©2015, College for Financial Planning, all rights reserved.
Session 13Plan Selection
CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits
Session DetailsModule 7Chapter(s)
6
LOs 7-7 Analyze and choose the best retirement plan for a given scenario.
13-2
Plan Selection Qualified & Nonqualified Plans
Qualified Plans Nonqualified Plans
Pension Plans
Profit Sharing Plans (DC)
Tax-Advantaged Plans
Other Nonqualified Plans
Defined Benefit (DB)
Profit Sharing Traditional IRA Section 457 Plans
Cash Balance (DB) Thrift Plan Roth IRA Stock Bonus SIMPLE IRA ISO
Money Purchase (DC)
ESOP (LESOP) SEP ESPP
Target Benefit (DC) Age-Weighted (SARSEP) NQSOCross-Tested (Comparability)401(k) Plan 403(b) (TSA) Deferred
Compensation Plans
SIMPLE 401(k) 13-3
Retirement Plan Selection Process: Business Environment
Determine how best to meet owner’s retirement
savings through a qualified plan (Personal Objectives, Business Objectives, Altruistic
Objectives)
Yes
Owner will commit to a retirement
plan and owner has a savings need?
Stable cash flow and owner will make
annual commitment?
Select discretionary plan. Is owner’s savings need
<=25% of compensation?
Reassess retirementobjectives/alternate savings
Is owner’s savings need >25% of compensation?
Profit sharing plan (age-
weighted if over 45)
Is owner oldest and owner’s age
>=45?
DB plan
Reassess
SEP, profit sharing, stock bonus or ESOP plan.Share ownership?
Reassess
Select profit sharing or P/S 401(k)
Select stock bonus or ESOP
Yes
Yes
Yes
Yes
Yes
No
No
No
No
No
No
13-4
Qualified Plan Characteristics (1)
Basic Statutory Characteristic
Defined Contribution Plans Defined Benefit PlansProfit Sharing/ Stock Bonus
Money Purchase Pension
Target Benefit
Cash Balance
Defined Benefit
Cont. Type Flexible contribution
Fixed annual contribution to meet minimum funding requirement
Fixed % of comp.; annual actuarial adjustment
Annual actuarial determination
Maximum Employer Deduction
25% of covered payroll Amount necessary to fund benefit up to IRS limits
13-5
Qualified Plan Characteristics (2)
Basic Statutory Characteristic
Defined Contribution Plans Defined Benefit PlansProfit Sharing/ Stock Bonus
Money Purchase Pension
Target Benefit
Cash Balance
Defined Benefit
Minimum funding standard
Generally no Yes Yes Yes Yes
Employee Contribution
401(k) provisions allowed
May permit
voluntary after-tax
N/A N/A May permit voluntary after-tax
Forfeitures Generally reallocated
Reallocated or applied to reduce
employer contribution
Must be applied to reduce employer contribution
13-6
Qualified Plan Characteristics (3)
Basic Statutory Characteristic
Defined Contribution Plans Defined Benefit PlansProfit Sharing/ Stock Bonus
Money Purchase Pension
Target Benefit
Cash Balance
Defined Benefit
Annual additions limit (415 limit)
Annual additions to a participant’s account may not exceed the lesser
of 100% of compensation or $53,000 in 2015
N/A N/A
Annual benefit limit (415 limit)
N/A N/A N/A Participant’s annual benefit may not exceed lesser of
$210,000 or 100% of compensation
in 2015
13-7
Other Qualified Plan Characteristics
Basic Statutory Characteristic
Defined Contribution Plans Defined Benefit PlansProfit Sharing/ Stock Bonus
Money Purchase Pension
Target Benefit
Cash Balance
Defined Benefit
Most favored age group
Younger Younger Older Younger Older
Investment risk Employee EmployerMaintenance of plan funds
Individual Accounts Pooled Funds
Certainty of retirement benefits
Uncertain Guaranteed minimum return on
fund1
Specific annual benefit1
1 PBGC insured
13-8
IRA Hybrid Retirement Benefits
Type of Plan
Limits on Employer Contribution
Limits on EmployeeDeferrals
Allocation of Employer’sContributions
AdministrativeCosts/Burden
Simplified EmployeePensions (SEPs)
