1. The MandMarblestone Group LLC 2929 Arch Street, Suite 600 Philadelphia, PA 19104-2889 Phone: (215) 222-5000 Fax: (215) 222-5522 Web: www.mand.comwww.mand.com 401(k) Secrets Every Financial Advisor Should Know

2. The MandMarblestone Group LLC IRS Circular 230 Disclosure IRS regulations require us to notify you that this communication was not intended or written to be used, and cannot be used, by you or any taxpayer, for the purpose of avoiding penalties that the IRS might impose on the taxpayer.

3. The MandMarblestone Group LLC Adding Value Through Plan Design

4. www.mand.com 3 What Do Your Clients Want Plans that deliver benefits to owners, family and other valued employees – “owner-centric” plan designs Plans that minimize contributions for those who won’t appreciate them Plans that can easily adapt to changing business conditions and changing employee demographics Adding Value Through Plan Design

5. www.mand.com 4 Recognize Plan Design Strategies What does a 3% company contribution buy for the owner? How much does the maximum owner contribution cost the company in employee contribution expense?

6. www.mand.com 5 Assume owner > 50 years old, comp of $245,000 3% = $7,350 contribution plus $22,000 deferral ($16,500 deferral plus $5,500 catch-up) plus 6% of comp = $14,700 (Assumes maximum cross-tested design) What does 3% of Participants’ Compensation Buy for Owner? 3% of Participants’ Comp Buys Owner $44,050 Objectives

7. www.mand.com 6 Assume Owner > 50 years old, comp of $245,000 $22,000 owner deferral ($16,500 deferral plus $5,500 catch-up) 13.27% of owner’s comp = $32,500 4.42% contribution to employees (Assumes maximum cross-tested design) What is Minimum Participants’ Contribution Expense to Maximize Owner’s Contribution? Owner Maximum of $54,500 costs 4.42% of Participants’ Compensation Objectives

8. www.mand.com 7 What is OCPP® ? “One Category Per Participant” Defined Contribution (DC) Plan Adding Value Through Plan Design

9. www.mand.com 8 How OCPP® Satisfies Clients’ Wants Ability to favor owners and family of any age Ability to pay “tax-sheltered” bonus to any employee without requirement to do so again next year Ability to minimize contributions for non- favored employees Flexible to changing business conditions and demographics Adding Value Through Plan Design

10. www.mand.com 9 Identify OCPP® Plan Design Candidates Successful business. For example: Professional Practices (e.g. Medical, Dental, Law and Accounting Firms) Family Owned Businesses Companies With High Sales/Profit Margins Willing to make a 3% to 5 % profit sharing contribution for staff Top-Heavy Plans 401(k) Plans with Non-Elective Safe Harbor Owners want to maximize contributions for themselves and/or reduce contributions for staff Adding Value Through Plan Design

11. www.mand.com 10 Defined Contribution (Profit Sharing) Plan Types “Safe Harbor” Plans – Prototype Documents Non-Integrated Integrated “General Test” Plans – Prototype Documents New Comparability “General Test” Plans – Customized Documents OCPP® – One Category Per Participant Adding Value Through Plan Design

12. www.mand.com 11 New Comparability vs. OCPP® New Comparability Pre-Defined Categories or “Tiers” of Participants “Cross-Tested” (Preferred Employees MUST be older) OCPP® – One Category Per Participant Unlimited number of groups Each participant is in their own category Complete Testing Flexibility Preferred Employees need NOT be older OCPP ® : NOT A MULTI-TIERED NEW COMPARABILITY DESIGN Adding Value Through Plan Design

13. www.mand.com 12 MMG OCPP® Plan Document Form of plan has received a favorable opinion letter from the IRS as a volume submitter document under EGTRRA May be submitted for individual determination letters based on each client’s unique fact pattern Adding Value Through Plan Design

14. The MandMarblestone Group LLC Case Studies

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16. www.mand.com 15 (Case #1 - Illustration A) This is a typical integrated allocation found in safe harbor (prototype) documents. Because of low deferral rates by employers, the family is unable to maximize their 401(k) contributions. In order to maximize the contribution for Child and Owner, a 25.17% contribution rate will be needed for the staff. Family will receive less than 47% of company contributions (including their own deferrals).

