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Continental Benefits Group

Retirement Plan Design

Retirement plan design requires a careful review of the needs and resources of the plan sponsor and participants. Please consider the following meant for general background information. Please contact us to discuss an actual plan design. Our consultants are very experienced in crafting an efficient and effective plan design.

New Comparability Profit Sharing plans
"New comparability", "age-weighted", and "age-neutral" generally are methods for allocating employer contributions to a profit sharing plan (which may or may not also include "section 401(k)" and "matching contribution" features). In general, these methods replace the usual method of allocating employer profit-sharing contributions (e.g., "pro-rata" (in which each employee receives an allocation of the same percentage of his or her compensation); or "integrated" (in which contributions are allocated more favorably with respect to income in excess of the taxable wage base of $128,400 for 2018).

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New Comparability - Age-Based. Under a new comparability method, contributions are allocated in accordance with a formula set forth in the plan. The resulting allocation must not discriminate in favor of the group of employees classified as "highly compensated" employees. However, discrimination is measured after taking into consideration social security benefits and each participant's age.

Age-weighted. Under an age-weighted method, contributions are allocated more heavily to older employees. The basis for this method is that each employee receives an allocation equal to the same percentage of his or her current compensation when such percentage is calculated utilizing the value of such allocation at the participant's normal retirement age.

Age-neutral (not illustrated). The age-neutral method is similar to the newcomparability / age -based method. However, the age-neutral method does not rely and is not dependent on participant's relative ages. The formula is set forth in the plan and satisfies the discrimination requirement by imputing the employer's contributions to social security on the participant's behalf. Permitted formulas generally result on an allocation of 12.25% of compensation to highly compensated employees earning over $275,000, 9% of compensation to half of non-highly compensated employees, and 3% to the remaining non-highly compensated employees.

The following example illustrates the advantage that these methodologies can provide certain employers. The allocations set forth below satisfy all tax-qualification requirements including non-discrimination and the top-heavy minimum contribution requirement.

New Comparability 2012

As you can see, the age-weighted formula is not always appropriate because the age-weighted formula allocates contributions based solely on participants' relative ages. Because the allocations under the new comparability formula are set by the employer, the resulting allocations perfectly satisfy the employer's goals and require the minimum overall contribution required by law. While the age-neutral allocation is less advantageous than the new comparability, bear in mind that this allocation is permissible regardless of participants' ages. Thus, it would be appropriate if A were 30 years old whereas the new comparability formula would not.

Defined Benefit Plans

Overview and Basic Terminology

A defined benefit plan is a plan in which the monthly benefit to be provided at retirement is defined in the plan. Contributions are not defined in the plan, but are actuarially computed as the amount necessary to provide the benefit.

Benefits are usually defined in terms of the participant's compensation and service or participation and are expressed in terms of a monthly benefit commencing at the participant's normal retirement date.

In many cases, the actual payment of the benefit is in a form other than the plan's normal form. These other forms of benefit are called alternate forms and are generally actuarially equivalent (of an equal value, using the actuarial equivalent factors defined in the plan).

When is a Defined Benefit Plan Appropriate?

Employers often adopt defined benefit plans so they can provide full retirement benefits to employees who are older at plan commencement. Since defined benefit plans provide specified benefits, rather than just whatever benefit can be provided by the participant's account balance at retirement, defined benefit plans are well suited to situations in which the employer establishes the plan late in an employee's career and wants to provide a significant retirement benefit.

In general, the favored employee must be at least age 45 in order for the defined benefit plan to provide a larger benefit/equivalent contribution than can be provided by a defined contribution plan.

Contributions in a Defined Benefit Plan

The amount of benefit payable at retirement is defined and therefore the contribution must be the variable. This is unlike a defined contribution plan in which the contribution or allocation is fixed and the benefit the participant will receive at retirement is the variable.

The amount of the contribution depends on the level of benefits, the ages and compensations of the participants and expectations regarding investment earnings, salary increases, turnover and other factors.

In a defined benefit plan, annual contributions are required, not discretionary.

Failure to make annual contributions as computed by the plan's actuary will trigger ongoing excise taxes on the outstanding contributions. Continued failure may result in disqualification of the plan.

