©2015, College for Financial Planning, all rights reserved. Session 13 Plan Selection CERTIFIED...

©2015, College for Financial Planning, all rights reserved.

Session 13Plan Selection

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits

Session Details

Module 7

Chapter(s)

6

LOs 7-7 Analyze and choose the best retirement plan for a given scenario.

13-2

Plan Selection Qualified & Nonqualified Plans

Qualified Plans Nonqualified Plans

Pension Plans

Profit Sharing Plans (DC)

Tax-Advantaged Plans

Other Nonqualified Plans

Defined Benefit (DB)

Profit Sharing Traditional IRA Section 457 Plans

Cash Balance (DB) Thrift Plan Roth IRA

Stock Bonus SIMPLE IRA ISO

Money Purchase (DC)

ESOP (LESOP) SEP ESPP

Target Benefit (DC) Age-Weighted (SARSEP) NQSO

Cross-Tested (Comparability)

401(k) Plan 403(b) (TSA) Deferred Compensation Plans

SIMPLE 401(k)

13-3

Retirement Plan Selection Process: Business Environment

Determine how best to meet owner’s retirement

savings through a qualified plan (Personal Objectives, Business Objectives, Altruistic

Objectives)

Yes

Owner will commit to a retirement

plan and owner has a savings need?

Stable cash flow and owner will make

annual commitment?

Select discretionary plan. Is owner’s savings need

<=25% of compensation?

Reassess retirementobjectives/alternate savings

Is owner’s savings need >25% of compensation?

Profit sharing plan (age-

weighted if over 45)

Is owner oldest and owner’s age

>=45?

DB plan

Reassess

SEP, profit sharing, stock bonus or ESOP plan.Share ownership?

Reassess

Select profit sharing or P/S 401(k)

Select stock bonus or ESOP

Yes

Yes

Yes

Yes

Yes

No

No

No

No

No

No

13-4

Qualified Plan Characteristics (1)

Basic Statutory Characteristic

Defined Contribution Plans Defined Benefit Plans

Profit Sharing/ Stock Bonus

Money Purchase Pension

Target Benefit

Cash Balance

Defined Benefit

Cont. Type Flexible contribution

Fixed annual contribution to meet minimum funding requirement

Fixed % of comp.; annual actuarial adjustment

Annual actuarial determination

Maximum Employer Deduction

25% of covered payroll Amount necessary to fund benefit up to IRS limits

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Target Benefit

Cash Balance

Defined Benefit

Minimum funding standard

Generally no Yes Yes Yes Yes

Employee Contribution

401(k) provisions allowed

May permit

voluntary after-tax

N/A N/A May permit voluntary after-tax

Forfeitures Generally reallocated

Reallocated or applied to reduce

employer contribution

Must be applied to reduce employer contribution

13-6






Target Benefit

Cash Balance

Defined Benefit

Annual additions limit (415 limit)

Annual additions to a participant’s account may not exceed the lesser

of 100% of compensation or $53,000 in 2015

N/A N/A

Annual benefit limit (415 limit)

N/A N/A N/A Participant’s annual benefit may not exceed lesser of

$210,000 or 100% of compensation

in 2015

13-7

Other Qualified Plan Characteristics





Target Benefit

Cash Balance

Defined Benefit

Most favored age group

Younger Younger Older Younger Older

Investment risk Employee Employer

Maintenance of plan funds

Individual Accounts Pooled Funds

Certainty of retirement benefits

Uncertain Guaranteed minimum return on

fund1

Specific annual benefit1

1 PBGC insured

13-8

IRA Hybrid Retirement Benefits

Type of Plan

Limits on Employer Contribution

Limits on EmployeeDeferrals

Allocation of Employer’sContributions

AdministrativeCosts/Burden

Simplified EmployeePensions (SEPs)

25% deduction limit

SARSEPs can no longer be established

Allocation formula used—can include integration with Social Security

Low—employer has full discretion re: future contributions within the 25% limitation

SIMPLE IRA 3% dollar-for-dollar or 1% in 2 out of 5 years matching or 2% non-elective

$12,500 (2015) plus $3,000 age 50 catch-up if eligible

Percentage of compensation

Low—no ADP or ACP testing; employer may reduce matching contribution to 1% in 2 out of 5 years

SIMPLE 401(k)

3% dollar-for-dollar matching or 2% non-elective

$12,500 (2015) plus $3,000 age 50 catch-up if eligible

Percentage of compensation

Low—no ADP or ACP testing

13-9

Points to Consider in Selection of Most Appropriate Plan

• Seeks maximum tax shelter• Owner usually 45 or older and oldest or one of

oldest employees, only one or two older• Rewards long-term employees, and favors older

employees• Stable cash flow• Willing and able to make annual financial

commitment in excess of 25% of compensation• Willing to accept investment risk• Allows owner to meet his/her retirement

Defined Benefit Plan

• Business has stable cash flow; owner is willing to make annual financial commitment, but unwilling or unable to commit more than 25% of compensation

• Shift investment risk to employees• Easier to communicate plan to employees, and

reduce administrative costs• Younger employees benefit from years of

contributions and compounding

Money Purchase or

Target Benefit Plan

(to provide age-weighted plan)

13-10

Points to Consider in Selection of Most Appropriate Plan

• Business cash flow fluctuates• Shift investment risk to employees• Desire plan that will motivate

employees• Younger employees benefit from years

of contributions and compounding

Profit Sharing, SEP, or

Tandem Plan

• No other qualified plan or 403(b)• No more than 100 employees earning

$5,000 or more• Owner willing to make minimal

contribution—2% or 3% of compensation

• Desire to provide tax-deferred savings for employees

• Desire very low administrative cost

SIMPLE IRA or SIMPLE 401(k)

13-11

Practice Problem 1

Plan or category Characteristic

1. Money purchase

A. Must be established by October 1 of plan year

2. Stock bonus B. Can no longer be established, older plans are grandfathered

3. Cash balance C. One of the two defined contribution pension plans

4. ESOP D. Must be established by calendar year end

5. SEP E. Subject to the ACP test, but not the ADP test

6. SARSEP F. Employer guarantees a certain return on plan assets

7. 403(b) plan G. Employer stock is limited to 10% of plan assets

8. Qualified plans H. Can be established until tax due date, including extensions

9. SIMPLE IRA I. Has diversification requirement at age 55 & 10 years of service

10. Pension plans J. If company is publicly traded, must be able to diversify out after three years

Match the following characteristics with the item that matches it best (one match each).

13-12

Practice Problem 2

Test HCE Key Employee

50/40 Test (DB Plans)

Ratio % (DB & DC Plans)

Average Benefits (DB & DC Plans)

ADP (401(k) Plans)

ACP (401(k) Plans)

Top-heavy (DB & DC Plans)

Indicate which type of employee is used for each test.

13-13

Practice Problem 3

What is the maximum vesting schedule allowed

for each of the types of plans indicated?

Defined benefit_________________________

Cash balance__________________________

Defined contribution_____________________

13-14

Want More Review?

Visit eCampus1. Click Programs or Individual Courses Tab2. Click Online Classes Tab3. Click MyChoice Recordings to expand4. Click Recordings link for your courseFinal recordings contain reviews.

13-15

©2015, College for Financial Planning, all rights reserved. Session 13 Plan Selection CERTIFIED...

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