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18. www.mand.com 17 (Case #1 - Illustration B) By adding a 3% non-elective safe harbor contribution, the situation is significantly improved. The safe harbor contribution allows all family members to maximize their 401(k) contributions. This step alone will increase the family’s share of total company contributions (including their own deferrals) to 60.63%. Note that because of the catch-up contribution, the Father of the Owner is able to have in excess of 100% of compensation contributed!

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20. www.mand.com 19 (Case #1 - Illustration C) Because staff deferral rates are not high, a discretionary match should be considered. The non-elective safe harbor allows the company to make a matching contribution of up to 4% of compensation without regard to the discrimination testing usually required for matching contributions. The family receives nearly 90% of the matching contribution. This in turn permits the company profit sharing contribution rate to be reduced to 17.33%, saving almost $40,000 in company expense.

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22. www.mand.com 21 (Case #1 - Illustration D) With a new comparability profit sharing allocation, the Child’s age causes the staff contribution rate to increase to 18.17% This rate is higher than any family member receives! The family’s share of the total contribution (including family deferrals) drops to 62.98% of the total. NEW COMPARABLITY DOES NOT WORK WHERE THE FAVORED GROUP INCLUDES YOUNG EMPLOYEES!

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24. www.mand.com 23 (Case #1 - Illustration E) The only reason the two Warehouse Staff are treated as “favored employees” is because they are young. PROBLEM: This would appear to violate the Age Discrimination in Employment Act and Internal Revenue Code Section 411(b)(2)(A) which prohibits reduction to allocation rates because of age.

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26. www.mand.com 25 (Case #1 - Illustration F) With OCPP®, age is not a factor! The favored employees (Office Manager & Warehouse Manager) are selected for a higher contribution rate because they are valued. Using this “discretionary pre-tax bonus” for two favored employees enables the other employees’ contributions to be minimized at 5% of compensation. The family’s share of contributions (including deferrals) increases to 79.90% of the total!

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28. www.mand.com 27 (Case #1 - Illustration G) Under this OCPP® allocation, the goal is to maximize the family at the least cost for employees. The two “favored” individuals are those with the lowest compensation. Age discrimination is not an issue – the two favored employees are among the oldest. The family’s share of the total company contributions (including their deferrals) increases to 83.99%.

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30. www.mand.com 29 (Case #2 - Illustration A) If the youngest employee terminated employment during the current plan year, the new comparability formula becomes a disaster. The third-party administrator typically does not learn about the demographic changes until after the end of the plan year, where any changes to the benefit formula may be a prohibited reduction in accrued benefits of the participants.

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32. www.mand.com 31 (Case #2 - Illustration B) Without the youngest employee, even the integrated allocation is superior to the new comparability allocation. But it is too late to restore this type of formula if the plan year has already ended!

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34. www.mand.com 33 (Case #2 - Illustration C) Using the OCPP® allocation, the effect of the youngest employee’s termination is negligible. The family’s share of the total contribution (including family deferrals) increases to 80.36%. Age continues to be a non-factor.

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36. www.mand.com 35 (Case #2 - Illustration D) Under the lowest-cost OCPP® scenario, the termination of the youngest employee is not a factor. The family’s share of the total contribution (including family deferrals) increases to 86.02%.

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38. www.mand.com 37 (Case #3 - Illustration A) This is a non-top heavy plan because key employees do not represent more than 60% of plan assets. The founder is young (37), so a new comparability design will be of no use in maximizing the benefits of Founder. With the plan providing for deferrals and match only, Founder receives $7,350 out of a total employer match of $82,599 split among 70 employees. Founder is able to maximize his 401(k) contribution because of sufficient level of employee deferrals.

