Pension Plan Types

"Pension 4 Life"

4 types of pension plans:

Defined Benefit:  Defined Benefit & Cash Balance

(DB : DB & CB)

Defined Contribution: Money Purchase & Target Benefit

(DC : MP & TB)

Profit Sharing Plan Types

"PS 7"

7 Types of Profit Sharing Plans

All are DC plans.  No Required ER Contributions!

Profit Sharing / Stock Bonus / ESOP / 401(k) / Thrift / Non-Comparability / Age-Based Profit Sharing

Defined Contribution Annual Limit

25% of covered compensation

(Covered compensation limit = $255,000,

i.e., plan funding formulas may not consider any compensation above $255,000 )

Highly Compensated Employee -

Defintions

Either:

1) A 5% owner in current year or prior year; or

2) received > $115,000 compensation

Note:  A "5% owner" must own MORE than 5% of the company's stock or capital.

Family attribution rule -

Qualifying Relatives for accumulation of shares

for Highly Compensated EE Status

Owner's Parents

Owner's Spouse

Children

Grandchildren

Note: Owner's grandparents are NOT

qualifiying relatives for the attribution rule.

Only one generation back, two forward.

Qualified Retirement Plans -

Coverage Tests & Formulas

General Safe Harbor = % of NHC covered

Ratio % Test = % of NHC Covered

% of HC Covered

Avg. Benefits Test = AB% of NHC

AB% of HC

Results must be >= 70% for plan to be qualified

Defined Contribution Plans -

Vesting Schedules

DC 2-6

2 to 6 Year Graduated - 0-20-40-60-80-100

3-Year Cliff - 0-0-100

2-Year Election - 0-100

Defined Benefit Plans -

Vesting Schedules 

DB 3 - 7

3 to 7 Year Graduated - 0-0-20-40-60-80-100

5-Year Cliff (fits in between 3-7) - 0-0-0-0-100

2-Year Election - 0-100

Top Heavy Plans -

Qualifiying Criteria

More than 60% of benefits or contributions go to key employees - Plan is Top Heavy

DB Plans

Present value of accrued benefits (DB) for key EE's exceeds 60% of PV of accrued benefits for all EE's.

DC Plans

Sum of account balances for key EE's exceed 60% of sum of account balances for all EE's.

Key Employee Criteria

1) > 5% owner (regardless of compensation)

2) > 1% owner + compensation > $150,000

3) Officer (administrative executive) w/ compensation > $165,000

Top Heavy Plans -

Minimum Funding Requirements

DB Plans = 2% X Years of Svc X Comp

(B is the 2nd letter; 2% is the funding factor)

DC Plans = 3% minimum to all eligible EE's

(C is the 3rd letter; 3% is the funding factor)

Comparison of DB vs DC Plan Features

Feature                    DB Plans             DC Plans

Annual Actuary          Yes                     NO

Investment Risk         Employer              Employee

Forfeitures                Reduce Costs       Allocate OR Reduce Costs

PBGC Coverage          Yes                     NO

Prior Svc. Credit         Yes                     NO

Soc Sec Integration    Offset or Excess    Excess Only

Separate Accts           NO - Comingled    Yes - Separate

Favors                      Older EE's            Younger EE's

DB Plan Funding Formulae

FLAT - FLAT- UNIT

Flat amount - Flat $ amount per month

Flat percentage - Flat % of comp per month

Unit Credit - Set % X Years of Svc X Avg. Comp

Cash Balance Pension Plans -

Key Features

1)  Comingled assets - No EE-specific accounts

2)  Guaranteed earnings attributable to EE's share of the comingled assets.

3)  Plan sponsor is responsible for investment performance

4)  ER contributions AND EE benefits are paid according plan formulas

5)  Favors younger EE's due to longer participation in the plan and more years of contributions.

Money Purchase Pension Plan -

Key Features

1)  DC pension plan - Provides specified ER contribution equal to a fixed % of EE compensation EACH YEAR.

2)  Separate accounts are set up for each EE.  No comingling of plan assets.

3)  Benefits younger EE's due to greater number of contribution periods and compounding periods.

4)  Contribution limits:  Lesser of $51,000 or 100% of EE's comp.

