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1. Welcome!

2. Understanding & Using Plan Design Charles Lockwood

3. July Business Services September 12, 2008 ERISA Workshop 2008 Charles Lockwood ASC Institute, LLC Highlands Ranch, CO Presented by:

4. Importance of Plan Design • All qualified plans must be restated to comply with current laws • All pre-approved plans must be restated by April 30, 2010 • Baby boomers are getting closer to retirement and looking for plan design options to help save more for retirement • Some ERs are trying to minimize fiduciary risk by eliminating investment risk on EEs • DB plans and hybrid plans (e.g., cash balance plans and new DB/k plans) will become more popular options

5. Plan Design – Traditional vs. Unique • Each client has specific objectives in implementing and maintaining a retirement program • Who is the plan for? • Do HCEs want to maximize benefits? • What are employee demographics? • Does ER want to provide a guaranteed benefit? • How much does employer want to spend? • Identify objectives and match them to plan design • Unique plan designs may fit unique needs

6. Plan Design Case Study • Rott ‘n Gumm Dentistry has a 401(k) plan with a 50% match on deferrals up to 6% of comp. The plan has failed the ADP test and Rott ‘n Gumm has had to make corrective distributions in each of the last 3 years • Dr. Rott, Dr. Gumm, and Dr. DeKay would like to maximize their contributions • Drs. Rott, Gumm and DeKay do not want to receive any more corrective distributions • Drs. Rott, Gumm and DeKay are happy with their current service providers

7. Improving ADP Results • Improve participation • Matching contributions = discretionary or fixed • Plan design • Loans • Hardships • Participant-direction • Better communication • Employee meetings • Avoid ADP testing altogether = safe harbor 401(k) plan • Automatic enrollment

8. Safe Harbor Match • Basic matching contribution formula • 100% of deferrals up to 3% of compensation • 50% of deferrals between 3% and 5% of compensation • Enhanced matching contribution formula • aggregate match which equals basic match at each level of compensation • e.g., 100% of deferrals up to 4% of comp

9. Safe Harbor Employer • 3% of compensation • Satisfies top heavy minimum requirements • May have other contributions (e.g., cross-tested formula)

10. Participant Notice • Required every year • 30 - 90 days prior to beginning of plan year • New employees -- date of eligibility • New plan -- first day of plan year • May provide “maybe” notice with respect to 3% nonelective safe harbor contribution

11. Safe Harbor 401(k) Plans * Safe harbor match = 100% of deferrals up to 4% of comp = must be 100% vested and cannot be subject to last day/ 1,000 HOS allocation condition

12. Safe Harbor 401(k) Plans Could Rott n’ Gumm make an additional matching contribution without subjecting the plan to ADP/ACP testing?

13. Safe Harbor 401(k) Plans * Plan provides for safe harbor match with additional discretionary matching contribution on deferrals up to 6% of compensation not to exceed 4% of compensation

14. Safe Harbor 401(k) Plans * The employer makes a 66.67% match on deferrals up to 6% of compensation ($9,200 / $13,800) not to exceed 4% of compensation

15. Safe Harbor 401(k) Plans • Is plan subject to ACP test? • No! • May plan impose vesting schedule on additional matching contributions? • Yes! • May plan impose allocation conditions on additional match? • No! • Must plan provide top-heavy minimum contribution? • No! SH plan is exempt from top-heavy if ONLY contributions are SH contributions

16. Safe Harbor 401(k) Plans * Plan provides for 100% fixed match on deferrals up to 6% of comp. To maximize contributions, ER makes a 54.35% discretionary match on deferrals up to 6% of comp ($7,500 / $13,800)

17. Scary News • Only 43% of private sector workers are covered by a retirement plan • Only 60% of workers over age 40 who are eligible for 401(k) plans actually participate • Average A/B of EEs in plans age 60 and above is $141,000 (which will provide annuity of $12,203 for male and $11,172 for female commencing at age 65) • Only 44% of families nearing retirement have IRAs with average balance of $60,000

18. Automatic Enrollment • Congress/IRS are encouraging 401(k) plans to add automatic enrollment features Actual results from employees between 3 and 15 months tenure. Study by Professor Brigitte Madrian, University of Pennsylvania’s Wharton School and Dennis Shea, United Health Group

19. Automatic Enrollment Rules • DOL estimates that automatic enrollment rules will have following effect: • Increase participation = DOL estimates 1/3 of eligible workers do not participate in their 401(k) plans and automatic enrollment could reduce non-participation rates to less than 10% • Increase investment levels = DOL estimates automatic enrollment provisions and QDIA rules will result in between $70 billion and $134 billion in additional retirement savings by 2034

20. What About Roth Deferrals? • Beginning in 2006 – ERs were permitted to add Roth features to 401(k) plans • Advantages of Roth Deferrals • Must pay taxes currently but can take qualified distribution without taxation (including earnings) • Must leave Roth Deferrals in plan for at least 5 years and must take distribution as qualified distribution (e.g., death, disability, age 59½) • Response has been fairly lukewarm • Difficult to explain to NHCEs and administrative problems • May be renewed interest in Roth contributions

