Qualified Retirement Plans: Features and Highlights

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• Qualified Retirement Plans Features and
  Highlights

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Individual 2003 Contribution and Benefit Limits

• Compensation 200,000
• Defined Contribution Limit 100 of pay, to a
  maximum of 40,000
• Defined Benefit Limit 100 of high three years
  average pay, to maximum of 160,000 at
  retirement age 62
• Social Security Wage Base 87,000
• IRA (Roth, deductible or non deductible) 3,000
• 401(k) Contributions 12,000 does not count
  against plan 25 limit but does count against
  40,000 limitation
• Highly Compensated Employee More-than-5 owner,
  OR comp over 90,000 in prior year
  (2002) ?

3
Individual 2004 Contribution and Benefit Limits

• Compensation 205,000
• Defined Contribution Limit 100 of pay, to a
  maximum of 41,000
• Defined Benefit Limit 100 of high three years
  average pay, to maximum of 165,000 at
  retirement age 62
• Social Security Wage Base 87,900
• IRA (Roth, deductible or non deductible) 3,000
• 401(k) Contributions 13,000 does not count
  against plan 25 limit but does count against
  41,000 limitation
• Highly Compensated Employee More-than-5 owner,
  OR comp over 90,000 in prior year
  (2003) ?

4
Defined Contribution Plan

• Generic term defines the contribution going
  into the plan
• Contribution typically defined as a percentage of
  compensation
• Includes the following sub-groups
• Profit Sharing
• Stock Bonus
• 401(k)
• Money Purchase Plan
• Target Benefit Plan
• Maximum individual contribution of 100 of
  compensation, to a maximum of 41,000 for
  2004 ?

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Basic Elements of a Defined Contribution Plan

• Individual account for each participant
• Account balance includes contributions (employer
  and employee), forfeitures of accounts of
  terminated participants, and gains and losses
  from plan earnings
• Profit Sharing, Stock Bonus and 401(k) plans are
  completely flexible as to contributions in any
  year
• In-service distributions are allowed at age 59-½
• Employee participants bear investment risk
• Defined contribution plans may allow employee
  participants to control the investment of their
  individual accounts ?

6
Basic Elements of a Profit Sharing Plan

• Contributions must be substantial and recurring
• Contributions may or may not be subject to a
  company profit requirement
• Contributions are flexible upon determination by
  the company
• Profit Sharing plans may allow in-service
  distributions for financial hardship
• Contributions are typically a function of
  compensation, although age may be added as a
  factor ?

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Profit Sharing
Participant DOB DOH Total Comp. Plan Contrib.
HCE 1-1-48 1-1-00 165,000 41,000 50.62 Sta
ff 1 1-1-63 1-1-00 60,000 15,000 Staff
2 1-1-68 1-1-00 40,000 10,000 Staff
3 1-1-71 1-1-00 30,000 7,500 Staff
4 1-1-78 1-1-00 30,000 7,500 NHCE
Subtotal 160,000 40,000 49.38 Total 325,0
00 81,000 100.00
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Basic Elements of an Integrated Profit Sharing
Plan

• Employees earning over the Social Security wage
  base of 87,900 for 2004 are allowed additional
  contributions
• Maximum contribution on compensation above
  87,900
• All employees must receive a contribution equal
  to an amount up to 5.7 of pay on earning up to
  87,900 for employees earning over 87,900 to
  receive the excess contribution
  ?

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Integrated Profit Sharing
Participant DOB DOH Total Comp. Plan Contrib.
HCE 1-1-48 1-1-00 165,000 41,000 53.60 Sta
ff 1 1-1-63 1-1-00 60,000 13,311 Staff
2 1-1-68 1-1-00 40,000 8,874 Staff
3 1-1-71 1-1-00 30,000 6,655 Staff
4 1-1-78 1-1-00 30,000 6,655 NHCE
Subtotal 160,000 35,495 46.40 Total 325,0
00 76,495 100.00
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Basic Elements of New Comparability Profit
Sharing Plans

• Based upon age and compensation
• Older owners are allowed a higher contribution
  percentage relative to the average age of all
  other plan participants as a group
• Minimum contributions must be provided for
  non-highly compensated employees
• Minimum contribution is the lesser of
• a. 1/3 of the highest highly compensated
  employees percentage, or
• b. 5 of compensation
  ?

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New Comp Profit Sharing Plan

• Participant DOB DOH Total Comp. Plan Contrib.
  
