Transcript OnePersonPlus Advisor Presentation for Clients

Advantages of Micro
Defined Benefit Plans
A 2013 Tax Strategy for High Income
Professionals, Small Business Owners
and Self-Employed Clients
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For Broker/Dealer Use Only
Agenda
 Introductions
 Defined Benefit Plans as an effective tax
strategy
 How the new micro Defined Benefit plans
are simplified and flexible
 The type of clients that qualify for these
plans
 Questions?
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Introductions
 Principal of The Wagner Law Group
 Specialist in ERISA, employee
benefits and executive
compensation including qualified
and non-qualified retirement plans
Marcia S. Wagner, Esquire
Managing Director
The Wagner Law Group
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 401k Wire: 100 Most Influential
Persons in the 401(k) industry
 Hundreds of articles and 13 books
about retirement and benefit plans
 The Wall Street Journal, Financial
Times, Pension & Investments, and
more
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Introductions
 Entrepreneur and business innovator in
online marketing for financial services
 Co-founder of Dedicated DB and a cofounder of Leaffer Shapiro
Karen Shapiro, CEO
Dedicated Defined
Benefit Services, LLC
 Opened more than 2,300 Micro Defined
Benefit Plans
 Bank of America - 18 years, SVP &
Director of Online Channel Management
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Tax Increases in 2013
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How Much Can Someone Save?
Defined Benefit (DB) Plans May Allow Clients to Contribute
Significantly more Earned Income than other Retirement Plans
SIMPLE
$22,150
SEP
Individual 401(k)
$51,000
$56,500
DB
DB + 401(k)
$173,800
$212,100
Hypothetical Example: Maximum annual contribution limits in 2013
for a business owner age 52, earning $300,000 W-2 income annually,
retiring in 10 years
Assumes 5-7% funding rate for Defined Benefit Plans
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Tax Qualified Defined Benefit Plans
 Definition
– “Pension plan” which also meets the qualification
requirements under IRC Section 401(a).
– Private employers may adopt tax-qualified plan.
 Advantages of tax-qualified retirement plans.
– Immediate deduction for employer contributions.
– Employees are not taxed currently.
– Earnings on plan trust assets are tax-exempt.
– Tax on distributions can be deferred with rollovers.
– Plan assets protected from creditors.
– PBGC insurance for benefits.
– High amount of deferrals.
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Defined Benefit Plans (DB Plans)
 DB plan provides stated pension benefit
beginning at retirement.
– Normally stated in form of life annuity.
– Employer contributions are determined actuarially.
 Types of DB plans
– Unit Benefit Plan: benefit formula is based on years of
service (e.g., 1% of pay for each year).
– Fixed Benefit Plan: fixed $ amount payable annually.
– Flat Benefit Plan: % of pay payable annually.
– Cash Balance Plan: benefit stated in the form of a
hypothetical account.
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Defined Benefit Plans (cont’d)
 Methods for calculating pay
– Final Average Pay – pension is based on average
compensation during defined period.
– Career Average Pay – pension is based on pay earned
during employee’s entire service period.
 IRS limits on pay
– Plan may not consider more than $255,000 (2013),
$260,000 (2014) of pay per year.
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Summary of Characteristics of DB Plans
 Employer considerations
– Commitment to contribute to plan
– Fully financed by employer
– Investment risk is borne by employer
 Benefit considerations
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DB plan can recognize past service.
Easier to provide cost of living adjustments (COLA).
May pay disability and death benefits.
Generally may not pay layoff or medical benefits.
No in-service distributions generally.
PBGC guarantee financed by employer premiums.
High HCE.
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Basic Rules for Tax-Qualified Plans
 ERISA and IRC impose comprehensive set
of rules for tax-qualified retirement plans.
 Philosophy of tax-qualification plan rules
– To receive tax benefits, plan sponsor must help
advance government’s social policies.
– For example, plan must help secure retirement
of “rank and file” employees as well as
management.
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Eligibility and Participation Rules
 Minimum age and service conditions.
– Must not exclude on account of age beyond age 21.
– May require service minimum of up to 1 year
(limited exception for 2-year minimum).
No maximum age condition permitted.
“1,000 hour” rule applies to minimum service.
Plan entry may be delayed up to 6 months.
DB plan must benefit lesser of 50 employees
or 40% of workforce.
 Examples of employee exclusions:
– Non-resident aliens
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– Union employees
– Certain employee classifications
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Coverage and Nondiscrimination Rules
 Minimum coverage rules
– Opportunity for Non-Highly Compensated Employees
(NHCs) to participate in plan must be similar to HCEs.
– Must satisfy one of following:
(1) Percentage Test: Plan covers at least 70% of NHCs
(2) Ratio Test: Ratio of percentage of NHCs covered to
percentage of HCEs covered is at least 70%
(3) Average Benefit Percentage Test: 2-prong test.
 Nondiscrimination rules
– General Test compares actual benefit accruals of NHCs
against actual benefit accruals of HCEs.
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Minimum Vesting Standards
 DB benefits must fully vest in 5 years or:
Years of Service
Less than 3
At least 3, 4, 5 or 6
7 or more
Vesting Percentage
0%
20%, 40%, 60% or 80%
100%
 Special 3 year cliff vesting for cash balance plans.
 Must vest upon Normal Retirement Age.
 Year of service based on “1,000 hour” rule.