25% deduction limit
SARSEPs can no longer be established
Allocation formula used—can include integration with Social Security
Low—employer has full discretion re: future contributions within the 25% limitation
SIMPLE IRA 3% dollar-for-dollar or 1% in 2 out of 5 years matching or 2% non-elective
$12,500 (2015) plus $3,000 age 50 catch-up if eligible
Percentage of compensation
Low—no ADP or ACP testing; employer may reduce matching contribution to 1% in 2 out of 5 years
SIMPLE 401(k)
3% dollar-for-dollar matching or 2% non-elective
$12,500 (2015) plus $3,000 age 50 catch-up if eligible
Percentage of compensation
Low—no ADP or ACP testing
13-9
Points to Consider in Selection of Most Appropriate Plan
• Seeks maximum tax shelter• Owner usually 45 or older and oldest or one of
oldest employees, only one or two older• Rewards long-term employees, and favors older
employees• Stable cash flow• Willing and able to make annual financial
commitment in excess of 25% of compensation• Willing to accept investment risk• Allows owner to meet his/her retirement
Defined Benefit Plan
• Business has stable cash flow; owner is willing to make annual financial commitment, but unwilling or unable to commit more than 25% of compensation
• Shift investment risk to employees• Easier to communicate plan to employees, and
reduce administrative costs• Younger employees benefit from years of
contributions and compounding
Money Purchase or
Target Benefit Plan
(to provide age-weighted plan)
13-10
Points to Consider in Selection of Most Appropriate Plan
• Business cash flow fluctuates• Shift investment risk to employees• Desire plan that will motivate
employees• Younger employees benefit from years
of contributions and compounding
Profit Sharing, SEP, or
Tandem Plan
• No other qualified plan or 403(b)• No more than 100 employees earning
$5,000 or more• Owner willing to make minimal
contribution—2% or 3% of compensation
• Desire to provide tax-deferred savings for employees
• Desire very low administrative cost
SIMPLE IRA or SIMPLE
401(k)
13-11
Practice Problem 1Plan or category Characteristic1. Money purchase
A. Must be established by October 1 of plan year
2. Stock bonus B. Can no longer be established, older plans are grandfathered
3. Cash balance C. One of the two defined contribution pension plans4. ESOP D. Must be established by calendar year end5. SEP E. Subject to the ACP test, but not the ADP test6. SARSEP F. Employer guarantees a certain return on plan assets7. 403(b) plan G. Employer stock is limited to 10% of plan assets8. Qualified plans H. Can be established until tax due date, including
extensions9. SIMPLE IRA I. Has diversification requirement at age 55 & 10 years
of service10. Pension plans J. If company is publicly traded, must be able to
diversify out after three years
Match the following characteristics with the item that matches it best (one match each).
13-12
Practice Problem 2
Test HCE Key Employee50/40 Test (DB Plans)Ratio % (DB & DC Plans)Average Benefits (DB & DC Plans)ADP (401(k) Plans)ACP (401(k) Plans)Top-heavy (DB & DC Plans)
Indicate which type of employee is used for each test.
13-13
Practice Problem 3What is the maximum vesting schedule
allowedfor each of the types of plans indicated?
Defined benefit_________________________Cash balance__________________________Defined contribution_____________________
13-14
Want More Review?Visit eCampus1. Click Programs or Individual Courses Tab2. Click Online Classes Tab3. Click MyChoice Recordings to expand4. Click Recordings link for your courseFinal recordings contain reviews.
13-15
©2015, College for Financial Planning, all rights reserved.
Session 13End of Slides
CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits
