Plan Designs for Closely Held Businesses Presented by
Plan Designs for Closely Held Businesses Presented by: Jim Gairns VP, Special markets & Institutional Sales Retirement Plans Division RP 2507 3 -15 For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC.
Disclosure This information is provided by Ameritas®, which is a marketing name for subsidiaries of Ameritas Mutual Holding Company, including, but not limited to: Ameritas Life Insurance Corp. , Ameritas Life Insurance Corp. of New York, and Ameritas Investment Corp. , member FINRA/SIPC. Ameritas Life Insurance Corp. is not licensed in New York. Each company is solely responsible for its own financial condition and contractual obligations. For more information about Ameritas®, visit ameritas. com. Ameritas® and the bison are registered service marks of Ameritas Life Insurance Corp. © 2015 Ameritas Mutual Holding Company For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC.
Small Business Needs • Offer a valuable benefit for the owner • Offer a valuable, yet economically feasible, benefit for employees • Offer a level of flexibility within the plan’s design to meet the challenge of: • Attracting and retaining talented employees • Cash flow fluctuations of the business • Retirement needs of the owner and key employees For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC.
What Plan Sponsors Valued Most When Selecting An Advisor • Improved performance of my plan • Gives me a better understanding of plan design features and options • Gives me a better understanding of my fiduciary duties Source: Fidelity Survey: Plan Sponsor Attitudes as of 12/31/2017 For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC.
Opportunity Is Knocking 35% of plan sponsors are less than satisfied with advisor 38% of plan sponsors are actively looking to switch their plan advisor Source: Fidelity Survey: Plan Sponsor Attitudes as of 12/31/2017 For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC.
Key Options That Help Small Business Owners • Safe Harbor 401(k) – Provides a pass on non-discrimination tests • Roth 401(k) option – No compensation issues • New Comparability allocation formula – Contribution may be geared to the older, more highly compensated employees • New Plan Sponsor Tax Credit – Credit of up to $500 for first 3 plan years, for certain small employers • Employees Tax Saver’s Credit* - Encourages rank-and-file to salary defer • Cash Balance Plan *Some restrictions apply For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC.
Business Demographics ABC Physical Therapy Employees Age Plan Compensation Owner (100%) 50 $200, 000 Employee 1 45 $65, 000 Employee 2 37 $45, 000 Employee 3 25 $25, 000 Employee 4 22 $13, 500 $348, 500 Key Point: Business is a C-Corp. Owner wants to spend as little as possible, but still receive the maximum contribution. For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC.
Profit Sharing Allocations • Traditional Allocation (pro rata) Each employee gets the same percent of contribution – 25% maximum deductible contribution • Integrated with Social Security A base percentage is given to all employees plus an additional percentage is given to those whose salary exceeds the Taxable Wage Base $128, 700 (2018) • New “Comparability” Contribution is based on age, salary and benefit comparison at age 65 For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC.
Profit Sharing Comparisons ABC Physical Therapy #1 #2 #3 Name Income Traditional Integrated New Comp Owner $200, 000 $51, 732 $55, 000 HC Total $200, 000 $51, 732 $55, 000 Employee 1 $65, 000 $16, 250 $15, 492 $5, 450 Employee 2 $45, 000 $11, 250 $10, 725 $3, 773 Employee 3 $25, 000 $6, 250 $5, 959 $2, 096 Employee 4 $13, 500 $3, 375 $3, 218 $1, 132 Non HC Total $148, 500 $37, 125 $35, 394 $12, 451 TOTAL $348, 500 $87, 125 $87, 126 $67, 451 Hypothetical illustration. Actual results may vary. For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC.
Now…Consider a 401(k) • Cost may be shared by employer and employee • The employer can contribute both a match and a profit sharing contribution…with both being deductible as a business expense • Only those who defer salary will get a matching contribution • A profit Sharing contribution is an additional option For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC.
