1. Advanced Plan Design Maximizing tax efficiency and generating favorable allocations to accelerate retirement savings Presented by: Kelton Collopy Tycor Benefit Administrators, Inc. ® Confidence in your plan ™

2. Agenda Identify reasons why an Employer does not offer a plan or why a plan is not fully utilized Provide a broad overview of a variety of tax-qualified retirement plans available for a sponsor to choose from –Defined Contribution Plans –Defined Benefit Plans –Owner-Only Plans Case Study of Plans for a small employer –Use plan design to improve the plan results and client satisfaction –Demonstrate how tax treatment can increase retirement savings

3. Reasons Owners Don’t Take Full Advantage of or Don’t Sponsor a Plan Their existing plan is already returning 401(k) deferrals so they believe they have reached their limits They sponsor a DC plan, such as 401(k) Profit Sharing, and believe that $52,000 is the maximum They believe maximizing their contribution would result in a cost-prohibitive contribution to the plan Too busy re-investing into their own business Properly designed, it may be possible to increase the contribution received by favored person or group while reducing the overall contribution to the Plan, while realizing significant tax savings at the same time

4. Defined Contribution Plans Retirement benefits are derived from contributions that the employee and/or employer make to Plan Individual accounts are established for each participant and the investment risk/reward is borne by the employee. Employer contributions are tax deductible and can be up to 25% of eligible compensation. Allocation to participants generally based on compensation or based on combination of compensation and a deferral amount made by employee (i.e., Match) Maximum contribution to employee’s account for 2014 is $52,000. Ability for employees over age 50 to save an additional $5,500 for total of $57,500 Rules that each plan type is subject to vary & knowing how this affects plan design & reporting requirements is important

5. Defined Contribution Plans Feature SIMPLE 401(k) SEP401(k)Profit Sharing Money Purchase Sponsor another Plan? NoYes, unless adopted on IRS 5305 Yes Max EE Deferral (2014) Lesser of $12,000 or 100% of comp None, only ER Contributions Lesser of $17,500 or 100% of compensation None Catch Up Contributions permitted? Yes, $2,500 (2014)N/AYes, $5,500 (2014)N/A Employer Contributions Required Match 100% up to 3% or 2% of Eligible Comp to all Employees. Fully Vested Discretionary, up to 25% of comp. Subject to vesting Discretionary, up to 25% of comp. Employee deferral fully vested. Employer subject to vesting Discretionary, up to 25% of comp. Subject to vesting Required contribution as stated in plan doc. Up to 25% of comp. Subject to vesting Eligibility Age cannot exceed 21, Service cannot exceed 1 year Age cannot exceed 21, earned compensation of $550 in 3 of 5 previous years Age cannot exceed 21, Service cannot exceed 1 year Age cannot exceed 21, Service cannot exceed 1 year. 2 Years if 100% vested Age cannot exceed 21, Service cannot exceed 1 year. 2 Years if 100% vested Maximum Contribution $12,000 + $2,500 + 3% Match 25% of pay, up to $52,000 $52,000 or $57,500 (not to exceed 100% of pay) $52,000 (not to exceed 100% of pay) Loans or Roth? Plan OptionNoPlan OptionLoan – Plan Option Roth - No

6. Profit Sharing Plans Flexibility Range of contribution can be 0% - 25% of payroll Contribution can vary every year Can offer 401(k) and/or Matching Contributions Max individual allocation is lesser of 100% of W-2 or $52,000 ($57,500 with Catch Up) Methods to allocate the PS $ Pro-Rata Integrated Age-Weighted Cross-Tested, or New Comparability

7. Defined Benefit Plans Promise to provide a monthly benefit beginning at retirement and payable as long as retiree lives. The amount is typically based on years of service and how much was earned during the highest-paid three consecutive years of employment. Maximum annual lifetime benefit is $210,000 payable to a participant with retirement age of 62-65 or later in 2014 These plans provide an employer with the potential for much higher contribution levels than defined contribution plans Older employees receive a larger share of contributions May require PBGC insurance, does require the services of an enrolled actuary Two types of DB Plans –Traditional Defined Benefit –Cash Balance

8. Traditional Defined Benefit Plan Future Benefits Defined by Plan and promised by Employer Annual benefit defined as accrued monthly benefit payable at Retirement Age, based on factors such as current or past compensation and service Employer bears the investment risk of the pooled investments of the plan Why do DBs permit higher contribution limits? Maximum benefit limit mandates 10 years of participation. Less than 10 years creates an adjustment Maximum annual benefit of $210,000 at age 62 has an approximate lump sum value of $2,400,000 Participant at age 52 has only 10 years to receive contributions of approximately $200,000 to achieve maximum