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Top-Heavy Rules
 Purpose
– Participants who are NHCs must receive minimum
benefit or contribution if plan becomes Top Heavy.
 Definition of “Top-Heavy” plan.
– Disproportionate amount of plan’s accrued benefits are
for the benefit of key employees.
– Key employees generally include officers earning more
than $165,000 for 2013 ($170,000 for 2014) and 1%
owners.
 If plan is top-heavy for any year, NHCs must
receive minimum benefit/contribution.
– Separate minimum vesting schedule also applies.
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Special Accrual and Funding Rules
for DB Plans
 Benefit accrual rule for DB plans
– Plan must not provide “back loaded” benefit
accruals.
– Benefit must accrue ratably over employee’s
career.
– After PPA, benefit can be “front loaded”
 Minimum funding standard for DB plans
– Designed to ensure plans are able to pay benefits
when they become due.
– Requirements backed by 10% excise tax (and
100% excise tax if deficiency is not corrected).
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Limitations on Benefits
 Maximum annual benefit under DB plan
− Lesser of 100% of average pay, or $205,000
(2013), $210,000 (2014)
 Maximum deduction for plan contributions
− linked to funding standards — minimum required
contributions always deductible
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Advantages and Disadvantages of
Tax Qualified Defined Benefit Plans
 Advantages
– Tax benefits, including immediate deductions.
– Upon termination, assets rolled to IRA
 Disadvantages
– Higher income or older employees earn high benefits
– Annual contributions
 Examples of plans meeting business needs
– To maximally benefit owners or management
– To encourage long-term employment
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How Does the “Micro” DB Work for Your Client?
 Actuary calculates goal (benefit in retirement), the
accumulation & contributions required to reach goal
 Calculation based on
– Compensation, age, years to retirement, benefit formula, interest
rates, etc.
– Generally, the older you are, the higher the limit
– Investment performance in subsequent years
 Employer contributes annually
 Employer should be able to maintain the plan for a
minimum of three to five years
 When plan is terminated, assets rolled into an IRA
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Owner–only, Sole Proprietor
Charles, Age 52
Objective: Maximum Tax Deduction
 Annual earnings: $450,000
 Maximum DB+ 401(k) contribution for: $212,100
– Contribution to DB plan: $173,800
– Contribution to 401(k): $38,300
 Annual tax savings: $80,500
– Combined marginal tax rate of 38%
 Estimated DB accumulation at age 62: $2.48 MM
-10 years, 5% – 7% rate of return
 Annual DB benefit: $205,000
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Who Qualifies?
®
 OnePersonPlus
Defined Benefit Plan
– Owners and immediate family
– Owners with up to 4 common-law employees*
 Defined Benefit Plan + Individual 401(k)
– Owners and immediate family
– Individual 401(k) + Defined Benefit Plan can
be combined to MAXIMIZE deductible
contributions for owner and spouse.
* Business can be incorporated or unincorporated.
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Prime Candidates
 Earned Income, 1-5 employees
Individuals with self employment income
‒ Small business owners (1-5 person)
‒
Independent Professionals
‒ Side Income (consulting, board fees, royalties, etc.)
‒ Spouse income of highly-paid executive
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Attorney
Designer
Sales Rep
Board Member
Engineer
Physician
Consultant
Farmer
Programmer
Contractor
Financial Advisor
Real Estate Agent
Dentist
Insurance Agent
Wants to contribute more than $50,000 or a higher percentage of
compensation
Expect to contribute at least 3-5 years
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Compensation Considered for Plan
Type of Business Entity Determines What Can Be Counted as
Compensation in Calculating the Contribution Amounts for a
Defined Benefit Plan
Compensation Quick Reference Chart
Entity Type
Source of Income
Compensation for Plan
Corporation
W-2 income
W-2 income
S-Corporation
W-2 + Schedule K-1
W-2 income only
Sole Proprietorship
Schedule C (net profit)
Earned Income (calculate)*
Partnership
Schedule K-1 (net profit)
Earned Income (calculate)*
Limited Liability Company (LLC) – compensation for plan depends on how LLC is taxed. See above for
partnership or corporation rules.
Employees, other than owners, are paid W-2 income for all entity types.
* Earned Income = net profit minus ½ self-employment tax minus plan contribution. Deductions for sole
proprietors and partners are limited to net profit minus ½ self-employment tax.
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Married Couple in
Business Together, C-Corp
Paul, Age 60, Mary, Age 58
Objective: Maximize Retirement Savings
 5 Years from Retirement
 W-2 Income: $510,000 ($255,000 each)
 Total annual DB contribution: $412,100
$201,200 towards Paul’s Retirement
$210,900 towards Mary’s Retirement
 Annual income tax savings: $156,500
 Accumulation at retirement:
Paul: $1.15 Million
Mary: $1.21 Million
1. Assumes 38% combined federal/state marginal rate.
2. 5-7% rate of return.
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Small Business Owner, C-Corp,
+2 Employees,
Mollie, Endodontist, Age 55
 Owner’s W-2 income: $400,000
– Employee 1 age 28 earning: $35,000
– Employee 2 age 35 earning: $45,000
 Maximum DB contribution for owner: $197,800
– DB contribution for Employee 1: $6,100
– DB contribution for Employee 2: $11,400
– 92% of contribution for Mollie
 Annual income tax savings for Mollie: $75,1001
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 Estimated accumulation for Mollie at 62: $1.73 Million
1. Assumes 38% combined federal/state marginal rate.
2. 5-7% rate of return.
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Sole Proprietor, Spouse with SelfEmployment Income
Ella, interior designer, Age 60

