization Approval Number NYPO ).

For financial professional use only. Not for client presentation. OLA Life Insurance in Split-Funded Defined Benefit Plans