defined benefit plans presented by: mary read, cpc, qpa national director of qualified plan...
TRANSCRIPT
DEFINED BENEFIT PLANS
Presented by:
Mary Read, CPC, QPA
National Director of Qualified Plan Marketing
For Financial Professional Use Only. Not For Use With the Public.
DISCLOSURE
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This material is intended as a general discussion of
qualified plan concepts and strategies. It is not
intended as specific advice concerning any
individual legal, tax or accounting matter. Alliance
Benefit Group-Pentegra does not provide legal, tax
or accounting advice. Any questions regarding your
individual situation should be directed to your
personal advisor on such matters.
For Financial Professional Use Only- Not For Use With Public
HOW MUCH DOES RETIREMENT COST?
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60%, 75%, 80%, or more, of current income?
$1,000,000?
$2,000,000?
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THE VALUE OF CERTAINTY
Guaranteed Returns
Guaranteed Death Benefits
Predictable Costs
Protection from Creditors
Current Income Taxes
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COST?
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ADVANTAGE FOR BABY BOOMERS?
The Defined Benefit plan is the only plan that may allow older employees to accumulate more assets than a defined contribution plan in the short period remaining until retirement.
COMPARE THE DEDUCTION – 55 TO RETIRE AT 65
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Traditional Defined Benefit$137,358
ProfitSharing$50,000
The above example is purely hypothetical and for illustrative purposes only. The example shown above does not represent the setup of any particular plan and your results likely will differ. Contributions are actuarially determined and may change based on actual experience.
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COMPARE THE ACCUMULATION – 55 TO RETIRE AT 65
ProfitSharing
$739,180
Traditional Defined Benefit$2,261,465⁵
Profit Sharing plan assumes $50,000 annual contribution growing at 5% for 10 years. Traditional Defined Benefit amount is value required at retirement to pay the defined monthly benefit. The above example is purely hypothetical and for illustrative purposes only. The returns above do not consider inflation, taxes, changes of law, or management expenses which may reduce your return. The example shown above does not represent the setup of any particular plan and your results likely will differ. Contributions are actuarially determined and may change based on actual experience.
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TYPES OF DEFINED BENEFIT PLANS
■ Traditional
– Safe Harbor
– General Tested
■ Fully Insured 412(e)
(3)*
■ Cash Balance
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* Guarantees are provided through life insurance and annuity contracts and are dependent upon the claims-paying ability of the issuing company.
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DEFINED BENEFIT PLAN LIMITS
Maximum Annual Benefit (2012) is lesser of
– 100 % High 3 consecutive year average compensation; or
– $200,000
No specific contribution limit
Maximum Compensation $250,000 (2012)
HOW MUCH WILL THE CONTRIBUTION BE?
It Depends…
– Entry Age
– Retirement Age
– Years of Service
– Average Compensation
ANSWERING THE “WHAT IF’S”
Defined retirement benefits, insured death benefits and large deductions for the corporation sound great, but what if business goes south?
– Reduce formula
– Convert from Fully Insured 412(e)(3) to traditional defined benefit
– Terminate plan
MINIMUM FUNDING
Annual contributions must be paid
Contributions must be paid within 8 ½ months after the end of the plan year
Includes any interest on late quarterly payments
IRS penalties for failure to meet minimum funding requirements
PBGC
Pension Benefit Guaranty Corporation
Created in 1974
Insures monthly pension benefits
Funded by plan sponsor’s with premiums paid annually
May take over a plan in a distress termination
*$4,654.41 monthly 2012 for age 65 straight-life annuity
ENHANCED BENEFITS
Pre-retirement Death Benefits■ Pre-tax premium payment■ Provides survivor benefits in the
event of premature death– Plan Self Completes for insurance face
value
■ Pure death benefit passes to beneficiaries income tax free
■ Policy continuance after retirement
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NET COST OF $1,000,000 LIFE INSURANCEFACE AMOUNT
No Life Insurance
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With Life Insurance ²
Current Age 55 55
Retirement Age 65 65
Average Compensation $250,000 $250,000
Plan Sponsor Contribution $137,358 $138,000
Value at Retirement 5 $2,261,465 $2,261,465
Monthly Benefit @ Retirement $16,667 16,667
Face Amount of Life Insurance
$0 $1,000,000
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Benefit formula: 203% of compensation for each year of participation less than 25 years.NL Life Bulder whole life insurance [form series 8311/8311ID(0306)] standard, non-smoker, unisex rates; max 2/3rd rule, Issued by National Life Insurance Company, Montpelier, VT and a side fund. Product may not be available in all states. All insurance values shown are guaranteed. Guarantees are dependent upon the claims-paying ability of the issuing company. The above example is purely hypothetical and for illustrative purposes only. The example shown above does not represent the setup of any particular plan and your results likely will differ. Products may not be available in all states. Contributions are actuarially determined and may change based on actual experience.
