THE PENSION PROTECTION ACT OF 2006 What does the Financial Planner Need to Know??? May 20, 2008

EGTRRA PERMANENCY

Allowed Catch-Up Contributions for Older Workers Allowed Roth 401(k)s Simplified Top Heavy Rules Allowed Plan Loans to All Employees, Regardless of the Type of Business Entity Established Low-Income Saver’s Credit Miscellaneous Provisions

DEFINED BENEFIT PLAN FUNDING CHANGES

Asset Valuations Minimum Required Contributions Use of Credit Balances “At-Risk” Plans Restrictions on Benefit Increases, Lump Sums and Other Benefits

DEFINED BENEFIT PLAN FUNDING CHANGES

Yield curve would be derived from a 2- year average of interest rates on investment-grade bonds Alternatively, a plan can elect to use the full yield curve (i.e., non- segmented) without the 2-year averaging, but only for minimum funding

DEFINED BENEFIT PLAN FUNDING CHANGES Minimum Required Contribution (MRC) is sum of: –Target Normal Cost (TNC) –Shortfall Amortization Charge –Any Funding Waiver Amortizations. The MRC may be reduced by Credit Balances in certain circumstances

DEFINED BENEFIT PLAN FUNDING CHANGES

With the exception of accelerated benefit distributions: –Plan sponsors may make additional contributions or provide security to avoid the limitations. Restrictions do not apply to new plans for the first five years of the plan. Small plans not exempt from these rules even though they are exempt from “at-risk” rules.

DEFINED CONTRIBUTION PLAN CHANGES Faster vesting to either 3 yr or 6 yr graded Rollovers of after-tax money and Roth 401(k)’s allowed to 403(b) plans Rollovers from Qualified Plans, 403(b)’s, and 457 plans can be made directly to Roth IRA –Through 2009, compensation limits of $100k AGI –Compensation limits eliminated after 2009 –IRA conversions back in 2010 with 3 yr spread of taxes!!

DEFINED CONTRIBUTION PLAN CHANGES Special exemptions for government plans and Indian tribal plans Non-spousal beneficiaries now can rollover to IRA and take annual distributions –Big Estate Planning Opportunity

INVESTMENT ADVICE New Prohibited Transaction Exemption for Fiduciary Advisors Default Investment Elections Diversification Rights with Respect to Amounts Invested in Employer Securities

INVESTMENT ADVICE Prohibited Transaction Exemptions for “fiduciary advisors” to provide advice to participants and beneficiaries on their own funds under 2 alternative exemptions: “fiduciary advisor” defined as an Registered Investment Advisor, bank, insurance company, broker, dealer, an affiliated offshore institution/individual, or an employee Fee Leveling Exemption Fees received by fiduciary advisor are not dependent on the investment selections made.

INVESTMENT ADVICE Computer Model Exemption Advice delivered by a computer model certified by an independent investment expert Model must use all plan investments and cannot weigh towards advisor’s investments Must allow participants to use other advisors Disclosures made before advice given as well as annually –All relationships identified –Past performance –Advisor indicates fiduciary status –Participant can have independent advisor Fiduciary Advisor is an RIA, Bank, Ins Co. Broker/Dealer, or an affiliate

INVESTMENT ADVICE Detailed disclosures required to be made before the initial advice given, as well as annually thereafter –The relationship between the fiduciary advisor, the plan investment options and fees that will be received –The past performance of investment options under the plan –Services provided by the advisor and that the advisor is a fiduciary –That the participant is free to engage an independent advisor –Other disclosures required by securities laws

PORTABILITY OF BENEFITS In-service distributions from pension plans to participants who have reached age 62 (even if the normal retirement age is later than age 62) will be allowed Distributions from Qualified plans, 403(b) annuities and 457 plans can be rolled over directly to ROTH IRAs. The ROTH IRA conversion rules must be followed: –The taxable portion of the rollover amount would be taxed at the time of the rollover, and –Only individuals with $100,000 or less of Adjusted Gross Income (AGI) can do the rollover. After 2010, there is no $100,000 AGI restriction.

PORTABILITY OF BENEFITS

AMENDING PLANS Private Retirement Plans Must Be Amended By End of the 2009 Plan Year Governmental Retirement Plans Must Be Amended By End of the 2011 Plan Year Plans must comply operationally through end of 2009 Plan Year

Gross Company Payroll$1,000,000$1,000,000 Employee Elective Deferrals$100,000$100,000 Net Payroll for Computing Deductible Contribution$900,000$1,000,000 Deduction Limit 15% 25% Deductible Contribution$135,000$250,000 Adjustment for Employee Deferrals (100,000) 0 Allowable Employer Profit Sharing$35,000$250,000 Contribution EGTRRA PERMANENCY 401(K) PROFIT SHARING PLANS

EGTRRA PERMANENCY CATCH-UP CONTRIBUTION LIMITS Year401(k), 403(b), SARSEP, SIMPLE Governmental 457 Plan Plan 2002$1,000$ $2,000$1, $3,000$1, $4,000$2, $5,000$2, $5,000$2,500

EGTRRA PERMANENCY ONE-PERSON 401(k) PLAN To maximize contributions (2007), we need the following: Minimum Compensation:$118,000 Section 401(k) Deferral:$15,500 Profit Sharing Contribution:$29,500 Total Contribution/Allocation:$45,000 Total dollars needed in Business Entity:$147,500 Contribution as a % of Compensation:38.14%

REPORTING AND DISCLOSURE Plan sponsors of DB Plans must furnish a new detailed funding notice to all participants and the PBGC within 120 days after the end of the plan year. Must include whether plan’s funding target percentage is less than 100%; the plan’s assets and liabilities as of the last day of the prior plan year; breakdown of active participants versus retirees; the plan’s funding policy and asset allocation and an explanation of any amendments affecting plan liabilities

REPORTING AND DISCLOSURE Small plans (100 or fewer participants) allowed to provide notice when Form 5500 due Summary Annual Reports for DB Plans repealed DOL to provide model notice

REPORTING AND DISCLOSURE

Plan sponsors required to file an ERISA 4010 notice if funding target percentage below 80% for preceding year. Participants have right to get access to information filed with the PBGC upon a plan termination.