9. A Closer Look: Owner-Only Plans Employers, such as Sole Proprietors or Partnerships often consist of just the business owner(s). With no employees, or at least no employees meeting plan entry requirements, the plan may only cover the Owner(s) These plans are not subject to ERISA They do have to comply with variety of rules Common Choices are: –SIMPLE 401(k) –SEP –Solo 401(k) Any Plan established is going to be Top Heavy –Will they ever hire employees? –Will they become participants eligible to enter the plan? Consider Defined Benefit

10. Owner Only - Simple, SEP, 401(k) PS SIMPLE 401(k)SEPSolo 401(k) Earned Income Employer MatchEmployee EE Def & ER MatchEmployer Employee EE Def & ER PS $50,000 $1,500 $12,000 $13,500 $ 12,500 $ 17,500 $ 30,000 $100,000 $3,000 $12,000 $15,000 $ 25,000 $ 17,500 $ 42,500 $138,000 $4,140 $12,000 $16,140 $ 34,500 $ 17,500 $ 52,000 $150,000 $4,500 $12,000 $16,500 $ 37,500 $ 34,500 $ 17,500 $ 52,000 $200,000 $6,000 $12,000 $18,000 $ 50,000 $ 34,500 $ 17,500 $ 52,000 $260,000 $7,800 $12,000 $19,800 $ 52,000 $ 34,500 $ 17,500 $ 52,000 ER Maximum 100% of 3% Def 2% of Elig Comp 25% of Elig. Comp 25% of Elig. Comp. Maximum $12,000 $ - $ 17,500 Catch Up $2,500 $ - $ 5,500

11. Owner Only – Defined Benefit Earned Income $50,000$100,000$150,000$200,000 or higher AgeContribution 40$19,000$38,000$57,000$74,000 45$25,000$50,000$75,000$97,000 50$33,000$65,000$98,000$127,000 55$43,000$85,000$128,000$166,000 60$56,000$111,000$167,000$217,000 65$58,000$115,000$173,000$225,000 If the amount of savings provided by a Defined Benefit is still not high enough, can also utilize a 401(k) PS Plan to increase the savings and flexibility to the Owner

12. Case Study Employers have many options in offering retirement programs SIMPLE, SEP, and 401(k) Profit Sharing are the most common Less common, but growing, are Cash Balance Plans Depending on client objectives, any one of these, or even a combination of, these plans can be the solution Sample Client –10 Employees, including 2 Owners –Annual payroll is approaching $1 million. Company is profitable with stable revenue –Owners, age 64 and 49, are looking to save more for retirement –Will provide benefits to staff if it makes sense financially –Staff was surveyed and there is interest in saving among the group Objective: Maximize the 64 year old Owner, and possibly the 49 year old Owner, under various plan types and consider the tax efficiency of each solution

13. Sample For Small Employer Employee Age as of 12/31/2014Compensation5% Owner Tiered Class for New Comparability Owner64$260,000YA Owner49$200,000YB Staff of 8 EEsAvg Age 42Avg Comp $48,000NC EmployeeSimple Def Simple Match Simple TotalSEP401(k)Pro-RataTotal Owner$14,500$7,800$22,300$52,000$23,000$34,500$57,500 Owner$12,000$6,000$18,000$40,000$17,500$26,538$44,038 Total ER $40,300$92,000 $101,538 Staff of 8$11,450$8,650$20,100$99,000$11,450$65,600$77,050 The 401(k) PS allows for 64 yr old to reach maximum (with catch up). SEP gets to limit (without catch up) but is entirely funded by Employer at 20% of payroll. Under 401(k) PS, Owners receive $101,538 in total contributions

14. Employer Contributions Analyzed Simple MatchSEPPro-Rata Owner$7,800$52,000$34,500 Owner$6,000$40,000$26,538 Owner Total$13,800$92,000$61,038 EE Total$8,650$99,000$65,681 Total ER Contrib$22,450$191,000$126,719 40% Tax Rate $8,980$76,400$50,688 Adjusted Cost of Contribution($13,470)($114,600)($76,031) Owners Share$13,800$92,000$61,038 Net Cost$330($22,600)($14,993) The SIMPLE is more efficient in terms of tax treatment but the income replacement to the Owner’s is likely insufficient to meet their objectives.

15. Meeting Client Objective With These Plans Objective: Maximize the 64 year old Owner, and possibly the 49 year old Owner, under various plan types and consider the tax efficiency of each solution –SIMPLE: Has tax efficiency but low overall benefit to owners –SEP: Solely the Employer responsibility to fund and not tax efficient –PRO-RATA PROFIT SHARING: Maximizes the primary Owner but not a tax efficient result Let’s consider advanced design techniques to better satisfy the objective. New Comparability, or cross-tested, plan design may work.