Traditional vs. New Comp – See the Comparison Safe Harbor 401(k) (Matching) with Traditional Plan Name Deferrals EE% Match $ Catch-up TPS $ TPS % Totals Owner $18, 500 9. 25% $8, 000 $6, 000 $28, 500 14. 25% $61, 000 HC Total $18, 500 $8, 000 $6, 000 $28, 500 Employee 1 $3, 900 6. 00% $2, 600 $0 $9, 263 14. 25% $15, 763 Employee 2 $1, 800 4. 00% $1, 575 $0 $6, 413 14. 25% $9, 788 Employee 3 $500 2. 00% $500 $0 $3, 563 14. 25% $4, 563 Employee 4 $270 2. 00% $270 $0 $1, 924 14. 25% $2, 464 Non HC Total $6, 470 $4, 945 $0 $21. 161* $32, 578 Total $24, 970 $12, 945 $6, 000 $49, 663 $93, 578 $61, 000 Safe Harbor 401(k) / New Comparability with Matching Contribution Name Deferrals EE% Match $ Catch-up NCPS $ NCPS % Totals Owner $18, 500 9. 25% $8, 000 $6, 000 $28, 500 14. 25% $61, 000 HC Total $18, 500 $8, 000 $6, 000 $28, 500 Employee 1 $3, 900 6. 00% $2, 600 $0 $4, 536 6. 98% $11, 036 Employee 2 $1, 800 4. 00% $1, 575 $0 $3, 140 6. 98% $6, 515 Employee 3 $500 2. 00% $500 $0 $1, 745 6. 98% $2, 745 Employee 4 $270 2. 00% $270 $0 $942 6. 98% $1, 482 Non HC Total $6, 470 $4, 945 $0 $10. 363* $21, 778 Total $24, 970 $12, 945 $6, 000 $38, 863 $82, 778 Equals 65. 18% to Owner $61, 000 • New Comparability costs owner $10, 800 less in employee benefit costs! • Hypothetical illustration. Actual results may vary. For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC. Equals 73. 69% to Owner
Here’s the Value of a New Comparability Allocation Safe Harbor Match Traditional PS Safe Harbor Match New Comparability PS Plan Cost $93, 578 $82, 778 Tax Savings (35% Tax Rate) $32, 752 $28, 972 Net Cost After Tax Savings $60, 826 $53, 806 Owner Contribution $61, 000 Percent of Net Cost Allocated to Owner 100. 29% 113. 37% Net Cost of plan after tax savings and owner contribution $-174 -$7, 194 The 401(k) with a New Comparability Profit Sharing allocation is the most “profitable. ” Hypothetical illustration. Actual results may vary. For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC.
An option of the 401(k) makes savings via a Roth available to those not normally eligible to make contributions to a Roth IRA. For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC.
Roth 401(k) • A great benefit for highly compensated employees • Participants can defer on a traditional pre-tax basis, post-tax basis incorporating Roth or a combination of the two • Roth contributions will be matched unless the plan specifically provides otherwise For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC.
Roth 401(k) has two significant advantages over the Roth IRA: • There is no limit on AGI to contribute as there is with the Roth IRA • Contributions are available up to the election deferral limit, reduced by any other pretax elective deferrals ($18, 500 in 2018, plus $6, 000 in catch-ups, if applicable) For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC.
What If An Employer Wants More? After passage of the Pension Protection Act of 2006, cash balance plans are a great opportunity for owners and key individuals to save more. For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC.
Consider a Cash Balance Plan? A “hybrid” pension plan • A defined benefit (DB) plan that looks like a profit sharing plan, but with DB plan deduction limits • Each participant’s benefit is expressed as an account balance • Periodic statements reflect the opening balance, contributions made by the employer, and any interest credited to the account For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC.