For Financial Professional Use Only- Not For Use With Public
NET COST OF $1,000,000 LIFE INSURANCEFACE AMOUNT
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InsurancePremiums$28,600
Total Contribution$138,000 ²
Fund Only$137,358¹
Benefit formula: 203% of compensation for each year of participation less than 25 years.NL Life Bulder whole life insurance [form series 8311/8311ID(0306)] standard, non-smoker, unisex rates; max 2/3rd rule, Issued by National Life Insurance Company, Montpelier, VT and a side fund. Product may not be available in all states. All insurance values shown are guaranteed. Guarantees are dependent upon the claims-paying ability of the issuing company. The above example is purely hypothetical and for illustrative purposes only. The example shown above does not represent the setup of any particular plan and your results likely will differ. Products may not be available in all states. Contributions are actuarially determined and may change based on actual experience.
Contribution IncreaseOver Fund Only$642 Per Year
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Incidental Limits 100 X Projected Monthly Retirement Benefit
Revenue Ruling 74-307
•1/3 Theoretical Contribution for Univerasl Life
•2/3 Theoretical Contribution for Whole Life
Provides Death Benefits from Day 1
Policy surrender values partially fund defined benefit at retirement
INCIDENTAL LIMITS
CASE STUDY – INDUSTRIAL DESIGN, INC.
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Age Compensation
Owner A 61 $250,000
Owner B 48 $250,000
Employee 1 32 $60,000
Employee 2 62 $30,000
$590,000
This example is purely hypothetical and for illustrative purposes only. The example shown does not represent any particular plan and your results will differ.
For Financial Professional Use Only- Not For Use With Public
TRADITIONAL DEFINED BENEFIT PLAN
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Benefit formula:219% of compensation for each year of participation less than 25 years.NL Life Builder life insurance, form series 8310/8311/8310ID(0306)/8311ID(0306), standard non-smoker, unisex rates; max 2/3rd rule and Flexible Premium Annuity, form series 9614/9614ID(0307), issued by National Life Insurance Company, Montpelier, VT. The above example is purely hypothetical and for illustrative purposes only. The example shown above does not represent the setup of any particular plan and your results likely will differ. Products may not be available in all states. All insurance values shown are guaranteed. Guarantees are dependent upon the claims-paying ability of the issuing company. Contributions are calculated based on the guarantees in the products.
Age Salary Max Monthly Benefit ³
Trad DB Contribution without Life Insurance ¹
Trad DB Contribution
with Life Insurance ²
Insurance Death
Benefit⁴
61 $250,000
$8,981 $188,111 $197,373 $2,887,557
48 250,000 16,667 56,618 63,697 2,591,791
32 60,000 5,000 2,823 3,686 512,591
62 30,000 1,095 22,704 23,542 322,292
Total $270,255 $288,299
Key %
90% 91%
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WHICH CLIENTS?
