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Planning for Retirement Needs

Planning for Retirement Needs. Profit-Sharing Plans, 401(k) Plans, Stock Bonus Plans, and ESOPs Chapter 5. Profit sharing 401(k) Stock bonus ESOP. Chapter 5: Profit Sharing. Discretionary contributions Or state as percentage of profits Or state as percentage of pay

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Planning for Retirement Needs

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  1. Planning for Retirement Needs Profit-Sharing Plans, 401(k) Plans,Stock Bonus Plans, and ESOPs Chapter 5

  2. Profit sharing 401(k) Stock bonus ESOP Chapter 5: Profit Sharing

  3. Discretionary contributions Or state as percentage of profits Or state as percentage of pay Withdrawal flexibility Tie contributions into profits Cross-tested allocation formula Why Profit Sharing?

  4. “Employer contributions made for the year will be allocated, as of the last day of each plan year, to each participant’s account in the proportion which that participant’s compensation bears to the total compensation of all eligible participants for the plan year.” Allocation Formula

  5. Can not provide benefits based on past service Can not provide specified replacement ratio Disadvantages of Profit Sharing

  6. Employee salary deferrals Employer matching contributions Employer profit-sharing contributions Employee after-tax contributions 401(k) Plans

  7. Employee deferrals 100 percent vested Withdrawals Termination of employment Attainment of age 59 1/2 Financial hardship General rule Safe harbor Special Requirements

  8. Hardship events Medical expenses Purchase principal residence College education for family member Forclosure Burial expenses for family member Repair of damage to principal residence “Reasonably available” requirement Receive all distributions and loans available first Suspend deferrals for 6 months Safe Harbor Hardship

  9. Average deferral percentage test Compare the contributions made by HCEs in relation to the contributions made by non-HCEs Mathematical test Plan has to satisfy one of two alternative tests ADP Test

  10. 5-percent owners in current or prior year Earn more than dollar limit in prior year $100,000 in 2006 $100,000 in 2007 Election to limit group earning more than the dollar limit to only the highest paid employees (in the top 20 percent) Highly Compensated Employees

  11. Calculate deferral percentage in prior year for each non-HCE Calculate average deferral of entire group Determine maximum deferral for HCE group Performing the Test

  12. Average ADP of the HCEs for the current year can not exceed 125 percent of the average ADP for the nonhighly compensated for the prior year. Example: 6% deferral for non-HCEs means 7.5% for HCEs ADP Test –1.25

  13. The average of the ADP for the HCEs for the current year can not exceed more than 200 percent of the average ADP for the nonhighly compensated for the prior year. In addition, the difference between the averages for each group cannot exceed 2 percentage points. Example: 6% for non HCEs means 8% for HCEs ADP Test—2.0

  14. If the average ADP of the NHCE group is 2 percent, what is the maximum for the HCE group? (4%) How about 8 percent? (10%) How about 10 percent? (11.25%) Questions

  15. Current or prior-year testing Safe harbor provision Nonelective option-3% for all participants Matching option-100% match on first 3% and 50% on next 2% deferred (4% contribution) Correcting excess Satisfying the ADP Test

  16. $15,500 salary deferral (for 2007) $5,000 additional for those over 50 Total allocations can not exceed Code Sec. 415 dollar limits ($45,000 in 2007) ADP and ACP (test) can limit the contributions for HCEs 401(k) Contribution Limits

  17. Employees elect “Roth” tax treatment on salary deferrals Establish separate account for Roth Election does not effect tax treatment of employer contributions Roth salary deferrals are counted under maximum deferral limits and ADP testing Qualified Roth distributions are tax free Roth account can be rolled to a Roth IRA Several tax differences between Roth 401(k) and Roth IRA. Roth 401(k)

  18. Assets invested primarily in stock Market for company stock Distributions in stock Stock versus Profit Sharing

  19. Leveraged ESOP Bank Stock Loan Repayments Suspense account ESOP Loan guarantee accounts Contributions Company

  20. Defined benefit Cash balance Target benefit Money purchase Profit sharing Stock bonus ESOP 401(k) Qualified Plan Scorecard

  21. Distributions from a profit-sharing plan may be made only after termination of employment resulting from death, retirement, or disability. An allocation formula in a profit-sharing plan determines how much the employer must contribute on behalf of each participant. Stock bonus plans and ESOPs are categorized as profit-sharing plans. If a participant elects to defer cash compensation to a 401(k) plan, the amount deferred is taxed in the following year. True/False Questions

  22. An individual can defer a larger amount on a tax-preferential basis to a 401(k) plan than can be deferred to an individual retirement account (IRA). Contributions attributable to 401(k) salary reduction elections are always 100-percent vested. One of the 401(k) safe-harbor “financial hardship” events is payment of college tuition for a family member. True/False Questions

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