Cash Balance Basics • Different classes of employees allow for different contribution rates– Similar to cross tested plans • Pooled investments – No directed accounts • Actual Gains/losses on funds do not affect the benefit payable to a participant • Gains/losses decrease or increase plan costs • Employer assumes investment risk • Subject to annual minimum funding requirement • Subject to annual discrimination testing For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC.
Cash Balance Plan Design • Higher contributions than Defined Contribution Plan • More flexibility than traditional Defined Benefit Plan (subject to non-discrimination testing) • Flexibility in “contribution” rates to different employee groups (similar to new comparability plans) • • • Provide the same “contribution” level when there are multiple owners at different ages Provide rank and file employees with different rates of “contributions” than owners Provide the same percent of pay independent of age • Easier for employers and employees to understand than traditional Defined Benefit Plans For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC.
Maximum Contributions - 2018 350, 000 300, 000 250, 000 200, 000 150, 000 100, 000 50, 000 0 35 45 Participant Age 55 401(k) 65 401(k)/PS Note: All figures are estimates For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC. 401(k)/PS/CB
Pension Protection Act and Cash Balance Plans • The law clarifies that Cash Balance plans are not inherently age discriminatory prospectively • Certain criteria need to be met • Interest credit does not exceed market rate of return • Full vesting after 3 years of service • Lump Sum = hypothetical account balance For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC.
Combining Cash Balance with Existing Safe Harbor Profit Sharing Plan • Structure Profit Sharing allocation to use New Comparability class allocations and 3% Safe Harbor • Allocate maximum [including 401(k)] to each owner • Lowest % to rank & file employees (including terminees) • Provide top heavy minimum (5%) in this plan • Add Cash Balance Plan • Equal contributions to all owners • Limit combined contribution to 25% if Profit Sharing is more than 6% of pay For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC.
Cash Balance Offers Tax Benefit Potential Name Age Annual Salary 401(k) Profit Sharing Cash Balance Total Contribution Tax Savings* $36, 500 $0 to $250, 000 $311, 000 $124, 400 2 Owners Owner 1 64 Owner 2 63 Subtotals $275, 000 $24, 500 $36, 500 $0 to $250, 000 $550, 000 $49, 000 $73, 000 $500, 000 $622, 000 $248, 800 7 Staff 7. 5% of pay Subtotals (7 employees) $272, 000 $0 $20, 400 $8, 400 $28, 800 $11, 520 Grand Totals $822, 000 $49, 000 $93, 400 $508, 400 $650, 800 $260, 320 Percent of Contribution to Owners 78. 16% 95. 57% Plans designs are for illustrative purposes only. Actual results may vary. *Assuming a 40% tax rate; taxes are deferred only. For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC.
Ideal Prospects • Owner over age 50 • Staff members at least 10 years younger than the owner (on average) • Owner looking for maximum deductible contributions • Steady, predictable cash flow • Currently sponsor a new comparability plan; or • Currently sponsor a traditional DB plan For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC.
Types of Plans • Profit Sharing • 401(k) o Traditional o Safe Harbor o New Comparability o MEP • 403(b) • 457 • Defined Benefit / Cash Balance For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC.
How Can We Help You? Pre-Sale Support • Larkspur 1 searches for existing plan information • Prospect plan evaluation • ERISA compliance access • New comparability allocation models Sales Support • Meeting client/prospect together • Presenting alternatives Post-Sale Support • Enrollment meetings (bilingual availability) • Quarterly investment review reports • Annual plan reviews 1 Larkspur Data Resources is not affiliated with Ameritas Life Insurance Corp. For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC.
In Conclusion. . . • Understanding your client is key to building trust • Listening enables you to help your client design a plan that will best meet their needs and goals both as an owner and as a participant • Be organized, be prepared, offer several options • Partner with a retirement vendor than complement your skills and level of expertise For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC.
Thank You For Broker/Dealer Use only. Not for use with clients. Securities and Investment Advisory Services offered through Ameritas Investment Corp. (AIC), member FINRA/SIPC.
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