Cash Balance Plans - 201 Maximizing Contributions and Tax Deductions in a Cash Balance Plan – Part II
July Cash Balance Plans 201
May 29, 2015
More in-depth review of the rules and regulations surrounding the establishment and operation of a cash balance retirement plan.
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Cash Balance Plans - 201
Maximizing Contributions and Tax Deductions in a Cash Balance Plan – Part II
Our Path Today
Review of the Basics
Interest Rate Crediting
PBGC Coverage
Compliance Testing
Contribution Considerations
How to Get Started
2
REVIEW OF THE BASICS A quick look at the basics from Cash Balance 101
3
Cash Balance Plan Advantages
Larger contributions than 401k
Participants Understand Better
than DB
Flexibility in plan design
Minimize funding costs
Can have Combo Plan
Costs do not necessarily increase as participants age
4
Cash Balance Vocabulary
• Type of Defined Benefit Plan that Provides Lump Sum Benefit
Hybrid Plan
• Contribution and Interest Credits are Specified in Plan Document
Hypothetical Accounts
5
Plan Type Comparison
Characteristic Traditional DB Cash Balance 401K / PS
Contribution Levels? Not limited Not limited Limited to $56,500
Who Bears Investment Risk? Plan Sponsor Plan Sponsor Employee
Direction of Investments? Pooled Pooled Individual/Pooled
Participant Accounts? No Hypothetical Yes
Are Contributions Required? Yes Yes No1
PBGC Coverage Required? Sometimes Sometimes No
Retirement Benefit Formula? Annuity Lump Sum N/A
6
1Safe Harbor and Top Heavy Plans may require contributions
How should Assets be Invested?
If Actual Investment Return is Higher than Interest Credit Rate (ICR)
Amount of Required Contribution Decreases
7
ICR
How should Assets be Invested?
If Actual Investment Return is Lower than Interest Credit Rate (ICR)
Amount of Required Contribution Increases
8
ICR
Cash Balance Plan Example 1 One Owner Plans at Different Ages
EE Age Plan Comp.
Deferrals Profit Sharing
Contribution Credit
Total Contribution w
deferrals
Owner 65 $255,000 $23,000 $33,500 $216,750 $273,250
Owner 60 $255,000 $23,000 $33,500 $198,900 $255,400
Owner 55 $255,000 $23,000 $33,500 $178,500 $235,000
Owner 50 $255,000 $23,000 $33,500 $137,700 $194,200
Owner 45 $255,000 $17,500 $33,500 $107,100 $158,100
Owner 40 $255,000 $17,500 $33,500 $84,150 $135,150
Owner 35 $255,000 $17,500 $33,500 $66,300 $117,300
9
This is a hypothetical example dependent on specific assumptions and used for illustrative purposes ONLY. Plan is assumed to have PBGC coverage, otherwise combined plan limits may apply. Full amounts may not be deductible in the first plan year.
Cash Balance Plan Example 1 One Owner Plans at Different Ages
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
35 40 45 50 55 60 65
Co
ntr
ibu
tio
n
Age
Deferrals Profit Sharing Cash Balance
10
This is a hypothetical example dependent on specific assumptions and used for illustrative purposes ONLY. Plan is assumed to have PBGC coverage, otherwise combined plan limits may apply. Full amounts may not be deductible in the first plan year.
Cash Balance Plan Example 2 One Owner – Maximum in Both Plans
EE Age Plan
Comp. Deferrals Profit
Sharing Contribution
Credit
Total Contribution w/o deferrals
Owner 50 $255,000 $23,000 $33,500 $137,700 $171,200
NHCE 1 50 $40,000 $2,000 $3,600 $800 $4,400
NHCE 2 40 $35,000 $1,750 $3,150 $700 $3,850
NHCE 3 35 $45,000 $2,250 $4,050 $900 $4,950
NHCE 4 30 $50,000 $2,500 $4,500 $1,000 $5,500
NHCE 5 25 $30,000 $1,500 $2,700 $600 $3,300
% to Owner
65.05% 97.18% 88.61%
11
This is a hypothetical example dependent on specific assumptions and used for illustrative purposes ONLY. Plan is assumed to have PBGC coverage, otherwise combined plan limits may apply. Full amounts may not be deductible in the first plan year.
Cash Balance Plan Example 2 One Owner – Maximum in Both Plans
$0 $20,000 $40,000 $60,000 $80,000
$100,000 $120,000 $140,000 $160,000 $180,000
Co
ntr
ibu
tio
n
Participant
Cash Balance
Profit Sharing
12
This is a hypothetical example dependent on specific assumptions and used for illustrative purposes ONLY. Plan is assumed to have PBGC coverage, otherwise combined plan limits may apply. Full amounts may not be deductible in the first plan year.
