Docstoc

Employer Example 412 Pension Annuity Contract

Document Sample
Employer Example 412 Pension Annuity Contract Powered By Docstoc
					Advanced Retirement Plans
Keith Baumgarn
QPA, CLU, ChFC, FLMI,
CRC

Sales Vice President – Qualified
Market
The Lafayette Life
Agenda


         Plan Design Techniques: Case
         Studies
         412(I) Plans – What, When,
         Why and Who
         EGTRRA
         Opportunities/Overview
Agenda Continued...
  Feasibility Studies
  Players/Lafayette Life Process
  Misc./Q&A’s
Why are we here?
To increase awareness of the
opportunities available
To help you and your clients make
and save more $$
To become your pension resource
Hot buttons : Retirement and Tax
Savings
Offer CPE credits
We make pensions SIMPLE
Niche Market
  Businesses with one to twenty five
  employees
  Available to any tax entity
  Focus on employer benefit designs
  versus employee benefit

We specialize in providing the package that allows you
  to work the small business pension market
  Fact: 80% of small businesses
  do not have tax deductible
  retirement plans!
 Some Reasons for this are:
  Owners don’t think they will get a large
  enough share of the plan contribution
  Owners think plan administration is too
  costly and too much paperwork
  Owner doesn’t know where to go for
  advice or how to begin the planning
  process

Source: National Underwriters - 12/98 Issue
Lafayette Life’s Qualified
Markets Package

Our package includes:
 Plan design
 Plan administration services
 Plan funding options
Available cutting edge
plan design options
New comparability and age weighted
New comparability plans with 401(k)
feature - “the simpler plan”
401(k) safe harbor profit sharing plans
- D.A.S.H. plans
Traditional and 412(i) defined benefit
plans
Insurance in 403(b) TSAs (90-24
transfers)
DB/401(k)
DB/DC carve outs
Case Studies
  Scenario
  Objectives
  Census
  Options
  Issues
        Case I(a) - Increased
        Individual Dollar Limit New
        Comp. PS Plan

Census Age     Comp.      Contrib. % of Pay % of
                                            Total
Owner     50   $104,355   $41,000 40%       88.6%
EE 1      25     20,000    1,250    6.25%   2.7%
EE 2      27     20,000    1,250    6.25%   2.7%
EE 3      33     20,000    1,250    6.25%   2.7%
EE 4      47     24,000    1,500    6.25%   3.3%
Total          $188,355   $46,250
        Plan Design
         This example highlights reasons business
         owners adopt pension plans.
           Employer tax deductible               $46,250
           contribution
           Less estimated tax savings            -18,900
           (40%)
           Net cost after estimated tax           27,750
           savings
           Contribution for business              41,000
           owner

           Net cost after taxes for owner        -13,250
           (After tax savings and
           principal’s contribution)
Not having a Qualified Plan is costing you $13,000 per year!
Case I(b) Individual Limit Increase
Plus Max. Compensation
New Comp PS Plan
Census    Age       Comp. Pre-    Comp.      Post          Pre-
                    EGTRRA        Post       EGTRRA        EGTRRA
                                  EGTRRA
Owner     60        $170,000      $200,000   $40,000       $31,025

Spouse    61          12,500        12,500     12,500        2,281

EE 1      24          12,000        12,000          600       360

EE 2      41          28,000        28,000         1,400      840

EE 3      32          13,000        13,000          650       390

Total                                        $55,150*      $34,896


*Additional $20,254 is allocated 100% to owners.
Case II(a) - New
Comparability Profit
Sharing Plan
            Compensation    Profit Sharing
            (Corporation)   Contribution

Owner –     $205,000        $41,000
age 55
Spouse of   $50,000         $22,750
owner –
age 54
Total       $255,000        $63,750
New Regulations
IRS Code Sec 401(a)(4)
Nondiscrimination in a Defined
Contribution Plan can be
demonstrated by:

  1. Comparing Contributions
           (Traditional)
                or
     2. Comparing Benefits
         (Age Weighted)
                Case II(b) - New
                Comparability Profit
                Sharing/401(k) Plan
                Contribution
          Compensation    Profit Sharing 401(k)   Catch up       Total
          (Corporation)   Contribution            Contribution   Profit
                                                                 Sharing +
                                                                 401(k)
Owner-    $200,000        $28,000       $13,000   $3,000         $44,000
Age 55
Spouse of $50,000         $28,000       $13,000   $3,000         $44,000
Owner
Age 54
Total     $250,000        $56,000       $26,000   $6,000         $88,000
              Case II(c) - Traditional
              DB Plan/401(k) Plan
              Combination
         Compensation    Defined        401(k)    Catch up       Total
         (Corporation)   Benefit                  Contribution   Defined
                         Contribution                            Benefit +
                                                                 401(k)
Owner-   $200,000        $157,921       $13,000   $3,000         $173,921
Age 55
Spouse   $50,000         $53,523        $13,000   $3,000         $69,416
of
Owner
Age 54
Total    $250,000        $211,337       $26,000   $6,000         $243,337
Other Plan Design Techniques
  D/B – D/C Carveouts
  DB/401(k)
  UNO 401(k) plans
  Product only
DB/DC Case Study III
Sample Census