16. What is a New Comparability Plan? Profit Sharing plan with: Employees divided into groups The allocation % to each group can vary (e.g., 3% to the staff, 9% to Owner) Groups can even be defined as each employee is their own group for ultimate flexibility Often have 401(k) and other features as well (Safe Harbor, Roth, etc.) These plans are attractive to what type of company? Professional firms such as physicians, attorney, CPA firms but works for many other businesses Favored group should be older than a significant portion of employees Allows larger contributions to favored group without loss of flexibility in funding Companies looking for tax deductions

17. New Comparability Plan (cont.) Is this plan discriminatory? Projected benefits at retirement age are considered, not the $ received today, allowing higher rate to older participants The allocations must be tested for non-discrimination on a cross-tested basis Generally, the resulting allocation favors selected, older, higher paid employees. Typically, the Owner(s) is/are targeted for highest amount Can 401(k) deferrals be made? Definitely! It works best when 401(k) feature is available. Roth or traditional deferrals available Better yet, pair with “Safe Harbor” contributions so HCEs can max 401(k) deferral Allocation to NHCE must be at least 1/3 of that provided to HCEs or 5% (if less)

18. 401(k) New Comparability With 3% Safe Harbor EEDeferrals 3% Safe Harbor New Comparability Total EmployerTotal Contributions Owner$23,000$7,800$26,700$34,500$57,500 Owner$17,500$6,000$20,538$26,538$44,038 Owner Totals $61,038$101,538 Staff of 8 Ees$11,450$14,850$7,040$21,890$33,340 Total Employer Contribution$82,928 Estimated Tax Rate40% Tax Savings $33,171 Cost of EE Contribution($21,890) Net Cost of Contribution$11,281 By using New Comparability design, we are able to keep the Owner’s at the same contribution level ($101,538) but greatly reduce the cost of providing the employee’s benefits ($65,682 to $21,894). The Employer Contribution is very effective from a tax perspective as well.

19. Meeting Client Objective With This Plan Objective: Maximize the 64 year old Owner, and possibly the 49 year old Owner, under various plan types and consider the tax efficiency of each solution New Comparability Design meets the criteria of maximizing the Owner, treats the 49 year old equally in terms of % of pay and is tax efficient allocation so it may be the solution. However, Owner is 64 and may be looking for more retirement savings. Let’s consider adding a Cash Balance Plan

20. Cash Balance Plan Benefit is based on hypothetical account Account is credited with annual contribution and with interest credit as defined by plan (generally in 5% range) Plan looks like a Money Purchase Plan Accrued benefit is in the form of a Lump Sum Distribution, making it very understandable to participants Assets held in Trust and managed by Trustees, not employee directed. Almost always paired with a New Comparability 401(k) Plan for maximizing benefits and adding flexibility Defined Benefit Plans have required annual contributions and employer bears the investment risk

21. CB/DC Combo Plans Two separate plans (documents, reporting & administration for each) No contribution restrictions for employers that (a) are NOT Professional Service entities and (b) have rank & file employees Professional Service entities with >25 employees do not have contribution restriction either The restrictions on Sole Proprietors or Professional Service firm with <25 employees limit the Profit Sharing to a max of 6% of total eligible compensation Sole Proprietor Plans want to use most restrictive eligibility rules and communicate changes early

22. CB/DC Combo – Cash Balance Plan Paired With 401(k) New Comparability 3% Safe Harbor Plan The combination of Cash Balance Plan with a 401(k) Profit Sharing Plan is an exceptional method for increasing both the Owner’s and the Staff opportunity for income replacement in retirement and can be done in a tax efficient manner. Note: These plans can also be used in succession planning. EE 401(k) Deferrals 3% Safe Harbor 7.5% Profit Sharing Cash Balance Total EmployerTotal Owner$23,000$ - $243,557 $266,557 Owner$17,500 $ - $132,320 $149,820 Owner Totals $ - $375,877 $416,377 Employee$11,450$14,850$37,125$14,850$66,825$78,275 Total Employer Contribution$442,702 Estimated Tax Rate40% Tax Savings $177,081 Cost of EE Contribution($66,825) Net Cost of Contribution$110,256

23. Agenda - Recap Identify reasons why an Employer does not offer a plan or why a plan is not fully utilized Provide a broad overview of a variety of tax-qualified retirement plans available for a sponsor to choose from –Defined Contribution Plans –Defined Benefit Plans –Owner-Only Plans Case Study of plan available for a small employer –Use plan design to improve the plan results and client satisfaction –Demonstrate how tax treatment can increase retirement savings

24. Thank You For Your Time Today! Kelton Collopy VP, TPA Services Tycor Benefit Administrators, Inc. ® O: (610) 251-0670 x19 Kcollopy@tycorplan.com Confidence in your plan ™