INTEREST RATE CREDITING Overview of the options for interest rate crediting and how each option affects plan design
13
Interest Rate Options
Fixed or Variable
Rate
• A fixed rate = < 5%
• 30 Year Treasury Bond Yield (Most Common)
Market Rate1
• Vanguard S & P 500 Index
• Actual Return on Diversified Portfolio
14
1Interest Crediting Rate Options have been simplified for presentation purposes. Other regulations surrounding the interest crediting rate exist and are beyond the scope of this presentation.
Fixed or Variable Rate
• Predictable Earnings
• Can Reduce Contributions in High Earnings Years
Advantages
• Can Never Credit a Loss to Participants
• May Increase Contributions in Low Earnings Years
• Advisor Must Manage Assets to Mirror Stated Rate
Disadvantages
15
Market Rate Option
• Interest Credit Closely Matches Actual Return
• Can Post Year-By-Year Loss to Participants
• Predictable Contributions
Advantages
• Can Never Credit a Loss Over a Career
• May Not Reduce Contributions in High Earnings Years
Disadvantages
16
PBGC COVERAGE Review of PBGC Coverage Requirements and Plan Design Implications
17
PBGC Coverage Overview
CB Plans Generally Subject to PBGC
Insurance
Owner Only Plans Are Exempt
Professional Service Firms with 25 or
Fewer Participants Exempt
If No Exemption, Annual Premiums
Required
18
PBGC Premiums
Total Premium
$9 per $1,000
Un-funded
$45 per Participant
PBGC Coverage - Impact on Combined Plan Limits
Covered by PBGC
• Combined Plan Limit Does Not Apply
• Allows Larger Contributions
Not Covered by PBGC
• Combined Plan Limit Does Apply
• If ER DC Contribution = < 6%, CB Contribution Not Limited
• If ER DC Contribution > 6%, Combined Plan Limit = 31% of Pay
19
Cash Balance Plan Example 3 Two Owners – Max in Both Plans + PGBC Coverage
EE Age Plan
Comp. Deferrals Profit
Sharing Contribution
Credit
Total Contribution w/o deferrals
Owner 50 $255,000 $23,000 $33,500 $137,700 $171,200
Owner 45 $255,000 $17,500 $33,500 $107,100 $140,600
NHCE 1 50 $40,000 $2,000 $3,600 $800 $4,400
NHCE 2 40 $35,000 $1,750 $3,150 $700 $3,850
NHCE 3 35 $45,000 $2,250 $4,050 $900 $4,950
NHCE 4 30 $50,000 $2,500 $4,500 $1,000 $5,500
NHCE 5 25 $30,000 $1,500 $2,700 $600 $3,300
% to Owners
78.82% 98.39% 93.41%
21
This is a hypothetical example dependent on specific assumptions and used for illustrative purposes ONLY. Plan is assumed to have PBGC coverage, otherwise combined plan limits may apply. Full amounts may not be deductible in the first plan year.
Cash Balance Plan Example 3 Two Owners – Max in Both Plans + PBGC Coverage
$0 $20,000 $40,000 $60,000 $80,000
$100,000 $120,000 $140,000 $160,000 $180,000
Co
ntr
ibu
tio
n
Participant
Cash Balance
Profit Sharing
22
This is a hypothetical example dependent on specific assumptions and used for illustrative purposes ONLY. Plan is assumed to have PBGC coverage, otherwise combined plan limits may apply. Full amounts may not be deductible in the first plan year.
Cash Balance Plan Example 4 Two Owners - Max in Both Plans - No PBGC Coverage
EE Age Plan
Comp. Deferrals Profit
Sharing Contribution
Credit
Total Contribution w/o deferrals
Owner 50 $255,000 $23,000 $15,300 $137,700 $153,000
Owner 45 $255,000 $17,500 $15,300 $107,100 $122,400
NHCE 1 50 $40,000 $2,000 $2,400 $800 $3,200
NHCE 2 40 $35,000 $1,750 $2,100 $700 $2,800
NHCE 3 35 $45,000 $2,250 $2,700 $900 $3,600
NHCE 4 30 $50,000 $2,500 $3,000 $1,000 $4,000
NHCE 5 25 $30,000 $1,500 $1,800 $600 $2,400
% to Owners
71.83% 98.39% 94.51%
23
This is a hypothetical example dependent on specific assumptions and used for illustrative purposes ONLY. Full amounts may not be deductible in the first plan year.
Cash Balance Plan Example 4 Two Owners - Max in Both Plans - No PBGC Coverage
$0 $20,000 $40,000 $60,000 $80,000
$100,000 $120,000 $140,000 $160,000 $180,000
Co
ntr
ibu
tio
n
Participant
Cash Balance
Profit Sharing
24
This is a hypothetical example dependent on specific assumptions and used for illustrative purposes ONLY. Full amounts may not be deductible in the first plan year.