Pension Plan Vs. Profit Sharing -

Key Features

Feature              Pension Plan        Profit Sharing Plan

Primary Goal              Pension @ retirement    Defer comp & taxes

In-service W/D's        No                             Yes (after 2 years)

Mandatory Funding     Yes                            No

ER Securities Limit      10%                           100%

ER Contribution Limit   25% of covered comp    25% of covered comp

401(k) Eligible Entities

Coporations

Partnerships

LLC's

Proprietorships

Tax-Exempt Entities

Actual Deferral Percentage (ADP) Schedule

ADP for NHC EE's        Permissable ADP for HC EE's

        0% to 2%                2 X ADP for NHC EE's

        2% to 8%                2% + ADP for NHC EE's

        8% and up               1.25 X ADP for NHC EEs'

2 Times - 2 Plus - 1.25 Times

Safe Harbor 401(k) -

Automatic Deferral Rates

for plans with

Automatic Enrollment Feature

Year 1 - 3% Min

Year 2 - 4% Min

Year 3 - 5% Min

Year 4+ - 6% Min

All Years - 10% Max Deferral Rate

Must be uniformly applied to all eligible EE's

Lump Sum Distribution from

Stock Bonus or ESOP -

Tax Treatment?

NUA

Net Unrealized Appreciation

Value of stock contributions taxed as ordinary income.

Gain/loss on stock remains deferred until stock is sold.

Exceptions to 10% Early W/D Penalty

Death

Disability

Age 59 1/2

Substantially Equal Payments (Sect. 72 (t))

Medical expenses >7.5% of AGI

QDRO

Public Safety EE termed after age 50

Age 55 AND termed from service

Additional Exceptions to the

10% Early Withdrawal Penalty

E - T - M - Q

ESOP Dividends paid within 90 days of plan year-end

Tax Payment Distribution

Medical Expenses > 7.5% of AGI

QDRO Distributions

Non-Contributory Plans -

Alternate Definition

Pension Plans

DB / Cash Balance / Money Purchase / Target Balance

These plans are considered Non-Contributory because the EE's (beneficiaries of the plan) do not contribute to them.

Self-Employment Tax Calculation

Net Self-Employment Income

X .9235 = (100.0% -.062 [Soc. Sec] -.0145 [Medicare])

Net Earnings subject to self-employment tax

X .133 (up to 113,700) + (.029 X over 113,700)

 = Self-Employment Tax

IRA Contribution Deductibility -

AGI Phase-Out Limits &

Deductibility Reduction Formulae

Phase Out Ranges - AGI Amounts

Single - AGI: $59K - $69K (-0- deduction > $69K)

 MFJ - AGI: $95K - $115K (-0- deduction > $115K)

Reduction Amount Formula:

Contribution Limit ($5,000 or $6,000) X AGI - Lower Limit

                                                            $10K (Single) or

                                                             $20K (MFJ) 

Roth IRA CONTRIBUTION Limits

Roth IRA Contribution Limits - AGI

Single    $112K - 127K

MFJ        $178K - 188K

MFSeparate     $0 - $10K

Contributions to Roth IRA's are prohibited above the limits noted above.  Use phase out reduction rules for AGI's within the ranges noted above.

Roth IRA Distribution Rules

BOTH rules must be satisfied for distributions to be qualified:

1)  5 tax-year holding period must be satisfied;

AND

distribution is made: 1) after owner is age 59 1/2; or

2) to the owner's beneficiary or estate; or

3) due to the owner being disabled; or

4) for first-time homebuyers, including owner, spouse, child or grandchild (up to lifetime cap of $10K)

IRA Prohibited Transactions

1) Selling, exchanging or leasing property to an IRA;

2) Lending money to an IRA;

3) Receiving unreasonable comp for managing an IRA;

4) Pledging an IRA as security for a loan;

5) Borrowing from an IRA;

6) Buying property for personal use.

If a prohibited transaction occurs, the entire account balance is deemed distributed, subject to ordinary income tax AND subject to 10% early withdrawal penalty.

Eligible entities to establish a SIMPLE plan

C-S-LLC-P-P-G

C Corp

S Corp

LLC

Partnership

Prorietorship

Governments

SIMPLE plan may NOT be established if

ER contributes a DB, DC, SEP or 403(b).

ISO (Incentive Stock Option) -

Holding Period Requirements

2 Years from date of ISO Grant

AND

1 Year from date of Exercise

(Failure to meet these holding period requirements causes loss of preferred tax treatment, i.e., taxed at OI rates.)

ISO grants > $100K are treated as NQSO.