Retirement Planning Allen and Nancy Berger The ideal retirement benefit plan to install in Allen’s company would be the Defined Benefit Plan. The defined benefit plan best fits Allen’s current business situation in multiple ways. Allen will be able to maximize corporate tax deduction because employers are generally allowed to contribute more (and therefore tax deduct) than the alternative retirement plans. Business owners can write off these contributions as a business expense which is tax deductible, which will assist in Allen maximizing his corporate tax deduction. Defined benefit plans have no contribution limits, Allen and Nancy have a goal to secure a $61,241.90 after-tax serial payment by retirement. Other retirement plans such as the 401(k) have contribution limits that will not allow for Allen and Nancy to meet this future retirement goal. Defined benefit plans are truly ideal for small business owners who are behind in retirement savings and are nearing retirement. In the case of Allen who is currently 54 years old, the defined benefit plan is ideal because he is not restricted on how much he can contribute, so by the time he does reach the age of retirement, he will likely be able to reach his goal. Because of the maximums on plans such as 401(k) and Money Purchase plans, those alternatives would serve little use to someone like Allen looking to retire in less than a 20 year period. Allen currently has stable, predictable cash flows throughout his business. He will therefore be able to contribute a predetermined fixed amount each year into his retirement fund that will help prepare for his retirement in 11 years. The defined benefit plan is great in this situation because his steady cash flows will provide him with his annual benefits needed for retirement. In the case of Allen’s brother Sam, Allen can contribute a higher amount than he would the rest of his rank and file employees because the defined benefit plan allows for Allen to make as big a contribution as he wants to each employee. Now let’s assume some changes in significant factors affecting our previous decision. Allen is now age 36 and Nancy age 34, and annual savings need is now $12,000 for Allen’s retirement at the age of 65. Business cash flow is fluctuating at least for the next 5 years with the company recently making its first profit in the previous year, and they plan to contribute $30,000 to the fund this year. In this case with all other factors remaining the same, the best retirement vehicle for Allen and Nancy would be the Profit Sharing retirement plan. Profit sharing plans are ideal with businesses with risky cash flows seeing as how there is great flexibility in any contributions made. Contributions to profit sharing plans are strictly discretionary and are only need to be made if the business can afford the plan. Money purchase and defined benefit plans are not suitable for businesses with fluctuating cash flows, and it is stated that Allen is not interested in offering equity so the stock bonus plan is also not an option. Let’s assume now Allen is 43 and Nancy is 41, and their annual savings is $22,000 for Allen’s 65 year old retirement. Business is now stabilized and the company wants to contribute at least $50,000 annually. All employees are young (below age 32) and employee turnover is high. In this case we now return to offering Allen and Nancy the defined benefit plan once again. Now that cash flows are more stable and Allen and Nancy want to make contributions of at least $50,000, the defined benefit plan works out great because contributions are limitless. Since employee turnover is high, the employer (Allen), can decide how much he wants to contribute to each employee plan and the contributions are not vested, meaning if one decides to leave before a certain period of time, they are not obligated to the contributions made by the employer, Allen. In the case of All Rite Plumbing Inc. implementing a money purchase retirement plan, the maximum age requirement for this plan would be 70 years and 6 months. Nobody currently employed by All Rite Plumbings Inc. would be excluded because of the statutory clause. The oldest employee is A. Berger who is 65 years of age, roughly 5 years below the required age limit. None of the employees working at All Rite Plumbings Inc. would be considered “key employees” because none fall under the following categories according to the IRC: annual compensation greater than $130,00, 5% ownership, or 1% owner whose compensation exceeds $150,000. If a profit sharing plan is installed, and the company makes a 15% contribution while the plan has a graded vesting schedule then the plan will not be considered “top heavy” in its first year according to the IRC. The plan is not considered top heavy because according to the IRC, a top heavy plan is recognized as a plan in which 60% of the benefits under the plan belong to key employees, we determined earlier that nobody working at All Plumbing Inc. fall under the category of a key employee, therefore the plan cannot be considered top heavy. If a top heavy defined benefit plan were to be implemented the company, All Plumbings Inc. would be required to implement 100% vesting to its employees after 3 years, or offer a 6 year vesting schedule. Non key employees in this case would receive the minimum benefit as long as they have worked at least 1,000 hours in the last calendar year. Now let’s assume Allen at age 58 withdraws $30,000 to fund the purchase of a new house. He currently has a qualified retirement plan for All Rite Plumbing Inc. that allows for both employee and employer contributions. If Allen has bought a house in the past 3 years, he will be subjected to a 10% withdrawal penalty. If he has not bought a home recently, he is only subject to paying income taxes on withdrawal according to his tax bracket. If Allen decides instead to borrow this $30,000 amount needed for the home purchase from his plan, he will be obligated to pay interest on his loan, but the interest paid will be reinserted into the fund, increasing the funds value. If Allen at 58 begins withdrawals from the plan in equal payments he will pay withdrawal penalties until he reaches the age of 59 years and 6 months, in which he will only be obligated to pay income taxes. In the case that Allen receives the balance standing to his credit, which would be about $300,000, no general income averaging provision would apply to Allen because he does not fall under any of the categories required for that specific provision under the IRC. If Allen were to reach age 70 and decide to begin distributions from his plan ($550,000 balance) in a straight life annuity and his life expectancy was 16 years, his minimum distribution for the first year would be $34,375 ($550,000/16). Let’s assume Allen doesn’t begin making contributions until age 75 because he has sufficient retirement funds from other sources, in this case he would not be subject to any withdrawal penalties because they funds are not being withdrawn early before retirement. In the case of Nancy being covered by a nondiscriminatory group life term insurance policy, she would indeed be subject to income tax consequences because of IRC law code. If the plan amount exceeds $50,000, which in her case it does because twice her salary would be $60,000, then she would be obligated to pay income taxes. Nancy’s noncontributory Group long-term disability plan covered by R.D Best that hasn’t been taxed previously on premiums paid by the employer would in fact be subject to income tax consequences because tax payments have been deferred all thorough out the payment of the premiums. Therefore when Nancy received the benefits in 2002 during a period of disability, she was subject to paying income tax in those withdrawals. If R.D. Best has more than 20 employees and it fails to offer continuation coverage to terminating employees under the Group Medical Insurance plan, there would be no tax implications on the employees but there would be implication for the employers. The income tax deductions usually awarded to employers for contributions would be eliminated because of the failure to continue to offer continuation.

Sources http://www.correllco.com/pdf_files/bi2008-04.pdf

http://mandmarblestone.wordpress.com/2011/04/21/when-a-plan-becomes-top-heavy-turning-lemons-into-lemonade/

http://www.dol.gov/ebsa/publications/profitsharing.html