Employee   Age   Compensation
HCE #1     60    $200,000
HCE #2     57    $200,000
HCE #3     37    $200,000
HCE #4     35    $200,000
NHCE #1    51    $60,000
NHCE #2    49    $60,000
NHCE #3    24    $40,000
NHCE #4    26    $40,000
Traditional DB Plan
Census    Projected   Normal
          Monthly     Cost Ind.
          Benefit     Aggreg.
                      Method
Owner 1   $ 6,667     $163,169
Owner 2    10,667     148,693
Owner 3    13,333      26,844
Owner 4    13,333      23,269
EE 1        2,750      18,055
EE 2        2,750      14,779
EE 3        2,750       2,299
EE 4        2,750       2,616
Total                 $399,724
DB/DC Case Study III

 DB Plans       DB             DC Plan   DC
                Contribution             Contribution
 HCE #1         $143,812       HCE #3    $40,000
 HCE #2         $139,741       HCE #4    $40,000
 NHCE #3        $5,428         NHCE #1   $10,194
 NHCE #4        $5,487         NHCE #2   $10,194
 Contribution   $294,548                 $100,338
Case IV - One Participant
401(k) Plan


        In 2004, to maximize a 1 person
        401(k) plan at $41,000, the
        following must occur
           Minimum compensation of $112,000
           401(k) deferral of $13,000
           PS contribution of $28,000
        Deduction limit = 25% of 112,000
        or $28,000 plus $13,000 deferral
Compare One Participant
Plans



    Comp.    Age   401(k)    Trad. DB 412(i)

    $112,000 50    $41,000   $68,490   $91,286

    NRA 62
Plan Design Discussion Topics
  Compensation
  Forecasting
  Tax Entity
Tax Entity Types

       Corps
          C
          S
       Proprietorship
       Partnerships
       LLPs or LLCs
       Tax Exempt
       501(c)(3)
           403b’s
           P/S or DB Plans
Eligibility Issues

         Rules
         Employees
            Part Time
            End Of Year
            Union
            Independent Contractors
            Leased
         Vesting
         Deadlines (Timetables)
         Classification
Objectives
  Deductions
  Flexibility
  Cash Flow
  Contribution/Benefit Based
412(i)s
  What
  When
  Why
  Who
Funding For A Monthly
Amount Maximum 415
Limit Amount
$13,750 a month beginning @
age 65.
    No reductions for NRAs 62-65
With $205,000 salary cap
Why are Defined Benefit &
412(i) Plans back?
Deductions and exemptions phased
out with adjusted gross income over
$250,000
Repeal of 415(e) after Jan. 1, 2000
Babyboomers
Social Security statements
Market Impact on 401(k) Plans
EGTRRA
What Are They?


       Insurance Contract Plan – IRS
       section 412(i)
          Fixed Annuity (may be Equity
           Indexed)
          Whole Life Insurance
       Contract Requirements
          Level Premiums
          Of the same series – 401(a)-(4)
       Competition
Why Larger Deductions
Under 412(i)?
             Traditional     412(i)
                DB
 Cash @ 65   $1,306,592    $1,825,768

  Interest     5%         3%
Assumptions
    (Pre)
  Actuarial  Current   Guaranteed
Assumptions
   (Post)
  NR Age    Reasonable Reasonable
Advantages of a “412(i) Plan”

       Maximum Current Tax Deduction
       No Market Risk
       No Complex “Funding”
       Limitations
       Accrued Benefit Is Equal to
       Contract Value
       ERISA Creditor Proof
       Guarantees
Business Profile
 Very small business (1 - 6
 participants)
 Stable cash flow projections for
 next 5 - 10 years
 Business owner’s cash flow in
 excess of $250,000
 Business owner will be working in
 business for at least 5 years
 Business owner is at least age 45
 and oldest in the group
Other Entrepreneurs

 Moonlighting Income
 No controlled group (I.e.
 Professors, Authors,
 Consultants, Board Of
 Directors, Coaches)
Sample Comparison
 1 Participant
 Male/Female (Unisex
 Calculations)
 Age 55 & Age 65 Retirement
 Age
 $100,000 Considered
 Compensation
Sample Comparison


