cash balance plans overveiw
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11
Cash Balance Plans
Overview
22
Initial Contribution Limits
$0
$50,000
$100,000
$150,000
$200,000
$250,000
40 45 50 55 60
Age
Combination Cash Balance 401(k)Source: Guardian, December 2009.
33
Simplicity
Participant Age 50, NRA 62, Salary $50,000
Defined Benefit Plan
Cash Balance Plan
PlanFormula
2.4% of pay times years of future service
16% of pay credits to your “account”
Accrued Benefit
$107.72 a month payable at age 62
$8,000 lump sum
44
Customizable
Group A:
48% of Current Pay Cash Balance Credits
Group B:
16% of Current Pay Cash Balance Credits
Group C: Ineligible to Participate
55
Commitment
“Permanent & On-going”
Employer Bears Funding Risk
Even in a “bad” year!
66
Plan Design Ideas
77
2010 Census Data Defined Benefit
Position AgePlan
Comp.EmployerAllocation
% ofPay
Owner A
Owner B
Staff 1
Staff 2
Staff 3
Staff 4
55
50
50
40
35
30
$ 245,000
245,000
50,000
40,000
30,000
25,000
$163,409
117,667
24,248
9,974
5,388
3,235
67%
48%
48%
25%
18%
13%
Total to Owners
Employee Total
$ 490,000
145,000
$ 281,076
42,845
Plan Total
% to Owners
$ 635,000
77%
$ 323,921
87%
Comparison of Initial Allocations
88
DB Problems
Employee Cost Based Solely on Age
Becomes an Issue for Owners of Differing Ages
Benefit is Opaque to the Participants
Defined Benefit
EmployerAllocation
% ofPay
$163,409
117,667
24,248
9,974
5,388
3,235
67%
48%
48%
25%
18%
13%
$ 281,076
42,845
$ 323,921
87%
99
DefinedDefinedContributionContribution
DefinedDefinedBenefitBenefit
Cash Balance Solution
Cash
Balance
1010
How It Works
Cash BalanceCredits
GuaranteedInterest
“Each owner will receive a credit of $117,600 and it is guaranteed to grow at 6.46% interest.”
The benefits guaranteed by cash balance plans are usually insured by a federal agency, the Pension Benefit Guaranty Corporation (PBGC).
1111
Non-discrimination Testing
IRC 401(a)(4) & 410(b)
HCE NHCE
““General Test” & “Average Benefits Test”General Test” & “Average Benefits Test”
1212
Years Until Retirement
0 10 20 30 40
Avg. Employee
Staff 4
Staff 3
Staff 2
Staff 1
Owner B
Owner A
1313
Census Data:Position
Defined Benefit Cash BalanceEmployerAllocation
% ofPay
EmployerAllocation
% ofPay
Owner A
Owner B
Staff 1
Staff 2
Staff 3
Staff 4
$163,409
117,667
24,248
9,974
5,388
3,235
67%
48%
48%
25%
18%
13%
$ 162,925
117,600
9,500
7,600
5,700
4,750
67%
48%
19%
19%
19%
19%
Owners
Staff
$ 281,076
42,845
$ 280,525
27,550
Total
% to Owners
$ 323,921
87%
$ 308,075
91%
Comparison of Initial Allocations
1414
Census Data:Position
Multi-Group Two Group
EmployerAllocation
% ofPay
EmployerAllocation
% ofPay
Owner A
Owner B
Staff 1
Staff 2
Staff 3
Staff 4
$ 162,925
117,600
9,500
7,600
5,700
4,750
67%
48%
19%
19%
19%
19%
$ 117,600
117,600
7,000
5,600
4,200
3,500
48%
48%
14%
14%
14%
14%
Owners
Employees
$ 280,525
27,550
$ 235,200
20,300
Plan
% to Owners
$ 308,075
91%
$ 255,500
92%
Cash Balance Initial Allocations
1515
Combination Plans
1616
Employer Deduction Limit
IRC 404(a)(7)
Not Covered by PBGC
CB Plan* + 6% in 401(k)
Or 31% of Eligible Payroll
Participates in PBGC CB Plan* + 25% in 401(k)
* Amount Necessary to Meet Plan Funding
1717
PBGC Exemptions
Owner Only Plans (10%+ Owners)
Professional Practices < 25 Employees
Medical & Dental
Legal
Architectural
Engineering
Accounting
1818
Non-PBGC Plan
6% Plan
CashBalance401(k) Plan
1919
PositionSalary
DeferralEmployerAllocation
% ofPay
PlanTotal
Owner A
Owner B
Staff 1
Staff 2
Staff 3
Staff 4
$ 22,000
22,000
-
-
-
$ 14,700
14,700
3,000
2,400
1,800
1,500
6.0%
6.0%
6.0%
6.0%
6.0%
6.0%
$ 36,700
36,700
3,125
2,500
1,875
1,563
Owners
Employees
$ 44,000
-
$ 29,400
8,700
$ 73,400
8.700
Plan Total
% to Owners
$ 44,000 $ 38,100
77%
$ 82,100
89%
3% Safe Harbor 401(k) & Profit Sharing Plan
6% of Payroll Limitation
2020
Position401(k)
Total
Cash
Balance
% of
Pay
Combo
Total
Owner A
Owner B
Staff 1
Staff 2
Staff 3
Staff 4
$ 36,700
36,700
3,000
2,400