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40. www.mand.com 39 (Case #3 - Illustration B) With an OCPP® plan design, Founder can be maximized ($32,500 profit sharing contribution + $16,500 deferral) at a total company cost of $7,262 for 69 other employees. No obligation to provide any contribution for most employees because plan is not top-heavy. Contribution goes only to 3 lowest-paid participants. Founder receives more than 87% of total company contributions.

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42. www.mand.com 41 (Case #3 - Illustration C) If the Founder wants to maximize the Chief Executive Officer as well, an incremental $10,126 will be required for 3 additional low-paid employees. Founder and CEO receive more than 84% of company contributions (and their own deferrals) ($98,000) at a total cost of $17,388.

43. www.mand.com 42 Questions?

44. The MandMarblestone Group LLC Cash Balance Plans

45. www.mand.com 44 Cash Balance Plans Cash Balance plan is a type of Defined Benefit plan These plans had been under scrutiny by Congress and the courts because of alleged age discrimination. The Pension Protection Act of 2006 and The Seventh Circuit’s reversal of the lower court in Cooper v. IBM has ratified the legitimacy of these plans. The Third Circuit (covering PA and NJ) has followed the Seventh Circuit IRS is issuing determination letters on new Cash Balance plans as well as conversions of traditional defined benefit plans.

46. www.mand.com 45 Cash Balance Plans Used for Owners who want to contribute more than $49,000

47. www.mand.com 46 Cash Balance Plans Illustration of Contributions at Various Ages AgeAmount 35$40,900 45$69,900 55$119,900 65$204,100 Assumes that retirement at age 65. Contribution can be larger at earlier retirement ages.

48. www.mand.com 47 Participant Accounts Participants have accounts Accounts increase Fixed Employer contribution For example, 5% of pay per year Different contribution tiers are possible for different classes of participants – owners contribution tier can be maximized Guaranteed interest credit For example, 30-year Treasury Rate Participants receive account on termination

49. www.mand.com 48 Participant Accounts Annual Benefit Accrual is easy to determine and be understood by participants Pooled investments

50. www.mand.com 49 With 2 Contribution Tiers It Looks Like This… 83 % of contribution goes to Physician AgePay Cash Balance% of Pay Physician53$200,000$118,00059% Staff25$30,000$6,00020% Staff30$30,000$6,00020% Staff33$30,000$6,00020% Staff40$30,000$6,00020%

51. www.mand.com 50 Combination Plans You can have both Cash Balance Profit Sharing General Rule – Aggregate tax deduction limit is 25% of pay or normal cash balance cost, whichever is greater PPA – do not count the first 6% of pay for profit sharing Beginning in 2008, cases subject to PBGC does not have aggregate tax deduction limit 401(k) deferrals do not count as part of deduction limit

52. www.mand.com 51 It Looks Like This… AgePay401(k) Profit Sharing Cash BalanceTotal Physician53$245,000$22,000$14,700$118,000$154,700 Staff25$30,0000$1,800$1,500$3,300 Staff30$30,0000$1,800$1,500$3,300 Staff33$30,0000$1,800$1,500$3,300 Staff40$30,0000$1,800$1,500$3,300 Total$365,000$22,000$21,900$124,000$167,900 92% of Contribution Goes to Physician

53. www.mand.com 52 Cash Balance Combo Deduction Deduction limitation is greater of cash balance expense ($124,000) or 25% of aggregate compensation ($365,000/4 = $91,250) but does not count first 6% of pay contributed to profit sharing ($21,900) Total company contributions: $21,900 profit sharing + $124,000 cash balance = $145,900 less $21,900 (6% profit sharing contribution) = $124,000 Deferrals do not count in total deduction

54. The MandMarblestone Group LLC IRS Circular 230 Disclosure IRS regulations require us to notify you that this communication was not intended or written to be used, and cannot be used, by you or any taxpayer, for the purpose of avoiding penalties that the IRS might impose on the taxpayer.