                                   412(i)
      Profit    Money    Defined   Defined
      Sharing   Purchase Benefit   Benefit
      $25,000   $25,000 $95,720    $134,835
Case Study
Dental Practice


       Dr. V. & Mrs. V.
       Four eligible non-key employees
       Currently has a profit sharing
       plan
       Dr. V. & Mrs. V. wanting more
       retirement benefits
       Proposing Defined Benefit Plan
Analysis of Benefits

                  Profit % of Defined      % of
      Employee   Sharing Cont. Benefit     Cont.
     Dr. V       $23,371 61.50 $64,785      65.75

     Mrs. V        5,603 14.75    13,642    13.84

     Employee      3,010   7.92   10,460    10.62
     1
     Employee      2,211   5.82    3,056     3.10
     3
     Employee       975    2.57    2,196     2.23
     4
Financial Results
Deductible        $98,535
Plan
Contribution
Tax Savings      ($39,415)
(40%)
Net Cost After    $59,120
Tax Savings
Benefit to        $78,427
Family Unit
Net Cost to      ($19,307)
Business
       Repeal of 415(e) Created a
          Win/Win/Win Case

Corporation gets a $98,535 tax deduction
vs. $38,000
Dr. & Mrs.V. get a lump sum retirement
benefit of 1,525,000 vs. $626,207
All Employees get a Pre-Retirement Death
Benefit (Some may be eligible for a
“guarantee death benefit”)
Non-key employees get a guaranteed
pension benefit
Marketing Aids
  412(i) Q&A guide
  412(i) Projections
  Q/NQ Spreadsheet Analysis
EGTRRA Highlights
  Signed 06/07/2001
  Reasons
  Pension Provisions
  Sunset Provisions
  State Conformity
Setting the Stage

       EGTRRA tax bill signed June 7, 2001
       Most tax changes delayed
       Most employee benefit provisions
       effective in 2002
           Retirement plan professionals need to
            acquaint themselves with the new
            provisions to properly advise their
            clients
           Significant changes to qualified plans
            and IRAs
Reasons

 Low savings for retirement (USA)
 Longer life expectancy
 Wider, retirement income gap
 Opportunities/Incentives
 Most favorable pension
 legislation since ERISA
EGTRRA Overview
 Sunset Provision
   Increased contribution plan/benefit
    limits (415 & 404)
   Increased compensation limits (401a-
    17)
   Increased IRA, Roth, and SIMPLE limits

   Elimination of IRS user fees

   Tax Credits for small employer plans

   Others



 Add’l Info on these tax law changes
  available on www.ASPA.org
EGTRRA Highlights
(60 Pension Provisions)


         Increase in compensation limits
         Increase deferral limit plus catch
         up contributions for over age 50
         Increase in DB and DC plan
         limits
         Increase in IRA contribution
         limits
EGTRRA (cont.)

       Liberalization of
       Rollover/Distributions
       Increase in Deduction Limits
       Elective Deferral no longer
       considered for deduction
       purposes
       Tax Credit for Employee
       Contributions
EGTRRA (cont.)
 Tax Credit for Plan
 Administration Costs
 Loans to Unincorporated
 Business Owners
 SEPs
         Good News For All Plans With
         Existing Assets After January 1,
         2000
                           Adjusted For
                                                        st
                          415(e) Defined     After Jan. 1
            Past Profit      Benefit        Defined Benefit
Owner      Sharing Plan    Contribution     Monthly Amount
Age 50      $18,000 x 5      $42,000            $66,000
              Years
 Income                   Based on $6,000      Based on
$120,000                    per Month         $10,000 per
                              Benefit        Month Benefit
                           Beginning @       Beginning @
                              Age 65            Age 65
Plan Administration

 Staff
 Turn-Key In-house
 Administration
 Service Fee Agreement
 (Handout)
Plan Funding
 Life Insurance
   Guaranteed Issue up to $150,000

   Honeymoon Surrender Program

   412(i) Endorsement

   Regular Ratebook Products

 Group Annuity with Separate Accounts
   50+ Investment Choices

   Both 800 Number and on line capability
    for making changes to account
   Quarterly Statement of Values

 Group Marquis Flex (EIA)
Players In The Pension Market

       IRS / DOL
       Small Business Owner
       CPA/Accountant
       Insurance Company/Third Party
       Administrator
       Agent/Broker
       Feasibility Study - Objective:
       Qualified or Non-Qualified
Staff
  Designations
  Experience
  In-house Administration
  Support/Compliance
  Consultation Services
  Commitment/Players
No Cost Proposals

				
DOCUMENT INFO
Description: Employer Example 412 Pension Annuity Contract document sample