2929 Arch Street, Suite 600 Philadelphia, PA 19104-2889 Phone: [phone] Fax: [phone] Web: www.mand.com

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2929 Arch Street, Suite 600Philadelphia, PA
19104-2889Phone [phone] Fax (215)
222-5522Web www.mand.com

• 401(k) Secrets
• Every Financial Advisor Should Know

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IRS Circular 230 Disclosure

• IRS regulations require us to notify you that
  this communication was not intended or written to
  be used, and cannot be used, by you or any
  taxpayer, for the purpose of avoiding penalties
  that the IRS might impose on the taxpayer.

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• Adding Value Through Plan Design

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What Do Your Clients Want
Adding Value Through Plan Design

• Plans that deliver benefits to owners, family and
  other valued employees owner-centric plan
  designs
• Plans that minimize contributions for those who
  wont appreciate them
• Plans that can easily adapt to changing business
  conditions and changing employee demographics

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Recognize Plan Design Strategies

• What does a 3 company contribution buy for the
  owner?
• How much does the maximum owner contribution cost
  the company in employee contribution expense?

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Objectives
What does 3 of Participants Compensation Buy
for Owner?

• Assume owner gt 50 years old, comp of 245,000
• 3 7,350 contribution
• plus 22,000 deferral (16,500 deferral plus
  5,500 catch-up)
• plus 6 of comp 14,700
• (Assumes maximum cross-tested design)

3 of Participants Comp Buys Owner 44,050
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Objectives
What is Minimum Participants Contribution
Expense to Maximize Owners Contribution?

• Assume Owner gt 50 years old, comp of 245,000
• 22,000 owner deferral (16,500 deferral plus
  5,500 catch-up)
• 13.27 of owners comp 32,500
• 4.42 contribution to employees
• (Assumes maximum cross-tested design)

Owner Maximum of 54,500 costs 4.42 of
Participants Compensation
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What is OCPP ?
Adding Value Through Plan Design

• One Category Per Participant
• Defined Contribution (DC) Plan

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How OCPP Satisfies Clients Wants
Adding Value Through Plan Design

• Ability to favor owners and family of any age
• Ability to pay tax-sheltered bonus to any
  employee without requirement to do so again next
  year
• Ability to minimize contributions for non-favored
  employees
• Flexible to changing business conditions and
  demographics

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Identify OCPP Plan Design Candidates
Adding Value Through Plan Design

• Successful business. For example
• Professional Practices (e.g. Medical, Dental, Law
  and Accounting Firms)
• Family Owned Businesses
• Companies With High Sales/Profit Margins
• Willing to make a 3 to 5 profit sharing
  contribution for staff
• Top-Heavy Plans
• 401(k) Plans with Non-Elective Safe Harbor
• Owners want to maximize contributions for
  themselves and/or reduce contributions for staff

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Defined Contribution (Profit Sharing) Plan Types
Adding Value Through Plan Design

• Safe Harbor Plans Prototype Documents
• Non-Integrated
• Integrated
• General Test Plans Prototype Documents
• New Comparability
• General Test Plans Customized Documents
• OCPP One Category Per Participant

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New Comparability vs. OCPP
Adding Value Through Plan Design

• New Comparability
• Pre-Defined Categories or Tiers of Participants
• Cross-Tested (Preferred Employees MUST be
  older)
• OCPP One Category Per Participant
• Unlimited number of groups
• Each participant is in their own category
• Complete Testing Flexibility
• Preferred Employees need NOT be older

OCPP NOT A MULTI-TIERED NEW COMPARABILITY DESIGN
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MMG OCPP Plan Document
Adding Value Through Plan Design

• Form of plan has received a favorable opinion
  letter from the IRS as a volume submitter
  document under EGTRRA
• May be submitted for individual determination
  letters based on each clients unique fact pattern

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• Case Studies

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(No Transcript)
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(Case 1 - Illustration A)

• This is a typical integrated allocation found in
  safe harbor (prototype) documents.
• Because of low deferral rates by employers, the
  family is unable to maximize their 401(k)
  contributions.
• In order to maximize the contribution for Child
  and Owner, a 25.17 contribution rate will be
  needed for the staff.
• Family will receive less than 47 of company
  contributions (including their own deferrals).