COMPLIANCE TESTING Overview of the required compliance tests and the impact on plan design
25
Compliance Tests
Meaningful Benefit Test
Lesser of 50 or 40% of Total Eligible EE’s
Must Receive Meaningful Benefit
Defined as 0.5% of Accrued Benefit
at Age 65
Discrimination Test
General Non-Discrimination Test
Average Benefits Percentage Test
Gateway Test
Minimum Employer Contribution
Required
5% to 7.5% in the DC Plan
25
Cash Balance Plan Example 5 Two Owners + 1 HCE. HCE Receives No Cash Balance
EE Age Plan
Comp. Deferrals Profit
Sharing Contribution
Credit
Total Contribution w/o deferrals
Owner 50 $255,000 $23,000 $15,300 $137,700 $153,000
Owner 45 $255,000 $17,500 $15,300 $107,100 $122,400
HCE 31 $255,000 $17,500 $12,750 $0 $12,750
NHCE 1 50 $40,000 $2,000 $2,400 $800 $3,200
NHCE 2 40 $35,000 $1,750 $2,100 $700 $2,800
NHCE 3 35 $45,000 $2,250 $2,700 $900 $3,600
NHCE 4 30 $50,000 $2,500 $3,000 $1,000 $4,000
NHCE 5 25 $30,000 $1,500 $1,800 $600 $2,400
% to Owners
55.28% 98.39% 90.55%
27
This is a hypothetical example dependent on specific assumptions and used for illustrative purposes ONLY. Full amounts may not be deductible in the first plan year.
Cash Balance Plan Example 5 Two Owners + 1 HCE. HCE Receives No Cash Balance
$0 $20,000 $40,000 $60,000 $80,000
$100,000 $120,000 $140,000 $160,000 $180,000
Co
ntr
ibu
tio
n
Participant
Cash Balance
Profit Sharing
28
This is a hypothetical example dependent on specific assumptions and used for illustrative purposes ONLY. Full amounts may not be deductible in the first plan year.
Cash Balance Plan Example 6 Two Owners + 1 HCE. HCE Receives Cash Balance
EE Age Plan
Comp. Deferrals Profit
Sharing Contribution
Credit
Total Contribution w/o deferrals
Owner 50 $255,000 $23,000 $15,300 $137,700 $153,000
Owner 45 $255,000 $17,500 $15,300 $107,100 $122,400
HCE 31 $255,000 $17,500 $12,750 $40,000 $52,750
NHCE 1 50 $40,000 $2,000 $3,800 $800 $4,600
NHCE 2 40 $35,000 $1,750 $3,325 $700 $4,025
NHCE 3 35 $45,000 $2,250 $4,275 $900 $5,175
NHCE 4 30 $50,000 $2,500 $4,750 $1,000 $5,750
NHCE 5 25 $30,000 $1,500 $2,850 $600 $3,450
% to Owners
49.08% 84.76% 78.43%
29
This is a hypothetical example dependent on specific assumptions and used for illustrative purposes ONLY. Plan is assumed to have PBGC coverage, otherwise combined plan limits may apply. Full amounts may not be deductible in the first plan year.
Cash Balance Plan Example 6 Two Owners + 1 HCE. HCE Receives Cash Balance
$0 $20,000 $40,000 $60,000 $80,000
$100,000 $120,000 $140,000 $160,000 $180,000
Co
ntr
ibu
tio
n
Participant
Cash Balance
Profit Sharing
30
This is a hypothetical example dependent on specific assumptions and used for illustrative purposes ONLY. Plan is assumed to have PBGC coverage, otherwise combined plan limits may apply. Full amounts may not be deductible in the first plan year.
CONTRIBUTION CALCULATIONS Important considerations in calculating and funding contributions
31
First Year Funding Limitation
Special Requirements Apply in Year
One
Exact Contribution –
No Funding Range
May Not Be Fully
Deductible in Year One
32
Contribution Requirements
Mandatory Annual
Contribution
Funding Range After Year One
Contribution Depends on Asset
Performance
Profit Sharing Mandatory with Combo CB Plan
33
GETTING STARTED How to work with JULY to setup a Cash Balance Plan
34
Best Candidates
Desire Contributions >
$51,000
Maintain Steady, Predictable
Profits
Accumulate a Large Benefit
Quickly
Older Owners and Younger Workforce
Contributions Between 5% to
7.5% of Pay
Medical, Legal, Dental,
Professional
35
The Design Process
Collect Data
•Date of Birth
•Date of Hire
•Compensation
•Desired Contribution Amount
•Goal of Plan Design
Prepare Illustration
•Data Provided to July
•Plan Designed Based on Client’s Goals and Demographics
• July Provides Proposal
Review / Finalize Design
•Review Design with Advisor
•Review Design with Client
•Request any Modifications in Design
Implement Plan
•Complete Setup Paperwork
•Prepare Plan Document
•Open Investment Account
•Prepare First Year Valuation
•Fund First Year Contributions
36
Plan Implementation
• Set up Guide
• Document Preparation
• Document Signed – 12/31/2013 Deadline*
• 2013 Valuation Prepared
• 2013 Contribution Made – 9/15/2014 Deadline*
37 *Deadlines are for 2013 calendar year plans.
Cash Balance Plans - 201
Maximizing Contributions and Tax Deductions in a Cash Balance Plan – Part II
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