1,800
1,500
$ 117,600
117,600
2,500
2,000
1,500
1,250
48.0%
48.0%
5.0%
5.0%
5.0%
5.0%
$ 154,300
154,300
5,500
4,400
3,300
2,750
Owners
Employees
$ 73,400
8,700
$ 235,200
7,250
$ 308,600
15,950
Plan Total
% to Owners
$ 82,100
89%
$ 242,450
97%
$ 324,550
95%
Two Group Combination Initial Allocations
2121
Design Options Summary
PositionDefinedBenefit
3 GroupCB Plan
2 GroupCB Plan
ComboPlan
Owner A
Owner B
Employees
$ 163,409
117,667
42,845
$ 162,925
117,600
27,550
$ 117,600
117,600
20,300
$ 154,300
154,300
15,950
Plan Total
% to Owners
$ 323,921
87%
$ 308,075
91%
$ 255,500
92%
$324,550
95%
2222
PBGC Covered Plan
25% Plan
CashBalance
401(k) Plan
2323
PositionSalary
DeferralEmployerAllocation
% ofPay
PlanTotal
Owner A
Owner B
Staff 1
Staff 2
Staff 3
Staff 4
$ 22,000
22,000
-
-
-
$ 32,500
32,500
4,500
3,600
2,700
2,250
13.3%
13.3%
9.0%
9.0%
9.0%
9.0%
$ 54,500
54,500
4,500
3,600
2,700
2,250
Owners
Employees
$ 44,000
-
$ 65,000
13,050
$ 109,000
13,050
Plan Total
% to Owners
$ 44,000 $ 78,775
83%
$ 122,050
89%
401(k) Plan Component
2424
Position401(k)Total
CashBalance
% ofPay
ComboTotal
Owner A
Owner B
Staff 1
Staff 2
Staff 3
Staff 4
$ 54,500
54,500
4,500
3,600
2,700
2,250
$117,600
117,600
1,000
800
600
500
48%
48%
2%
2%
2%
2%
$ 172,100
172,100
5,500
4,400
3,300
2,750
Owners
Employees
$ 109,000
13,050
$ 235,200
2,900
$ 344,200
15,950
Plan Total
% to Owners
$ 122,050
89%
$ 238,100
99%
$ 360,150
96%
Two Group Combination Initial Allocations
2525
Design Options Summary
PositionDefinedBenefit
3 GroupCB Plan
2 GroupCB Plan
ComboPlan
Owner A
Owner B
Employees
$ 163,409
117,667
42,845
$ 162,925
117,600
27,550
$ 117,600
117,600
20,300
$ 172,100
172,100
15,950
Plan Total
% to Owners
$ 323,921
87%
$ 308,075
91%
$ 255,500
92%
$ 360,150
96%
2626
Plan Benefits & Funding
2727
Projected Benefits
Ʃ Allocations + Interest Credits @ 6.46%
AgeAnticipated Credit Cash
BalanceContribution Interest
56 $ 117,600 $ 0 $ 117,600
57 117,600 7,597 242,797
58 117,600 15,685 376,082
59 117,600 24,295 517,977
60 117,600 33,461 669,038
61 $ 117,600 43,220 829,858
62 $ 117,600 53,609 1,001,066
2828
Market Rate of Interest
3rd Segment of Yield Curve.
(6.80%)*
30 Year TreasuryYield
(4.19%)** Rates for Oct ’09 Look-back
2929
Funding Yield Curve
Segment 1
0 – 5 Years: 4.92%
Segment 2
5 – 20 Years: 6.71%
Segment 3
20+ Years: 6.80%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
1 2 3
Corporate Wtd. Avg. Index
6.46%
3030
Plan Funding & Benefit Restrictions
Funding Percentage
Effect on Distributions
100% or higher Fully Funded
No Restrictions
80 to 99% Sufficient Funding Restrictions for Key Empl.
60 to 79% Plan “at risk”
Lump sums are restricted
Below 60% Plan is “distressed”
No lump sum, benefits frozen
3131
Aligning the Rates
Cash Balance Rate
YieldCurve
PlanInvestments
Corporate Wgt.Avg. Bond Index
3232
Plan Administration
Plan Documents
Actuarial Certification
Annual Reporting
3333
Timing
Plan Installation
New Cash Balance
Prior to last day of tax year
Safe Harbor Elections
New Plan: 10/01
Existing Plan: 12/01 of prior year
Plan Contributions
Deferrals
As soon as possible
Employer Contributions
Tax Filing Date
Extensions Not to Exceed 6 months
Fund by 4/30 for FTAP Calculation Optimization
3434
Conclusions
Cash Balance Plans are DB Plans that Mimic DC Plans (in Certain Respects)
Cash Balance Plan Design is Flexible
Benefits Must Be Guaranteed by Sponsor
Combination Plans are Powerful
Professional Assistance is Required
3535
What We Need…
1.Fact Finder/ Current
Census Data
2.Existing Plan Document
and Last Valuation
3.Goals and Objectives
3636
Questions & Answers
The Guardian Life Insurance Company of America and its subsidiaries, affiliates, employees, agents and representatives do not provide tax, legal, accounting, actuarial or investment advice. Clients should consult their own advisor and/or attorney regarding their specific situation.
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