• HCE 1-1-48 1-1-00 165,000 41,000 83.67
• Staff 1 1-1-63 1-1-00 60,000 3,000
• Staff 2 1-1-68 1-1-00 40,000 2,000
• Staff 3 1-1-71 1-1-00 30,000 1,500
• Staff 4 1-1-78 1-1-00 30,000 1,500
• NHCE Subtotal 160,000 8,000 16.33
• Total 325,000 49,000 100.00

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Comparison of Profit Sharing Plans
Participant Profit Sharing Integrated
PS New Comp PS HCE 41,000
50.62 41,000 53.60
41,000 83.67 Staff 1 15,000
13,311
3,000 Staff 2 10,000
8,874 2,000 Staff
3 7,500 6,655
1,500 Staff 4
7,500 6,655
1,500 NHCE Subtotal 40,000
49.38 35,495 46.40 8,000
16.33 Total Cost 80,000
100.00 75,495 100.00 48,000 100.00
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Basic Elements of a 401(k) Plan Part I

• 401(k) is an elective provision as part of a
  profit sharing plan, allowing employees to defer
  a portion of their compensation into the plan
• 401(k) can stand alone or be used with an
  employer matching contribution or employer profit
  sharing contribution
• Highly compensated employees are limited in
  deferrals as a function of the average deferrals
  on non-highly compensated employees
• Highly compensated employee is defined as
• More than 5 owner
• Linear ascendant or descendent of A, or
• Employees earning over 90,000 in prior plan year
• Highly compensated employees are allowed a
  deferral percentage greater than the average
  deferral percentage for non-highly compensated
  employees ?

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Basic Elements of a 401(k) Plan Part II

• Each employee has the flexibility to contribute
  or not
• Once an employee contributes to the plan,
  contributions are deemed to be employer
  contributions, subject to restrictions on
  withdrawal
• 401(k) contributions are no longer considered
  subject to the 25 of total eligible compensation
  limitation, but are included in the 41,000
  individual employee dollar limitation
  ?

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401(k) Plan
Participant DOB DOH Total Comp. Plan Contrib.
Deferral HCE 1-1-48 1-1-00
165,000 13,000 7.9 55.32 Staff
1 1-1-63 1-1-00 60,000 6,000
10.0 Staff 2 1-1-68 1-1-00 40,000
0 0.0 Staff 3 1-1-71 1-1-00
30,000 4,500 15.0 Staff
4 1-1-78 1-1-00 30,000 0
0.0 NHCE Subtotal 160,000 10,500
25.0 44.68 Total 325,000 23,500
100.00
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401(k) PS Safe Harbor
Participant DOB DOH Total Comp. 401(k)
PS Total HCE 1-1-48
1-1-00 165,000 13,000 4,950 17,950
78.90 Staff 1 1-1-63 1-1-00
60,000 0 1800 1800 Staff 2
1-1-68 1-1-00 40,000 0
1200 1200 Staff 3 1-1-71 1-1-00
30,000 0 900 900 Staff
4 1-1-78 1-1-00 30,000 0
900 900 NHCE Subtotal 160,000
0 4,800 4,800
21.10 Total 325,000 13,000 9,350
22,750 100.00
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401(k) NCPS Safe Harbor Minimum
Participant DOB DOH Total Comp. 401(k)
PS Total HCE 1-1-48 1-1-00
165,000 13,000 14,850 27,850
85.30 Staff 1 1-1-63 1-1-00 60,000
0 1800 1800 Staff 2 1-1-68
1-1-00 40,000 0 1200
1200 Staff 3 1-1-71 1-1-00 30,000
0 900 900 Staff 4
1-1-78 1-1-00 30,000 0
900 900 NHCE Subtotal 160,000
0 4,800 4,800
14.70 Total 325,000 13,000 19,650
32,650 100.00
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401(k) NCPS Safe Harbor Maximum
Participant DOB DOH Total Comp. 401(k)
SH N. Comp Total HCE 1-1-48
1-1-00 165,000 13,000 4,950
23,050 41,000 83.67 Staff 1 1-1-63
1-1-00 60,000 0 1,800
1,200 3,000 Staff 2 1-1-68 1-1-00
40,000 0 1,200 800
2,000 Staff 3 1-1-71 1-1-00 30,000
0 900 600
1,500 Staff 4 1-1-78 1-1-00 30,000
0 900 600
1,500 NHCE Subtotal 160,000 0
4,800 3,200 8,000 16.33 Total
325,000 13,000 9,750 26,250 49,000
100.00
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Husband Wife Profit Sharing Plan
Participant DOB Total Comp. Profit-Sharing
Husband 1-1-53 205,000
41,000 Wife 1-1-55 40,000
20,000 Total 245,000 61,000
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Husband Wife 401(k) PS Plan
Participant DOB Total Comp.
401k Profit-Sharing Total Husband 1-1-53
205,000 16,000 28,000 44,000 Wife
1-1-55 41,000 13,000
28,000 41,000 Total 246,000 29,000
56,000 85,000
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Husband Wife EE 401(k) PS Plan
Participant DOB Total Comp. 401k Profit-Sharing
Total Husband 1-1-53 205,000
16,000 28,000 44,000 Wife 1-1-55
41,000 13,000 28,000 41,000 HW
Subtotal 246,000 29,000
56,000 85,000 Staff 1 1-1-78
40,000 0 4,000
4,000 Total 286,000 29,000 60,000
89,000
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Husband Wife 401(k) Plan
Participant DOB Total Comp. 401k of
Comp 3 SH Husband 1-1-53 100,000
13,000 13
3,000 Wife 1-1-55 100,000 13,000
13 3,000 Subtotal
200,000 26,000 13
6,000 Staff 1 1-1-78 40,000
0 0 1,200 Staff 2
1-1-63 30,000 0
0 900 Staff 3 1-1-68
20,000 0 0
600 Staff 4 1-1-73 10,000 4,400
44 300 Subtotal
100,000 4,400 44/4 11 3,000 Total
300,000 30,400 9,000
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Defined Benefit Plan