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(No Transcript)
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(Case 1 - Illustration B)

• By adding a 3 non-elective safe harbor
  contribution, the situation is significantly
  improved.
• The safe harbor contribution allows all family
  members to maximize their 401(k) contributions.
• This step alone will increase the familys share
  of total company contributions (including their
  own deferrals) to 60.63.
• Note that because of the catch-up contribution,
  the Father of the Owner is able to have in excess
  of 100 of compensation contributed!

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(No Transcript)
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(Case 1 - Illustration C)

• Because staff deferral rates are not high, a
  discretionary match should be considered.
• The non-elective safe harbor allows the company
  to make a matching contribution of up to 4 of
  compensation without regard to the discrimination
  testing usually required for matching
  contributions.
• The family receives nearly 90 of the matching
  contribution.
• This in turn permits the company profit sharing
  contribution rate to be reduced to 17.33, saving
  almost 40,000 in company expense.

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(No Transcript)
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(Case 1 - Illustration D)

• With a new comparability profit sharing
  allocation, the Childs age causes the staff
  contribution rate to increase to 18.17
• This rate is higher than any family member
  receives!
• The familys share of the total contribution
  (including family deferrals) drops to 62.98 of
  the total.
• NEW COMPARABLITY DOES NOT WORK WHERE THE FAVORED
  GROUP INCLUDES YOUNG EMPLOYEES!

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(No Transcript)
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(Case 1 - Illustration E)

• The only reason the two Warehouse Staff are
  treated as favored employees is because they
  are young.
• PROBLEM This would appear to violate the Age
  Discrimination in Employment Act and Internal
  Revenue Code Section 411(b)(2)(A) which prohibits
  reduction to allocation rates because of age.

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(No Transcript)
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(Case 1 - Illustration F)

• With OCPP, age is not a factor!
• The favored employees (Office Manager Warehouse
  Manager) are selected for a higher contribution
  rate because they are valued.
• Using this discretionary pre-tax bonus for two
  favored employees enables the other employees
  contributions to be minimized at 5 of
  compensation.
• The familys share of contributions (including
  deferrals) increases to 79.90 of the total!

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(No Transcript)
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(Case 1 - Illustration G)

• Under this OCPP allocation, the goal is to
  maximize the family at the least cost for
  employees.
• The two favored individuals are those with the
  lowest compensation.
• Age discrimination is not an issue the two
  favored employees are among the oldest.
• The familys share of the total company
  contributions (including their deferrals)
  increases to 83.99.

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(Case 2 - Illustration A)

• If the youngest employee terminated employment
  during the current plan year, the new
  comparability formula becomes a disaster.
• The third-party administrator typically does not
  learn about the demographic changes until after
  the end of the plan year, where any changes to
  the benefit formula may be a prohibited reduction
  in accrued benefits of the participants.

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(No Transcript)
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(Case 2 - Illustration B)

• Without the youngest employee, even the
  integrated allocation is superior to the new
  comparability allocation.
• But it is too late to restore this type of
  formula if the plan year has already ended!

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(No Transcript)
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(Case 2 - Illustration C)

• Using the OCPP allocation, the effect of the
  youngest employees termination is negligible.
• The familys share of the total contribution
  (including family deferrals) increases to 80.36.
• Age continues to be a non-factor.

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(No Transcript)
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(Case 2 - Illustration D)

• Under the lowest-cost OCPP scenario, the
  termination of the youngest employee is not a
  factor.
• The familys share of the total contribution
  (including family deferrals) increases to 86.02.

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(No Transcript)
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(Case 3 - Illustration A)

• This is a non-top heavy plan because key
  employees do not represent more than 60 of plan
  assets.
• The founder is young (37), so a new comparability
  design will be of no use in maximizing the
  benefits of Founder.
• With the plan providing for deferrals and match
  only, Founder receives 7,350 out of a total
  employer match of 82,599 split among 70
  employees.
• Founder is able to maximize his 401(k)
  contribution because of sufficient level of
  employee deferrals.