Annual earnings: $100,000
—
After paying SE Tax

Maximum DB contribution for 2013: $80,000
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2013 max tax savings: $30,400
—
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DB Accumulation at age 65: $461,000
—

combined marginal tax rate of 38%
5 years, 5 - 7% rate of return
Annual DB Benefit: $40,700
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Owner-only
Sole Proprietor, Age 40
Cathy is a freelance journalist, married to a
high-earning corporate employee

Annual earnings: $100,000
—
After paying SE Tax

401(k) contribution for: $42,500

Annual tax savings: $16,150

Combined marginal tax rate of 38%

Compared to SEP contribution of $25,000
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Owner-only
Sole Proprietor, Age 40
If Cathy wants to maximize her tax-deferred
contribution, she could open a DB+401(k):

Annual earnings: $100,000
—
After paying SE Tax
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DB contribution: $37,100
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401(k) contribution: $23,500
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DB + 401(k) contribution: $60,600
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Annual tax savings: $23,000
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Combined marginal tax rate of 38%
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Compared to 401(k) contribution of $42,500
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New Flexibility Strategies
 Adding an individual 401(k) to a DB
 Consultant age 50, $200,000 in W-2 income from his SCorporation
 Maximum DB Contribution ~$124,000 in 2013
 More comfortable committing to $75,000 a year; more only
in high income years.
2013 Annual Estimated DB Contribution:
2013 401(k) Contribution:
Total 2013 Contribution
$75,000
$35,000
$110,000
2014 DB Contribution:
2014 401(k) Contribution:
Total 2014 Contribution
$0
$75,000
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$75,000
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New Flexibility Strategies
 Contributions ranges
Years
Compensation Contribution Range
2010
2011
2012
2013
$95,000
$150,000
$115,000
$120,000
------$40,000 to $120,000
Susan Chooses to
Contribute
------$110,000
2014
$70,000
$30,000 to $120,000
$50,000
2015
$95,000
$44,000 to $120,000
$120,000
2016
$120,000
$25,000 to $120,000
$60,000
2017
$135,000
$25,000 to $135,000
$130,000
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New Flexibility Strategies
 Funding over time
 Amend Plan
 Freeze the Plan
 Terminate and roll to IRA
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SUMMARY:
Advantages of Micro DB Plans

LARGE contributions for the next 5-10 years

LARGE tax-deduction, saves client
$1MM to $2MM in new client savings
$40,000-$60,000* or more in 2013
* Assumes a 38% tax rate
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Seek stable, low risk investments, not chasing
high returns
Access to wide variety of investments
Loans available
Streamlined, easy set up, IRS-approved prototype
document
Clients ready to save who previously shied away from
commitment, now have more control over their
contributions
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SUMMARY: Plan Considerations
 Defined Benefit Plans are not right for
everyone
– Annual contributions are required
– More expensive to establish and maintain
– Primarily funded by the employer
– Benefits generally must be paid regardless of
how plan performs
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Plan Set-up /
Funding Deadlines
 Plan Set-up: Must be established by end of plan
year, usually December 31st
 Dedicated DB - Quick Adoption Process
 Individual 401(k) Salary Deferral
Contributions
Due as soon as administratively possible
 Individual 401(k) Employer Profit-Sharing
Contributions due by tax-filing deadline, including
extensions
 OnePersonPlus DB Contributions
– 8 ½ Months after end of plan year
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Supporting You & Your Clients
1. Online Calculator: Run an illustration comparing
small business plans online at:
www.OnePersonPlus.com
or
Call for a custom proposal: 1(866)269-2706
2. Present to Client: Dedicated DB available for call
3. Client Completes Set-up Questionnaire & sends
to Dedicated DB
- Set-up Fee ($1,250 for 1-person plan)
4. Client receives Adoption Agreement for signature
5. Then opens investment account
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Questions?
?
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Thank You!
Dedicated Defined Benefit Services
Call: 1(866)269-2706
Visit: www.OnePersonPlus.com
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