1. Designing the Right Retirement Plan Chapter 1 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company1 Gather relevant facts Identify employer goals and objectives Select plan features that meet objectives Initial steps:

2. Designing the Right Retirement Plan Chapter 1 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company2 Help employees with retirement savings Tax deferral for owners and highly compensated employees Help recruit, reward, retain, and retire employees Encourage productivity Discourage collective bargaining Advantages for the employer:

3. Designing the Right Retirement Plan Chapter 1 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company3 Employers may use qualified or nonqualified plans to meet their planning objectives Qualified plans – enjoy tax advantages but must meet strict IRS rules to ‘qualify’ for those advantages Nonqualified plans – allow employers more flexibility in plan design, but offer far fewer tax advantages than qualified plans

4. Designing the Right Retirement Plan Chapter 1 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company4 do not have to be duplicated among rank and file employees can exceed the dollar limits imposed under qualified plans can be custom tailored to meet needs of select executives or key employees A nonqualified plan allows an employer to provide benefits for key employees that …

5. Designing the Right Retirement Plan Chapter 1 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company5 With a nonqualified plan, an employer can: Recruit a key employee when matching or exceeding benefits of their current employer would make offered benefits exceed benefit levels given other employees Reward the individual or group that makes a substantial contribution to the success of the business Enable a business owner to use company earnings in ways that reduce or defer taxes and accumulate wealth

6. Designing the Right Retirement Plan Chapter 1 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company6 Tax Advantages of Qualified Plans Plan contributions (employer contributions and employee salary reduction contributions) - tax deductible for employer - tax deferred for employee Earnings on plan investments accumulate tax deferred Some lump sum distributions may qualify for 10 year averaging

7. Designing the Right Retirement Plan Chapter 1 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company7 Types of Qualified Plans Defined Contribution - contribution to plan by employer or employee is specified, but value of plan at retirement is not - employee bears investment risk Defined Benefit - benefit to be paid to employee at retirement is specified - employer responsible for meeting investment goals

8. Designing the Right Retirement Plan Chapter 1 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company8 Defined Contribution Plans Two Broad Types Money Purchase Pension Plan –Employer must contribute stated percentage of employee compensation to account each year (up to 25%) Profit Sharing Plan –Employer determines amount of contribution, often based on company profit –Contributions must be made on nondiscriminatory basis, often based on compensation –Allocation can be weighted to favor older workers

9. Designing the Right Retirement Plan Chapter 1 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company9 Defined Benefit Plans Plans funded on actuarial basis Funding amount greater for older employees –Makes defined benefit plans attractive to professionals or closely held business owners

10. Designing the Right Retirement Plan Chapter 1 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company10 In recent years, due to factors such as rising cost of providing benefits and more frequent job change among employees, the number of Defined Benefit plans has declined while the number of Defined Contribution plans has grown

11. Designing the Right Retirement Plan Chapter 1 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company11 Not all employees value retirement benefits: Younger employees Transient employees Low-paid employees Plan design must Maximize benefits for those who want them Be perceived as providing valued benefits

12. Designing the Right Retirement Plan Chapter 1 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company12 Which plan should an employer select?

13. Designing the Right Retirement Plan Chapter 1 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company13 Which plan should an employer select? A plan that matches, as best as possible, employer goals and qualified plan characteristics Consider how employers might achieve the following objectives

14. Designing the Right Retirement Plan Chapter 1 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company14 1.Employer wants to maximize the portion of plan costs that benefit highly- compensated employees.

15. Designing the Right Retirement Plan Chapter 1 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company15 1.Maximize the portion of plan costs that benefit highly-compensated employees. - Defined benefit plans - Service based contribution or benefit formulas - Age weighting and cross-testing - Combine defined benefit and defined contribution plans - 401(k) plans - Social Security integration

16. Designing the Right Retirement Plan Chapter 1 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company16 2.Provide a savings medium that employees perceive as valuable

17. Designing the Right Retirement Plan Chapter 1 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company17 2.Provide a savings medium that employees perceive as valuable - Defined contribution plans - Cash balance plans - Plans with employee participation

18. Designing the Right Retirement Plan Chapter 1 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company18 3.Provide adequate replacement income for each employee’s retirement - Defined benefit plan

19. Designing the Right Retirement Plan Chapter 1 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company19 4.Create an incentive for employees to maximize performance -Profit sharing plan -ESOP/stock bonus plan -Any other defined contribution or cash balance plan

20. Designing the Right Retirement Plan Chapter 1 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company20 5.Minimize turnover -Defined benefit plan -Graduated vesting

21. Designing the Right Retirement Plan Chapter 1 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company21 6.Encourage retirement - Defined benefit plan

22. Designing the Right Retirement Plan Chapter 1 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company22 7.Maximize employer contribution flexibility -Qualified profit sharing plans -SEPs

23. Designing the Right Retirement Plan Chapter 1 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company23 Application Exercise Software Solutions, Inc. is a 5 year old company that develops computer programs for clients. Jeff, the owner, is 35; average age of the 20 employees is 31. Jeff wants a plan that will encourage his employees to be more productive, but will also help reduce turnover. He’s also concerned about the cash flow of his young company. Which plan (s) should Jeff consider?

24. Designing the Right Retirement Plan Chapter 1 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company24 Application Exercise profit share or ESOP -would encourage employees to produce more since these plans are typically based on company profit -would give Jeff discretion in contributions gradual vesting -Could help reduce employee turnover -Funds forfeited by non-vested, departing employees could be used to benefit remaining employees