LAR Pensions LLC

Plan Scenarios


Defined Contribution

William is the president and sole owner of ABC Corporation. He is 50 years old and has an annual compensation of $270,000. Samantha, who is the company’s salesperson is age 45 and earns $150,000 per year. William and Samantha are the only Highly Compensated employees in the company. The other two employees, who are Non-Highly Compensated, are Anne and Jim. Anne is age 40 and has an annual income of $100,000 and Jim is age 31 and earns $50,000 per year. William would like to implement a Retirement Plan for ABC Corp. that will allow him to maximize his annual benefit while contributing as little as possible to his current employees. He would also like to stay within a budget of $60,000. The total payroll for the company is $840,000.

Illustrated below are three (3) different Defined Contribution Plans designed to maximize William’s benefit while remaining within his budget of $60,000. The three (3) plans shown are a traditional Profit Sharing Plan, a New Comparability (class allocated) Plan and a 401(k)/Safe Harbor Non-elective Profit Sharing Plan (also class allocated).

Click here to download   Valuation Model#1   Valuation Model#2   Valuation Model#3

As reflected in the illustration above, William can receive a contribution of 84.42% of the total employer allocation instead of 51.79% (under the traditional Profit Sharing Plan) simply by changing the allocation method to Class Allocated. He can further increase his benefit and reduce his total employer cost by adding a 401(k) and Safe Harbor feature. *With the 401(k) and Safe Harbor feature, William can contribute $18,000 in 401(k) deferrals as well as an additional $6,000 in catch up contribution because he is over age 50. The plan is also excused from 401(k) discrimination testing, which may have limited William’s 401(k) benefit, due to the Safe Harbor feature. Please note that the employer allocation limit per participant under a Defined contribution plan is $54,000.

* $36,000 (Employer Profit Sharing)
$18,000 (Salary Reduction)
+ $6,000 (Salary Reduction Catch-Up)
$60,000 (Maximum Contribution Limit)

 

Defined Benefit

William and Jones share ownership (50/50) of ABC Corporation. William is 51 years old and has an annual compensation of $270,000. Jones is age 56 and has an annual income of $270,000. Samantha, who is the company’s salesperson is age 46 and earns $150,000 per year. William, Jones and Samantha are the only Highly Compensated employees in the company. The other two employees, who are Non-Highly Compensated, are Anne and Jim. Anne is age 41 and has an annual income of $100,000 and Jim is age 26 and earns $50,000 per year.

The owners of ABC Corporation would like to explore the option of a Defined Benefit Plan while remaining within their budget of $250,000. Defined Benefit Plans are attractive because they provide a larger benefit than that under a Defined Contribution Plan (over $54,000). Below are three (3) examples of Defined Benefit Plans that ABC Corp. can put into operation.

Click here to download   Valuation Model#4   Valuation Model#5   Valuation Model#6

With a straight formula allocation, all employees share the same benefit allocation rate projected until normal retirement age (NRA). An older participant would require a higher cost due to a shorter time frame until (NRA). A straight formula Defined Benefit Plan is not appealing to companies with many employees but is appealing to sole proprietors. For those companies with a high population of eligible participants, a tiered formula, floor offset or Cash balance plan arrangement is more attractive. These types of Plans are beneficial because they provide an opportunity for the Employer to lower their cost of employee benefits in a significant way. For example, let’s compare the tiered formula results in the chart above to that of the straight formula. Simply by changing the allocation to tiered, a cost savings of $36,000+ is generated.

Now let’s assume the same company demographic as described above still exists, the table below illustrates scenarios under a Floor Offsets and Cash Balance Plan combined with a Defined Contribution Plan.

Click here to download   Valuation Model#7   Valuation Model#8

A Floor Offset Plan can lower contributions under the Defined Benefit Plan while allocating an employer contribution of 5% to 7.5% under a Defined Contribution Plan. The 5% to 7.5% range noted is typically comprised of a 3% Safe Harbor Non-elective allocation and a Profit Sharing contribution. In most cases it is not necessary to provide a contribution to the staff members under the Floor Offset Plan because they are receiving a benefit under the Defined Contribution Plan. Based on the scenario in the chart above, the owners are receiving 93.25% of the total contribution and are benefiting from a higher employer deduction. The scenario illustrates the two owners receiving different allocation amounts; this is not mandatory and based on the clients wishes the plan formula can be adjusted to provide equal allocations.

A Cash Balance Plan allows the owners to receive identical benefits that are subject to Defined Benefit limitations but are tested and allocated similar to that of a Profit Sharing Plan. Although Cash Balance and Floor Offset Plans are similar in operation and results,
it is easier for employees to understand their retirement benefit under a Cash Balance Plan as it resembles the account design of a Defined Contribution Plan. While Cash Balance Plans have many advantages and appealing features, they do have one disadvantage; all plan documents must be prepared and submitted individually to the IRS for approval which can be costly for the client. LAR Pensions, LLC will happily prepare free analysis and illustrations for clients of CPAs and Financial Advisors.