Contributions are determined for the plan as a whole, not as individual amounts for each participant.

Some plan sponsors, familiar with defined contribution plans and used to seeing a contribution amount for each individual, ask for individual participant contributions in a defined benefit plan. In response, actuaries and administrators sometimes prorate or otherwise allocate the plan contribution into amounts "attributable" to each individual's participation in the plan in a given year. It is important to understand that these amounts are not allocated to individual participant accounts and are not to be used to project amounts which will be payable upon termination of employment.

Cash Balance Plans

A Cash Balance Plan is a type of Defined Benefit Plan. A Cash Balance Plan defines the retirement benefit in terms of a hypothetical account balance or a single sum amount, resembling the type of benefit offered by a defined contribution plan, such as a 401(k) Plan or Profit Sharing Plan. Contributions and interest at a pre-determined rate (stated in the plan document) are credited each year to this hypothetical account balance. One of the major differences of Cash Balance Plans over traditional Defined Benefit Plans, the contribution formula is typically less complex and more intuitive in Cash Balance Plans.

In a Cash Balance Plan each participant has an account. The account grows annually in two ways: first, a contribution and second, an interest credit, which is guaranteed rather than being dependent on the plan's investment performance.

Features of a Cash Balance Plan include:
- Higher contributions may be obtained by using either a stand-alone Plan, or in combination with a Profit Sharing or 401(k) Plan.
- Annual contributions are generally required.
- Since the hypothetical account balance is computed using a pre-determined interest rate, if the Plan's investment gain is greater than this rate, required contributions would be reduced. Conversely, if the gains are less than this rate, greater contributions would be required.

CBGI will custom-designs cash balance plans in order to meet the objectives of the client.

Design features include:
- Formula to determine the contribution to the hypothetical account
- Interest rate to be credited to the hypothetical account
- Eligibility requirements
- Vesting schedules

Many owners and partners are looking for larger tax deductions and accelerated retirement savings. Cash Balance Plans may be the perfect solution for them. 2006 legislation is encouraging more and more professionals and successful business owners to adopt this type of plan.

Pooled Investment Account

Assets are not individually directed, but are pooled. Contributions are paid into the pool and benefits are paid from the pool.

Maximum Benefit/Contribution Limits for Qualified Plans

The maximum benefit/contribution limit for a participant in a defined benefit plan is defined in terms of the maximum benefit that can be provided at retirement, not in terms of a maximum contribution.

Contributions are not limited to the lesser of 100% of pay or $55,000 (2018 limit) as they are in a defined contribution plan.

Instead, the maximum benefit that can be provided is limited to a benefit equal to the lesser of 100% of 3 year high average compensation or $$220,000 (2018 limit).

Benefit Payments and Distributions

Benefits may be paid in any of the alternate forms of distribution allowed by the plan, generally annuities payable monthly or lump sums. While plans are not required to offer a lump sum, most small and medium size plans do. Larger plans may not offer a lump sum, but rather will pay annuity benefits to terminated employees when they reach retirement age.

As a practical matter, most terminees in plans which offer lump sum distributions elect to receive their benefits in the form of a lump sum and roll the distribution to another qualified plan or an Individual Retirement Account (IRA).

Pension Benefit Guaranty Corporation (PBGC)

The Pension Benefit Guaranty Corporation (PBGC), a quasi United States government agency, provides a safety net for participants in private-sector defined benefit plans by insuring the participants' benefits under the plan. This federal corporation was established by the Employee Retirement Income Security Act (ERISA) of 1974 to give participants in plans covered by the PBGC guaranteed "basic" benefits in the event that their employer-sponsored defined benefit plans become insolvent. Benefits may be insured by and an annual premium paid to the PBGC. A Plan that only covers an owner(s) or only an owner(s) and spouse(s), or a plan of a professional employer with less than 26 participants, is not subject to PBGC coverage.


If you have any questions regarding new comparability, defined benefit plans, plan design questions, would like to receive an illustration, or have any retirement plan questions, please contact Marketing Services at Continental Benefits Group, Inc, at 609.232.3200.