1. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company1 A defined contribution retirement plan for sharing employer profits with employees Requires a definite formula for allocating profits to each participant Employer must make recurring and substantial contributions to the profit sharing plan Employer need not make a contribution in years in which no profits are earned What Is A Profit Sharing Plan?

2. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company2 Employer can distribute payments in the form of current cash bonuses or on a deferred basis through contributions to an irrevocable trust Participants may receive benefits in the event of termination other than retirement, such as death, layoff or disability What Is A Profit Sharing Plan?

3. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company3 A retirement plan established and maintained by an employer to provide a definitely determinable benefit for the employer’s employees and their beneficiaries A pre-determined benefit formula is established upon creation of the plan The amount of an employer’s contribution to fund the promised benefit is based on an actuarial determination of the cost of the benefit Purpose is to provide a specific amount of retirement benefits upon retirement of employee. What Is A Defined Benefit Pension Plan?

4. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company4 A defined contribution retirement plan Employer commitment to make a specified contribution amount annually Benefits directly dependent on –Length of time an employee participates in the plan, and –Amount of money contributed on participant’s behalf each year (plus interest and appreciation) What Is A Money Purchase Pension Plan?

5. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company5 A CODA or 401(k) plan is a feature that is part of a profit sharing, money purchase pension or stock bonus plan Key feature: provides an employee the option to choose whether his employer should pay a certain amount to him –In cash, or –Contribute that amount to a qualified plan on his behalf What Is A Cash Or Deferred Arrangement (CODA) / 401(k) Plan?

6. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company6 Generally part of a plan that meets defined contribution requirements Employer typically agrees to make a matching contribution based on the employee’s contribution What Is A Cash Or Deferred Arrangement (CODA) / 401(k) Plan? (cont’d)

7. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company7 Client would like to be sure of a steady, adequate, and secure personal retirement income Client would like to set aside money for retirement on a tax deductible basis Client wants to reward long-service employees and provide for their economic welfare after retirement When Is Use Of A Profit Sharing/ 401(k)/ Pension Plan Appropriate?

8. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company8 Clients would like to put their business in a better competitive position for attracting, retaining personnel Client’s corporation is about to run into an accumulated earnings tax problem Client has employees who would like to defer compensation on an elective, pre-tax basis to a qualified retirement plan When Is Use Of A Profit Sharing/ 401(k)/ Pension Plan Appropriate?

9. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company9 Plan must be for the exclusive benefit of employees or their beneficiaries Primary purpose of the plan must be to offer the employees a retirement benefit or share of the company’s profits Plan provisions must be in writing and must be communicated to employees Plan must be permanent with no set termination date What Are The Requirements?

10. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company10 Plan must not discriminate in favor of highly compensated employees –Plans that provide more than 60% of aggregate accumulated benefits or account balances for current key employees are “top heavy” –Top heavy plans must meet more stringent vesting and minimum benefit rules What Are The Requirements?

11. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company11 Plan must meet minimum: –Age standards –Service standards –Coverage requirements –Vesting standards, and –Participation test (for defined benefit plans) What Are The Requirements?

12. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company12 Plan must provide for benefits or contributions that do not exceed Section 415 limits Distributions must generally begin to all participants by April 1 following the year of attaining age 70½ –Exception: Employees who are not more than 5% owners (or participants in government or church plans) may begin distributions April 1 of the year following the year they retire, if that is later than age 70½, if the plan so provides What Are The Requirements?

13. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company13 Special additional qualification requirements for 401(k) plans: –Plan must permit employees to elect to receive cash or an equivalent employer contribution –Plan cannot allow employees to receive a distribution attributable elective deferrals because of: The lapse of a fixed number years, or The completion of a specified number of years What Are The Requirements?

14. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company14 Special additional qualification requirements for 401(k) plans (cont’d): –Employee’s rights to benefits are nonforfeitable for benefits derived from: Elective contributions Qualified matching, or Qualified contributions used to meet the ADP (actual deferral percentage) test –Employer cannot condition the availability of any other benefit on whether the employee elects to make contributions under the CODA or to receive cash What Are The Requirements?

15. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company15 Special additional qualification requirements for 401(k) plans (cont’d): –Plan must meet special nondiscrimination tests with respect to the amount of elective contributions made to the plan each year –The CODA cannot require, as a condition of participation, that an employee complete more than one year of service for the employer maintaining the plan –The amount of elective contributions to the plan on behalf of a participant cannot exceed $16,500 (2011) and will be indexed for inflation What Are The Requirements?

16. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company16 Special additional qualification requirements for 401(k) plans (cont’d): –Participants who have reached age 50 by the end of the plan year may make “catch-up” elective deferrals of $5,500 (2011) indexed for inflation What Are The Requirements?

17. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company17 A qualified plan may not impose an age or service requirement that would exclude any full-time employee who has –attained age 21, or –completed 1 year of service, whichever is later If there is 100% immediate vesting, a 2-year waiting period is permitted Plan may exclude part-time and seasonal employees who work less than 1,000 hours in a 12-month period Eligibility Requirements?

18. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company18 A plan must be nondiscriminatory in its coverage of employees A defined benefit plan must cover on each day of the plan year, the lesser of –50 employees, or –40% or more of all employees of the employer Eligibility Requirements?

19. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company19 A plan will qualify if it benefits –At least 70% of the non-highly compensated employees, or –A % of non-highly compensated employees which is at least 70% of the % of highly compensated employees benefiting under the plan, or –If the plan does not discriminate in favor of highly compensated employees, and –The average benefit % for non-highly compensated employees is at least 70% of the average benefit % for the highly compensated employees Eligibility Requirements?

20. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company20 Minimum vesting standards must be met by all plans Vesting refers to nonforfeitability of benefits by covered employees General rule: Benefits attributable to employee contributions must always be 100% vested In a 401(k) plan: Employee’s rights to benefits derived from elective contributions, qualified matching and qualified non-elective contributions used to satisfy the ADP test must be 100% vested at all times Vesting Requirements?

21. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company21 Full vesting for 401(k) matching contributions and for top heavy plans is required after: –3 years, or –6 years under a graduated vesting schedule Full vesting under all other plans is required no later than: –5 years, or –7 years under a graduated vesting schedule A plan must take into account all years of service (1,000 hours in a plan year) completed after the employee attains age 18 for vesting purposes Vesting Requirements?

22. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company22 Defined contribution plans include: –Money purchase pension plans –Profit sharing plans –Stock bonus plans –401(k) plans –ESOP’s –Thrift plans –Target or assumed benefit plans Defined Contribution Plans

23. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company23 Defined contribution plans are subject to an annual additions limit equal to the lesser of: –100% of compensation, or –$49,000 (2011) indexed for inflation Employer-sponsor of profit sharing plan is permitted a maximum deduction of up to 25% of the total compensation of plan participants –Elective deferrals are not counted toward the maximum deduction limit –Total compensation in a 401(k) is determined before subtracting any elective deferrals Defined Contribution Plans

24. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company24 Plans can provide for voluntary employee contributions Thrift plans commonly do not require employees to contribute and require the employer to make matching contributions Defined contribution plans usually can be integrated with Social Security Disabled plan participants can receive a 100% vested employer contribution based on the annualized compensation of the employee during his last year of employment Defined Contribution Plans

25. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company25 A plan that provides a definitely determinable benefit established when the plan is created Maximum normal retirement benefit, based on retirement no earlier than age 62, is the lesser of –100% of the highest 3 consecutive years of average compensation while actively participating in the plan, or –$195,000 (in 2011) indexed –The limitation is increased for retirement after age 65 and decreased for retirement before age 62 –The benefit must be reduced pro rata if the employee has fewer than 10 years of plan participation with the employer Defined Benefit Plans

26. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company26 Hybrid benefit plan in which a “target benefit” is established under the plan for each participant Contributions to attain the target benefit are actuarially determined based on –A conservative interest assumption, and –Age of the participant Target or Assumed Benefit Plan

27. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company27 Maximum annual addition to the account of a participant cannot exceed the lesser of –100% of salary, or –$49,000 (2011) indexed –Each participant’s account is also credited with investment earnings, gains, and losses, which can produce an actual benefit greater than the target Target or Assumed Benefit Plan

28. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company28 Defined Benefit Plan: Employer can contribute and deduct the amount necessary to pay the benefits promised up to the full funding limitation CODA, Profit Sharing or Stock Bonus Plan: Sponsoring-employer may contribute and deduct a maximum of 25% of the total compensation of plan participants Combination Pension/Profit Sharing: Maximum deductible contribution for both plans is the greater of –25% of the compensation of covered employees, or –Contribution required to fund the minimum funding standard Deduction of Contributions

29. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company29 Defined benefit pension plans: A conservative rate of return should be used for funds invested in assets other than life insurance –Interest rate assumptions of 5% – 7% are typical –Actual return in excess of assumed amount must be used to reduce employer’s future contributions –Terminated, non-vested participant account balances are used to reduce future employer contributions Actuarial Assumptions

30. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company30 Money purchase and profit sharing plans: Investment experience directly affects the amount a participant will have at retirement –Earnings are allocated to a participant’s account in proportion to his or her account balance in a money purchase plan –Gains and losses must be allocated proportionately in a profit sharing plan –Terminated, non-vested participant account balances in a profit sharing plan may be used to Reduce future employer contributions, or Be allocated among the accounts of remaining participants Actuarial Assumptions

31. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company31 Mortality is an important actuarial assumption Fixed benefit pension plan: –Life insurance death proceeds, if included in the plan, will go to the employee’s beneficiary, and –The investment account that would have been used to pay the employee’s benefit, had he or she lived, is used to reduce future employer contributions to the plan Money purchase or profit sharing plan: –Total funds in a participant’s account are paid to the beneficiary as a death benefit, including life insurance proceeds Actuarial Assumptions

32. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company32 “Normal retirement age” will usually be age 65 Plans will make provisions for normal, early, and late retirement age Mandatory retirement is generally prohibited It is unlawful to –Eliminate the accrual of further benefit credits to an employee’s retirement account after the employee attains normal retirement age, or –Exclude an employee from participation in a pension plan even if his age is within 5 years of the age set for normal retirement Retirement Age

33. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company33 Early retirement benefits are generally available –Defined benefit plan: Actuarially reduced amount –Money purchase plan: Participant’s vested share –Profit sharing plan: Amount accumulated in participant’s account paid as a lump sum or monthly income Retirement Age

34. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company34 The benefit structure of Social Security can be viewed as discriminating against the higher-paid employee Integration of a retirement plan allows an employer to –Coordinate benefits from Social Security with the benefits from the employer retirement plan, and –Produce roughly the same proportionate benefit for higher- paid employees as for lower-paid employees Social Security Integration

35. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company35 A plan is top heavy when it provides more than 60% of its aggregate accumulated benefits or account balances to key employees Top heavy determination is made on a year by year basis A key employee is any employee-participant who, at any time during the plan year is –An officer earning more than $160,000 (2011) indexed –A more than 5% owner, or –A more than 1% owner earning more than $150,000 per year Top Heavy Plans

36. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company36 Special rules for smaller employers –If the business (or aggregated group of businesses) has fewer than 500 employees Only 10% will be considered officers –If the business has fewer than 30 employees At least 3 officers must be counted Top Heavy Plans

37. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company37 Top heavy plans must meet basic qualification requirements of other qualified plans and additionally –Implement one of two rapid vesting schedules –Provide minimum nonintegrated contributions or benefits for plan participants who are non-key employees, and –Reduce the aggregate limit on contributions and benefits for some key employees Top Heavy Plans

38. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company38 Years of Service3 Year % Vested 6 Year % Vested 10% 2 20% 3100%40% 460% 580% 6100% Top heavy plans must meet one of two special vesting rules for employees who are at least 21 years old and have completed the required years of service Top Heavy Plans - Vesting

39. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company39 The minimum defined benefit provided to non-key employees during a top heavy year must be –At least 2% of average pay for the highest 5 years for each year of service in which a top heavy plan year ends, –Up to a total of 20% of average pay Top Heavy Plans: Contributions & Benefits

40. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company40 Under a defined contribution plan, the minimum contribution provided to non-key employees during a top heavy year must be –At least 3% of compensation, or –If the plan provides the contribution rate of less than 3% for all participants, The highest contribution rate percentage on behalf of any key employee can be used Counting only the first $245,000 (2011 indexed) of compensation Top Heavy Plans: Contributions & Benefits

41. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company41 3 ways an employer funds a retirement plan: –Fully-Insured –Split Funded –Uninsured or All Equity How Is It Done?

42. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company42 Fully-Insured: –Employer places contributions into a funding vehicle of an insurance company (e.g. retirement income life insurance contract) Advantages –Easy to install and administer –Guaranteed principal, interest, annuity purchase rate, and expenses –Minimal cost and effort to comply with ERISA Disadvantages –Growth of dollars in the plan is fixed How Is It Done?

43. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company43 Split Funded: –Employer places contributions into a trust fund that splits contributions into two parts Part of the funds are placed in fixed assets, annuities and/or life insurance Remainder of funds are invested in other investments for diversification Advantages –Combines guarantees with the possibility of appreciation Disadvantages –Risk that depreciation in the value of securities will result in lower benefits for the employee How Is It Done?

44. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company44 Uninsured or All Equity: –Employer contributions placed into a trust fund are invested solely into investments including equity Advantages –Greatest potential for appreciation Disadvantages –High risk –No guarantees as to principal and interest –Higher costs of administration and expenses for small employers How Is It Done?

45. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company45 Within limits, employer contributions are fully deductible for income tax purposes Earnings on plan assets accumulate income tax free (tax-deferred) Distributions made in the form of a lump sum distribution are generally included as ordinary income to the employee in the year paid Tax Implications

46. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company46 Benefits payable under a qualified retirement plan, including deductible employee contributions and earnings –Are taxed only when paid to a participant or beneficiary, and –Are not taxed if merely “made available” or become fully nonforfeitable Tax Implications

47. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company47 If life insurance is provided under the plan –An employee is considered to have received a distribution each year equal to the portion of the employer’s contributions or trust earnings that have been applied during the year to provide pure insurance on the employee’s life (Table 2001 cost) –Such costs will be recovered income tax free when benefits are received under the contract –If life insurance is purchased with deductible employee contributions, the amount spent is treated as a distribution Tax Implications

48. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company48 When an employee first becomes eligible to receive benefits, if the plan allows, benefits may be left in the plan and are not taxed until paid –Distributions must begin by April 1 of the year following the year in which the participant reaches age 70½ Tax Implications

49. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company49 An employee who retires and receives periodic payments from the retirement plan is taxed on such payments in accordance with annuity rules Distributions before the participant attains age 59½ are subject to a 10% penalty tax –Exception to the penalty tax include certain payments upon: death, divorce, disability, medical expenses; and periodic payments made over the participant’s life expectancy –The penalty is increased to 25% for distributions from a SIMPLE IRA in the first two years of participation in the plan Tax Implications

50. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company50 Beneficiary receiving death benefits from a qualified retirement plan is taxed on the amount received for income tax purposes under either the lump sum or annuity rules –Except, voluntary employee contributions that were deductible are includable in ordinary income If the employee paid the insurance costs or reported the cost as taxable income on his return –Beneficiary treats only the cash value portion of any death benefit, plus any other cash distributions from the plan, as income subject to tax Tax Implications

51. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company51 If the employee did not pay the insurance costs or report the cost as taxable income on his return –The portion of the insurance proceeds consisting of “pure insurance” (difference between policy face amount and cash value) will be considered taxable income to the beneficiary Tax Implications

52. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company52 Qualified plan benefits may be received income tax free if a plan participant suffers permanent loss or loss of use of a member or function of the body, or permanent disfigurement –Plan must provide 100% vesting of benefits of the participant ceases employment due to total or permanent disability, and –Plan must include statutory language establishing the dual purpose of the plan as a retirement and “accident & health” plan Tax Implications

53. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company53 Entire value of a qualified plan death benefit is subject to inclusion in the decedent’s gross estate for federal estate tax purposes Application of the unified credit and unlimited marital deduction may help to minimize or eliminate federal estate taxes due at the first spouse’s death State inheritance tax laws vary, but may tax retirement plan death benefits Estate Tax Implications

54. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company54 If the participant spouse is married, the required form of distribution on the death of either spouse is in the form of a survivor annuity for the surviving spouse –Where the participant spouse is the first to die, the surviving spouse will receive the required annuity regardless of the community nature of the qualified plan benefit –Where the nonparticipant spouse is the first to die, one court ruled the required survivor rights superseded state community property laws The survivor annuity rule does not apply to distributions from IRAs, SIMPLE IRAs, or SEPs The survivor annuity may be waived Issues In Community Property States

55. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company55 ERISA Fiduciary Responsibility Rules Fiduciary includes persons exercising control, rendering advice for fees, or having authority over a qualified plan Fiduciary responsibility rules relate to plan administration, provide standards of conduct and make certain transactions prohibited ERISA sets forth “prudent person” standard and exclusive benefit rules

56. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company56 Plan Loan Limitations Plan may make loan to participant or beneficiary if provided for in plan document Must meet specific requirements: –Adequately secured –May not exceed 5-year term –May not exceed 50%/$50,000 limit (or $10,000 if greater) –Loan agreement must specify amount, terms and repayment schedule

57. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company57 Safe Harbor 401(k) Plan Requirements Satisfies nondiscrimination requirement by providing safe harbor contribution of: –Match of 100% of employee contribution up to 3% plus 50% from 3% to 5%, or –Nonelective contribution for all eligible nonhighly compensated employees equal to at least 3% of compensation –Notice and 100% vesting requirements apply

58. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company58 SIMPLE 401(k) Plan Requirements Available to employers with 100 or fewer employees earning $5,000 or less Salary deferrals up to $11,500 permitted in 2011 Catch-up contributions permitted up to $2,500 in 2011

59. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company59 SIMPLE 401(k) Plans Subject to ERISA and administrative and qualification requirements of qualified plans Contribution formula requirement must be one of following: –Match contribution: dollar for dollar up to 3% of compensation, or –Nonelective contribution: 2% of compensation for all eligible employees earning at least $5,000

60. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company60 401(k) Plans: Distribution Restrictions Distributable Events –Death, disability, retirement or other termination of service –Termination of plan without establishment of a successor plan –Sale of business or a subsidiary –Participant reaches age 59½ –Participant’s financial hardship

61. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company61 Hardship Distribution Limitations Distribution must be made due to an immediate and heavy financial need of the employee Distribution must be necessary to satisfy the need Plan must set forth objective and nondiscriminatory standards for determining immediate and heavy financial need Distribution due to hardship must be limited to “distributable amount” Regulations provide examples of expenses that will be treated as “immediate and heavy financial need”

62. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company62 Hardship Distribution Limitations Immediate and heavy financial need: –Medical care: taxpayer, spouse, dependents –Costs related to purchase of principal residence –Tuition and expenses for next 12 months of college for employee, spouse, children or dependents –Payments to avoid foreclosure from principal residence –Funeral expenses, casualty losses Distribution will not qualify to extent that amount is in excess of need, or is available from other sources

63. Profit Sharing / 401(k) / Pension Plan Chapter 52 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company63 Max annual IRA contribution (under age 50)$5,000 Max annual IRA contribution (age 50+)$6,000 Max annual 401(k), 403(b) or 457 deferral limit (under age 50)$16,500 Max annual 401(k), 403(b) or 457 deferral limit (age 50+)$22,000 Max annual additions limit under defined contribution plan$49,000 Max includible compensation for computing contributions$245,000 Max SIMPLE salary-deferral limit (under age 50)$11,500 Max SIMPLE salary-deferral limit (age 50+)$14,000 Minimum annual compensation for determining a highly compensated employee for 401(k) nondiscrimination tests $110,000 Summary Of Contribution Limits For Retirement Accounts 2011