■ Identify Clients With Need– Profitable– Cash Flow
■ Approach– Save Taxes– Protection from Creditors– Improve Design to Give More to the Business Owner– Add a Second Plan for Flexibility and Greater
Contributions– Buy Insurance with Tax Deductible Contributions
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Government Census Statisticshttp://www2.census.gov/csd/susb/2006/usst06.xlshttp://www.census.gov/epcd/nonemployer/2006/us/US000.HTMhttp://www2.census.gov/csd/susb/2006/usst06.xlshttp://www.census.gov/epcd/nonemployer/2006/us/US000.HTMU.S. Department of Labor, U.S. Bureau of Labor Statistics, August 2007National Compensation Survey: Employee Benefits in Private Industry in the United States, March 2009Update 2009 http://www.bls.gov/ncs/ebs/benefits/2009/benefits_retirement.htm
How About New Clients?30 million businesses
comprised of 9.5 million incorporated businesses with less than 10 employees and 20.7 million unincorporated
businesses
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IN A PERFECT WORLD…
Ask the employer:
How much do you want to contribute?
Which employees do you want to include?
Which employees do you want to favor?
…within the law we can help design a plan
that comes close to the client’s idea of
“perfect”
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ESTABLISHING A PLAN
Custom Plan Design Proposal
Execute Plan Document
Ongoing Administration
Must be established by last day of fiscal year, usually December 31
For Financial Professional Use Only – Not For Use With Public
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I CAN’T DO THIS ALONE
Outstanding Personal ServiceIndustry ExpertsNo Commission SplitsNo Hidden Fees
Lori J. CarpenterAdvisor Relationship Manager(800) 255-8678Direct: [email protected]
Mary Read CPC, QPANational Director of Qualified Plans [email protected]
For Financial Professional Use Only – Not For Use With Public
CIRCULAR 230 DISCLOSURES
The above information is not intended or written to be used, and it cannot
be used, by any person for the purposes of avoiding any penalty that may
be imposed by the Internal Revenue Service.
In the event the advice is also considered to be a “marketed opinion” within
the meaning of the IRS guidance, then as required by the IRS, please be
further advised of the following:
The above advice was written to support the promotion or marketing of the
transactions or matters addressed by the written advice and, based on the
particular circumstances, you should seek advice from an independent tax
advisor.
24For Financial Professional Use Only- Not For Use With Public
DISCLOSURES■ Footnote 1: Traditional DB & DB Select Without Life Insurance
- Annual contribution assuming annually computed 5.5% yearly total return and 4% salary increase.
■ Footnote 2: Traditional DB & DB Select With Life Insurance
- Reflects value of the fund and cash value in the life insurance contracts to fund the defined monthly benefit at retirement.
■ Footnote 3: Max Monthly Benefit
- Defined in accordance with IRC Section 415.
■ Footnote 4: Insurance Death Benefit
- This is the guaranteed death benefit provided by the life insurance contracts purchased in the plan.
■ Footnote 5: Lump Sum Value at Retirement
- The lump sum payments under a defined benefit plan are limited by the provisions of IRC417(e) and IRC415(GATT). The lump sum total is actuarially determined and assumes the defined monthly benefit is paid as a single life annuity. The lump sum is comprised of the cash value of plan investments (including the cash surrender value of the life insurance, if applicable) as of the defined retirement age. If the participant chooses to take distribution of the life insurance contract, the cash surrender value of the contract will comprise a portion of the distribution. These numbers are shown before taxes, which may reduce the funds available to you.
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DISCLOSURES■ Footnote 6: 412(e)(3) without Life Insurance
– Reflects value of the annuity contract to fund the defined monthly benefit at retirement. This is calculated in accordance with IRC Section 412(e)(3).
■ Footnote 7: 412(e)(3) with Life Insurance
– Reflects value of the annuity contract and cash value of the life insurance contract to fund the defined monthly benefit at retirement. This is calculated in accordance with IRC Section 412(e)(3).
■ Footnote 8: DB Advantage
– Contribution Credits and Interest Credits are credited each year to each plan participant’s hypothetical individual account in a cash balance plan.
■ Footnote 9: DB Advantage with Life Insurance
– Insured contribution the employer is required to make for each plan participant.
■ Footnote 10: DB Advantage without Life insurance
– Non-Insured contribution the employer is required to make for each plan participant.
■ Footnote 11: DB Advantage life premium
– With life insurance in the plan, this is the premium paid for the life insurance for each participant
■ Footnote 12: DB Advantage fund contribution
– With life insurance in the plan, the portion of the contribution that is unallocated funds in the participant’s account
26For Financial Professional Use Only- Not For Use With Public