• Generic term defines the benefit to be
  received from the plan
• Contributions are a function of the benefit at
  normal retirement age
• Maximum benefit of 100 of highest consecutive
  three year average compensation, to a maximum of
  165,000 per year at normal retirement age 62
  through 65 in 2004. ?

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Basic Elements of a Defined Benefit Plan

• No individual accounts for participants
• Benefits are typically earned pro-rata from
  current age to normal retirement age
• Contributions are mandatory and subject to
  minimum funding requirements under the law
• No in-service distributions are allowed
• Employer bears investment risk
• No self direction of investments is
  allowed ?

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Combination Defined Benefit and Defined
Contribution

• Overall tax deduction limitation of 25 of
  eligible plan compensation, OR the defined
  benefit contribution amount, if greater
• 401(k) allowed with defined benefit plan without
  restriction (not counted in 25 limitation)
• Defined benefit plan must cover 40 of eligible
  employees with a minimum of two employees under
  IRC 401(a)(2b)
• Preferred approach is floor offset plan
  combination of defined benefit pension plan with
  benefits reduced or offset by the projected
  benefits under the profit sharing
  plan ?

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Defined Benefit Prospects

• A Defined Benefit plan works well for business
  owners with no employees
• Can be paired with a deferral-only 401(k) plan
  for maximum deductions (bolt-on)
• Allows for deductible contributions beyond the
  25 or 41,000 limits that apply to defined
  contribution plans
• Allows for maximum accumulation of retirement
  funds
• Works best for older business owners
• Owners with rank and file employees may prefer an
  offset arrangement, rather than a straight
  defined benefit plan, to control
  costs ?

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Defined Benefit Plan Comparison Owner-Only Plan
Owner Retire DB Bolt-On
Total Excess beyond Age Age Cost
401(k) Contribution max PSP
contrib. 45 55 108,442
13,000 123,442 82,442 50
59 148,881 16,000
164,881 88,881 55 62 181,612
16,000 197,612 153,612 60
64 187,384 16,000
203,384 159,384 DB cost is based on
owners ability to take maximum required salary
for optimal length of time. Normal cost will be
actuarially adjusted going forward based on
salary and plan earnings.
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Basic Elements of a Floor Offset Arrangement

• Profit sharing plan for all eligible participants
  with a required threshold contribution of 7.5 of
  compensation
• Defined benefit pension plan providing for
  coverage of selected employees participating in
  profit sharing plan
• Defined benefit pension plan benefit formula is
  reduced or offset by the projected benefit
  generated by employees under the profit sharing
  plan ?

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Floor Offset Arrangement
Total Profit
Defined Participant DOB Comp.
Sharing Benefit Total HCE
1-1-48 205,000 15,375 66,500
81,875 85.85 Staff 1 1-1-53
60,000 4,500 0
4,500 Staff 2 1-1-58 50,000
3,750 0 3,750 Staff 3
1-1-63 40,000 3,000 0
3,000 Staff 4 1-1-78 30,000
2,250 0 2,250 NHCE
Subtotal 180,000 13,500 0
13,500 14.15 Total 385,000
28,575 66,500 95,875 100.00
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For Further Information
Designing and implementing a qualified
retirement plan is comparatively easy getting
the right plan for your client can be
challenging. If we can help, please visit our
web site, http//www.BenPlanInc.com, for proposal
documents, or contact us at Benefit Planning,
Inc. 4640 Admiralty Way, Floor 9 Marina del Rey,
CA 90292 310-577-1444 voice 310-821-1529
fax Sales_at_BenPlanInc.com