© 2010, kravitz inc. all rights reserved. ken guidroz, mba © 2010, kravitz inc. all rights...

© 2010, Kravitz Inc. All rights reserved.

Ken Guidroz, MBA


Greater Tax Deferral using Cash Balance Plans


Why Cash Balance and Why Now?

1) The new tax targets >$250,000

2) Catch-up Make up for 401(k) losses

3) Unique marketing opportunity


In the News


Cash Balance 101


101 Outline

1. What exactly is a Cash Balance Plan?

2. Case Studies

3. Six basic features you need to know


401(k)Profit Sharing

DefinedDefinedContributionContribution

Qualified Plans

DefinedDefinedBenefitBenefit

TraditionalHybrid

CashBalance


How Does Cash Balance Differ from a DB Plan?

• Complex formula

Defined Benefit Plans Cash Balance Plans

• Account balance,

$100,000

• Unfamiliar/archaic • Familiar: 401(k)

• Age-sensitive • Less age-sensitive


Legality of the Plan

Pension Protection Act 2006

Safe harbors

Clarification

1985


2010 Contribution Limits

Cash Balance lifetime limit $2,500,000

401(k) with

Age 401(k) only Profit Sharing Cash Balance TOTAL

60 - 65 $22,000 $54,500 $193,000 $247,500

55 - 59 $22,000 $54,500 $148,000 $202,500

50 - 54 $22,000 $54,500 $113,000 $167,500

45 - 49 $16,500 $49,000 $87,000 $136,000

40 - 44 $16,500 $49,000 $67,000 $116,000

35 - 39 $16,500 $49,000 $51,000 $100,000

30 - 34 $16,500 $49,000 $39,000 $88,000

401(k) Profit Sharing & Cash Balance Plans


How Do Cash Balance Plans Work?

401(k) Cash BalanceInterest Crediting

Rate (~5%)

ContributionContribution Earnings


Plan Investments

Earnings …next year’s contribution

Earnings …next year’s contribution

7-year make-up


Investment Dynamics

TARGET RETURN

Too low:

• Greater expense / larger contribution required

• Underfunding limitations

Too high:

• Lower contribution• Smaller tax deduction• Potential excise tax


CASE STUDIES


CASE STUDY: Small Business

Owners Age Compensation

Owner 1 62 $ 245,000

Owner 2 41 245,000

Employees

Jones 49 $ 89,000Keeler 63 88,000Marion 31 53,000Baldwin 29 50,000Dupre 41 48,000Ophir 25 39,000Smith 33 40,000Sabotin 48 35,000Parotta 22 15,000Keebler 30 14,000

Plan options?


All IRS-governed Plans: 2 basic rules

Employees


The Give to Get

Owners Age Compensation

Employees

Above the line

Below the line


CASE STUDY: Basic Plan

Profit TOTAL

Owners 401(k) Sharing CONTRIBUTION

5% of pay

Owner 1 $ 22,000 $ 12,250 $ 34,250

Owner 2 16,500 12,250 28,750

$ 63,000Employees 5% of pay

Jones 4,450Keeler 4,400Marion 2,650Baldwin 2,500Dupre 2,400Ophir 1,950Smith 2,000Sabotin 1,750Parotta 750Keebler 700

Subtotal $ 23,550 $ 23,550

Total $ 86,550

Percent to Owners 73%

Comparability


CASE STUDY: New Comparability

Profit TOTAL


13% of pay

Owner 1 $ 22,000 $ 32,500 $ 54,500

Owner 2 16,500 32,500 49,000

$ 103,500Employees 5% of pay

Jones 4,450Keeler 4,400Marion 2,650Baldwin 2,500Dupre 2,400Ophir 1,950Smith 2,000Sabotin 1,750Parotta 750Keebler 700

Subtotal $ 23,550 $ 23,550

Total $ 127,050



CASE STUDY: Cash Balance Options

Profit

Owners Age 401(k) Sharing

Owner 1 62 $ 22,000 $ 32,500 $0… $ 225,000

Owner 2 41 16,500 32,500 $0… 60,000

Employees 7.5% of pay

Jones 49 $ 6,675 $ 650Keeler 63 6,600 650Marion 31 3,975 650Baldwin 29 3,750 650Dupre 41 3,600 650Ophir 25 2,925 650Smith 33 3,000 650Sabotin 48 2,625 650Parotta 22 1,125 650Keebler 30 1,050 650

Cash

Balance


CASE STUDY: Cash Balance Actual

Profit TOTAL


Owner 1 $ 22,000 $ 32,500 $ 225,000 $ 279,500

Owner 2 16,500 32,500 25,000 74,000


Jones 6,675 $ 650 7,325Keeler 6,600 650 7,250Marion 3,975 650 4,625Baldwin 3,750 650 4,400Dupre 3,600 650 4,250Ophir 2,925 650 3,575Smith 3,000 650 3,650Sabotin 2,625 650 3,275Parotta 1,125 650 1,775Keebler 1,050 650 1,700

Subtotal $ 35,325 $ 6,500 $ 41,825

Total $ 395,325


Cash

Balance


Basic Plan

New Comparability

Cash Balance Plan

The Share of the Pie



Percent to Owners 89%Percent to Owners 89%


89% to 89% to Owners Owners

($353,500)($353,500)+$116,305+$116,305

No PlanNo Plan PlanPlan

60% to Owners

($237,195)

40%

tax bracket

$395,325

40% tax($158,130)

11% to employees11% to employeesversus Uncle Samversus Uncle Sam

Is the Cash Balance Plan tax-efficient?