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(No Transcript)
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(Case 3 - Illustration B)

• With an OCPP plan design, Founder can be
  maximized (32,500 profit sharing contribution
  16,500 deferral) at a total company cost of
  7,262 for 69 other employees.
• No obligation to provide any contribution for
  most employees because plan is not top-heavy.
• Contribution goes only to 3 lowest-paid
  participants.
• Founder receives more than 87 of total company
  contributions.

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(No Transcript)
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(Case 3 - Illustration C)

• If the Founder wants to maximize the Chief
  Executive Officer as well, an incremental 10,126
  will be required for 3 additional low-paid
  employees.
• Founder and CEO receive more than 84 of company
  contributions (and their own deferrals) (98,000)
  at a total cost of 17,388.

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Questions?
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• Cash Balance Plans

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Cash Balance Plans

• Cash Balance plan is a type of Defined Benefit
  plan
• These plans had been under scrutiny by Congress
  and the courts because of alleged age
  discrimination.
• The Pension Protection Act of 2006 and The
  Seventh Circuits reversal of the lower court in
  Cooper v. IBM has ratified the legitimacy of
  these plans.
• The Third Circuit (covering PA and NJ) has
  followed the Seventh Circuit
• IRS is issuing determination letters on new Cash
  Balance plans as well as conversions of
  traditional defined benefit plans.

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Cash Balance Plans

• Used for Owners who want to contribute more than
  49,000

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Cash Balance Plans

• Illustration of Contributions at Various Ages
• Age Amount
• 35 40,900
• 45 69,900
• 55 119,900
• 65 204,100

Assumes that retirement at age 65.
Contribution can be larger at earlier retirement
ages.
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Participant Accounts

• Participants have accounts
• Accounts increase
• Fixed Employer contribution
• For example, 5 of pay per year
• Different contribution tiers are possible for
  different classes of participants owners
  contribution tier can be maximized
• Guaranteed interest credit
• For example, 30-year Treasury Rate
• Participants receive account on termination

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Participant Accounts

• Annual Benefit Accrual is easy to determine and
  be understood by participants
• Pooled investments

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With 2 Contribution Tiers It Looks Like This
Age Pay Cash Balance of Pay
Physician 53 200,000 118,000 59
Staff 25 30,000 6,000 20
Staff 30 30,000 6,000 20
Staff 33 30,000 6,000 20
Staff 40 30,000 6,000 20

• 83 of contribution goes to Physician

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Combination Plans

• You can have both
• Cash Balance
• Profit Sharing
• General Rule Aggregate tax deduction limit is
  25 of pay or normal cash balance cost, whichever
  is greater
• PPA do not count the first 6 of pay for profit
  sharing
• Beginning in 2008, cases subject to PBGC does not
  have aggregate tax deduction limit
• 401(k) deferrals do not count as part of
  deduction limit

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It Looks Like This
Age Pay 401(k) Profit Sharing Cash Balance Total
Physician 53 245,000 22,000 14,700 118,000 154,700
Staff 25 30,000 0 1,800 1,500 3,300
Staff 30 30,000 0 1,800 1,500 3,300
Staff 33 30,000 0 1,800 1,500 3,300
Staff 40 30,000 0 1,800 1,500 3,300
Total 365,000 22,000 21,900 124,000 167,900
92 of Contribution Goes to Physician
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Cash Balance Combo Deduction

• Deduction limitation is greater of cash balance
  expense (124,000) or 25 of aggregate
  compensation (365,000/4 91,250) but does not
  count first 6 of pay contributed to profit
  sharing (21,900)
• Total company contributions
• 21,900 profit sharing 124,000 cash balance
  145,900
• less 21,900 (6 profit sharing contribution)
  124,000
• Deferrals do not count in total deduction

54
IRS Circular 230 Disclosure

• IRS regulations require us to notify you that
  this communication was not intended or written to
  be used, and cannot be used, by you or any
  taxpayer, for the purpose of avoiding penalties
  that the IRS might impose on the taxpayer.