21. Conversion to Roth IRA • Under PPA – beginning in 2008, EEs can roll from 401(k) plan to Roth IRA • Must pay income tax at time of rollover • AGI restrictions still apply (i.e., must have AGI below $100,000) • Post-2008 rollover may be accomplished by direct rollover or 60-day rollover • Plan Administrator of distributing plan is not responsible for ensuring that EE is eligible to make a rollover to a Roth IRA • No mandatory 20% withholding and early withdrawal penalty tax does not apply

22. Conversion to Roth IRA • PPA allows conversion beginning in 2010 for all taxpayers • AGI limits no longer apply = HCEs can convert existing IRAs to Roth IRAs • Income taxes due on conversion can be spread over 2 years (e.g., 2011 and 2012) • Conversions in subsequent years are included in income during tax year in which conversion is completed

23. Conversion to Roth IRA • May want to begin taking action to maximize Roth conversion opportunity (and reduced taxation) in 2010 • If possible = open up Roth IRA now to begin 5-year clock • If available = make contributions to traditional IRA to prepare for conversion • If cannot make deductible contributions = make after-tax contributions to traditional IRA and convert in 2010 • Rollover from qualified plan to traditional IRA and then convert = amend plan to allow for in-service distribution

24. New Comparability Plan • Have become very popular = based on concept of “cross-testing” • Permits substantial disparity in contribution for older employees • Must be tested for discrimination using general nondiscrimination test • IRS has issued regulations requiring a minimum 5% contribution for NHCEs in a “cross-tested” plan

25. New Comparability Plan

26. New Comparability Plan

27. New Comparability Plan

28. Conversion Factor • Factor used to convert contribution to equivalent benefit rate (EBR) at NRA • Conversion factor: • Project contribution to NRA at applicable interest rate (e.g., 8.5%) = Contribution * 1.085^N where N is years to NRA • Convert projected benefit to life annuity at age 65 based on applicable interest rate and mortality table (e.g., 8.5% and UP 1984 table) = 7.9486 annuity factor • Example = Dr. Rott (age 45) has a conversion factor of 0.643138 (1.085^20 / 7.9486)

29. New Comparability Plan

30. New Comparability Plan

31. New Comparability Plan

32. New Comparability Plan

33. New Comparability Plan

34. New Comparability Plan

35. Minimum Gateway Requirements • Gateway test = to use “cross-testing” for discrimination testing, plan must satisfy one of “gateway” tests: • All benefiting NHCEs must receive at least 5% allocation (based on §415(c) compensation) OR • Lowest allocation to any NHCE must be at least 1/3 of highest allocation to any HCE (based on any definition of §414(s) compensation) • Example. If highest HCE rate is 12%, lowest NHC rate must be 4%. If highest HCE rate is 18%, lowest NHC rate must be 5%.

36. New Comparability Plan

37. New Comparability Plan Drs. receive 88.185 % ($138,000/$156,500) of total contribution

38. New Comp / SH 401(k) Plan

39. New Comp / SH 401(k) Plan

40. New Comp / SH 401(k) Plan

41. New Comp / SH 401(k) Plan

42. New Comp / SH 401(k) Plan

43. New Comp / SH 401(k) Plan Drs. receive 84.84% ($91,500/$107,853) of total contribution plus deferrals

44. Potential Issues • Plan document issues = more limited under prototype plans • Turnover / hiring practices • Excluding family members • Failure of average benefits test = automatic enrollment • Not enough time to accumulate sufficient retirement savings

45. When to Recommend DB/DC Combo & Cash Balance Plans Charles Lockwood

46. Why Do DB Plans Make Sense? • Can provide substantially greater benefit to older employees (generally over 40 years old) • Especially useful for sole proprietors (or employers with very few EEs) • Benefit is guaranteed at retirement = employer bears investment risk • Entire normal cost is deductible = no limit unless combine with defined contribution plan

47. Benefit Accruals Under a DB Plan Maximum benefit accrual for first year of plan assuming normal retirement age of 65, 6% interest assumption and ’94 GAR mortality table

48. Code 415 Limits • Code §415 limits how much an EE may receive under a qualified plan • DC plan limit = lesser of $45,000 or 100% of compensation • DB plan limit = based on maximum annual benefit that can be provided at retirement • Under EGTRRA = DB limit is the lesser of 100% of 3 year high average compensation or $185,000

49. Sample Defined Benefit Plan Plan formula = 8.09% x YOP (up to 5) -- age 65 NRA, 6% interest, 94 GAR mortality table

50. DB Carve-Out • Cover enough EEs in both plans to pass coverage and Code §401(a)(26) • Can be maintained separately without combined testing • No cross-participation allows plan to avoid 25% combined deduction limit • DB plan can always deduct “normal cost” and DC plan can deduct up to 25% of total comp • If have cross-participation = no deduction in DC plan to DB/DC contribution exceeds 25% of compensation • New rules allow plan to deduct up to 6% of compensation in DC plan