CASE STUDY: Midsize Firm/Practice

Group I: Partners Age Compensation

Partner 1 62 $ 245,000

Partner 2 54 245,000

Partner 24 43 245,000

Partner 25 37 245,000

Group II: Associates

5 Associates various $ 175,000

Group III: Employees

30 Employees various $ 1,500,000


CASE STUDY: Current Plan

Profit

Partners 401(k) Sharing

Partner 1 $ 22,000 $ 32,500

Partner 2 22,000 32,500

Partner 24 16,500 32,500

Partner 25 16,500 32,500

Associates 5% of pay

5 Associates

Employees 5% of pay

30 Employees ? $ 75,025


Profit

Partners 401(k) Sharing

Partner 1 $ 22,000 $ 32,500 $0 to… $ 65,000

Partner 2 22,000 32,500 $0 to… 65,000

Partner 24 16,500 32,500 $0 to… 65,000

Partner 25 16,500 32,500 $0 to… 40,000

Associates 5% of pay

5 Associates $ 0

Employees 5% of pay

30 Employees ? $ 75,025 $ 0

Percent to Partners

Cash

Balance

85%

CASE STUDY: Add Cash Balance


CASE STUDY: Partner-Only Plan

Partners

Partner 1 $0 to… $ 65,000

Partner 2 $0 to… 65,000

Partner 24 $0 to… 65,000

Partner 25 $0 to… 40,000

Associates

5 Associates $ 0

Employees

30 Employees $ 0

Cash

Balance


Other Cases


Other Cases

Annual

Name Age Salary

2 Owners

Hardt 45 $ 245,000

Hardt 45 183,000

Subtotals $ 428,000

5 Eligible employees (>1 year)

Gren 46 45,500

Strom 56 31,605

Rivera 39 15,914

Anderson 46 12,000

Doll 61 11,000

Similar ages: owners and employees


Other Cases

Family business

A couple, mid 50s

College-age children (2)

120 employees: office and warehouse


Other Cases

Younger Owners

4 owners, early 40s

6 associate consultants

10 employees


Other Cases

Large Medical Group

700 Doctors


Who is Ideal?

1. Income, income, income ($250,000 plus)

a. Plumbers to pathologists

2. “Ologists”: 11,000 with a Profit Sharing contributiona. Anesthesiology, radiology

3. Law firms

4. Venture capital/financial services

5. Businesses with New Comparability plan in place

6. 1-500 partners


Why Cash Balance Plans Appeal to Partnerships

1. There is direct tracking of contribution(what goes in, plus interest, comes out)

2. Portable: if partner retires or leaves firm, rolled to IRA or the new plan

3. There can be contribution flexibility among partners

4. Liability among partners can be minimized

5. There are options if cash flows decrease


Six Basic Features You Need to Know


$

Cash BalancePlan

IRA

Other QualifiedPlan

rollover

Assets are portable

Feature #1


Feature #2

Owners/partners can have different amounts

contributed for them

Cash Balance Contribution

Partner 1, age 50: $100,000

Partner 2, age 50: $0

Contribution flexibility among partners


Feature #3

Contribution amounts can change, but use caution.

What are business owners most

concerned about these days?


Feature #3

What if the cash flows decrease?

1. Reduce 401(k) and/or Profit Sharing

2. Amend plan to change contribution amounts (3 years)

3. Freeze plan

1/1 12/31

Plan amendment deadline(1,000 hours/~June 15)


Feature #4

Funding of the Plan

1/1/10 12/31/10

Funding deadline

3/15/11

Plan year

9/15/11

Funding extension

Filing of the company tax return


1/1/10 12/31/10 3/15/11

4/15/11

Plan year

Professional firms

Family businesses

Feature #4

Funding Trends


40% of eligible participants Example: 8/20 = 40%

OR

50 total

Feature #5

Participation requirement(how many people need to be in the CB Plan?)


Feature #6

Non-discrimination testing primarily satisfied in the Profit Sharing Plan

(gateway contributions 5%-7.5%)

Profit TOTAL


Owner 1 $ 22,000 $ 32,500 $ 225,000 $ 279,500

Owner 2 16,500 32,500 25,000 74,000


Jones 6,675 $ 650 7,325Keeler 6,600 650 7,250Marion 3,975 650 4,625Baldwin 3,750 650 4,400Dupre 3,600 650 4,250Ophir 2,925 650 3,575Smith 3,000 650 3,650Sabotin 2,625 650 3,275Parotta 1,125 650 1,775Keebler 1,050 650 1,700

Subtotal $ 35,325 $ 6,500 $ 41,825

Total $ 395,325


Cash

Balance


www.CashBalanceDesign.com

© 2010, kravitz inc. all rights reserved. ken guidroz, mba © 2010, kravitz inc. all rights...

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