REPORTING AND DISCLOSURE

Statement must “on the basis of the latest available information” show amount of vested benefits. Statements must also include explanation of any permitted disparity or floor-offset arrangement affecting benefits under the plan. DC plan statements must show assets as of the most recent valuation date (e.g., some plan assets are trustee invested and “hard-to-value”), including employer securities.

REPORTING AND DISCLOSURE

All statements may be provided in written, electronic, or other appropriate form. DOL directed to provide simplified 5500 Form for plans with fewer than 25 participants. One-participant plans with assets less than $250,000 will be exempt from the 5500 Form filing requirement. Notice and comment period regarding distribution is expanded to days before the distribution commences.

AUTO-ENROLLMENT SAFE HARBOR Passes 401(k) tests and top heavy tests Must cover all eligible employees –Applies to new hires and those that did not affirmatively elect Automatic enrollment must be between 3% and 10% Employee contributions must automatically increase by 1% each year to at least 6% but not more than 10% Matching contributions must be 100% for the first 1% and 50% up to the next 5% with 100% vesting after 2 yrs Annual notices, preempts state laws, default investments, allows permissible distributions within 90 days, excess contributions disgorged and taxed in year of distribution This is a winner!

NEW 403(b) REGULATIONS Written Plan Document Contract Exchanges Plan-to-Plan Transfers Plan Termination Universal Availability Non-Discrimination Catch-Up Contributions

NEW 403(b) REGULATIONS Distributions Timing of Contributions Controlled Group Issues Incidental Life Insurance Roth IRA Contributions Effective Date-1/1/09

CASH BALANCE PLANS Contributions to fund retirement benefits can exceed 401(k)/defined contribution maximum of $46,000 Participants have hypothetical account balances

CASH BALANCE PLANS Cash Balance plans are granted regulatory recognition Cash Balance plans are not age- discriminatory if pay and annual interest credits for older workers are not less than those of younger workers Beneficial for small business and individual private corporations

CASH BALANCE PLANS Elimination of 25% deduction limit –2006/2007: 25% limit applies only to the defined benefit plan if, profit sharing allocations do not exceed 6% of pay –2008: 25% limit is eliminated for PBGC covered plans regardless of profit sharing contribution Professional services firm need a minimum of 26 employees to be PBGC covered

CASH BALANCE PLANS Participants have hypothetical accounts Accounts are credited with –Employer contribution credit –Interest credit Participant may receive account balance on termination

CASH BALANCE PLANS Benefits are more easily understood by the participant –Participant receives an annual statement that shows an account balance Costs are understandable for the plan sponsor Contribution credits for the staff (as a % of pay) can be the same

CASH BALANCE PLANS Assets must be pooled and trustee directed Interest credit is guaranteed For employer –Investment gains: decrease contributions –Investment losses: increase contributions

CASH BALANCE PLANS Manage investments to –Match the interest credit rate –Match the client’s objectives Investment risk on employer

CASH BALANCE PLANS Cash Balance investment strategies involve: –Plan demographics –Cash flow –Risk tolerance Investment strategy is coordinated with plan actuary

CASH BALANCE PLANS IDEAL CANDIDATES Professional Firms with 2 or more partners Principals between the ages of 45 & 65 Employees, on average, at least 5-10 years younger than principals Budget in excess of $45/$50k

CASH BALANCE PLANS AGE ANNUAL CREDITS 4585, , , , ,000

PLAN DESIGN

Employee-(Age)Compensation Defined Benefit Cost% of Comp. Notes: HCE-(60) Grp 1$220,000$102, % Normal retirement benefit: HCE-(50) Grp 2220,00049, % NHCE-(40) Grp 250,0006, % NHCE-(30) Grp 235,0002, % NHCE-(25) Grp 230,0001, % NHCE-(25) Grp 220, % Maximum 20 years. NHCE-(23) Grp 120,0001, % Normal retirement age: 65 NHCE-(23) Grp 119,0001, % Actuarial Assumptions: 6%, 1994 GAR-Unisex Mort. NHCE-(28) Grp 230, % NHCE-(27) Grp 218, % $662,000$165,722 % of Total HCE Total$151, % NHCE Total$13, % $165, % Cost Benefit Analysis Group % of compensation time year of participation. Group % of compensation time year of participation.

Plan Design DB/DC Combo ParticVARAComp CB Contrib CreditPS Contrib% of PayPrior Design% of Pay HCE , , %44, % HCE , , %17, % HCE , , %44, % HCE434053, %8, % NHCE , , %5, % NHCE , , %2, % NHCE , , %3, % NHCE , , %4, % NHCE , , %3, % NHCE , , %4, % NHCE755030, , %5, % NHCE832021, , %3, % NHCE926031, , %5, % NHCE , , %7, % Totals869, , , %160, %

SUMMARY EGTRRA Permanency Defined Benefit Funding Rules Investment Advice 403(b) Compliance Disclosure Cash Balance Plans Plan Design Opportunities