Contribution levels are just one aspect of pension plans, but they are an important aspect and particularly to a business owner who is setting up a pension plan for the first time, or wants to change the existing plan to allow a higher or more flexible contribution.

If you want to set up a new pension plan or revise your existing plan, call us at 818-769-4600 to chat about your situation. No fee for initial consultation. Ask for an Actuary. We will ask you for some data so we can do our planning Information We Will Need, and then will have you tell us how much you can afford to contribute into a pension plan. In this process, please put aside your pre-conceived notions of what the contribution rules or limitations might be; there is a great deal of mis-information out in the world, and it is easier if you tell us what your goals are and then we tell you your options. We will discuss with you any limitations or rules affecting the contributions. You have a great range in the contributions you can put in each year. We will help you choose a plan, and we do understand that your income can go up or down...we work with this all of the time.

There are several types of pension plans, and each type has different levels of maximum contributions.

Defined Benefit Pension Plan...the maximum contribution level varies by age. The maximum contribution ranges from $65,000 at age 40 to $140,000 at age 70, for Plan Years beginning 1/1/2002, and of course you choose what you want up to the maximums. If you have a salary (Compensation) of $50,000 per year, and want a contribution of $25,000 per year, we will design a plan which will let you do this, and will leave lots of flexibility in contributions ( up or down ) in the future.The contributions can be related to salaries in current and/or prior years, at your choice. If your current year Compensation is say $50,000, it is possible to have a contribution of more than $65,000 if you want (and are age 40 or over). You can vary the contribution from year to year, and we will help you to make prospective amendments to the plan to accomodate large changes in the contributions desired, if in fact these amendments are required. We don't charge for these type of amendments. A Defined Benefit Pension Plan can provide the same level of contributions or much higher contributions than other types, and is flexible year to year. We use it quite often for business owners who want the option to be able, in a profitable year, to contribute large amounts for themselves and their working spouses to the plan. You never know when you'll hit the big time. On the other hand, you need a plan which won't lock you into large contributions in bad years. The Defined Benefit Pension Plan nicely serves both purposes.

A Defined Benefit Pension Plan requires an Actuary who is licensed by the IRS to certify to the amount of the contribution and who has a great deal of training in pension plans generally. As a result, this type of plan, and the consulting involved, is not generally available directly from a Bank, mutual fund family, or brokerage firm. The bottom line of advice we have for you as a business owner is to ask an Actuary about Defined Benefit Pension Plans, not your Bank, your brokerage house, or mutual fund family. After all, would you ask a pool service guy to repair your electrical in the house? Pool service guys and electricians may both work around your house, but your pool guy is not a licensed electrician. We are pension plan experts and Actuaries. Ask to talk to the Actuary directly; you'll get a better situation set up.

Profit Sharing Plan...the Contribution level allowed is 0% to 25% of current Compensation ( Compensation is your pay for the current year ), to a maximum of $40,000 for Plan Years beginning 1/1/2002 or later. You can vary the contribution each year at will. If you are a sole proprietorship, the 25% contribution percentage is a bit lower and uses the net Schedule C figure for you, but the $40,000 maximum still applies.

Profit Sharing Plans and Money Purchase Pension Plans are somewhat less expensive than Defined Benefit Pension Plans to maintain. This can be a factor in some cases, but the difference is fairly small, perhaps two hundred dollars per year. Don't cut several hundred thousand dollars off your pension fortune for two hundred dollars of expenses. Like we said earlier, you will get a lot more value from us than the fees we charge you.

Money Purchase Pension Plan...the Contribution level is specified in the plan document as a fixed percentage of current Compensation (from 0% to 25%) with a dollar maximum of $40,000. You can change the percentage, but only looking forward. I.e., you can't reduce the contribution mid-way in a Plan Year or after the end of the Plan Year. This is less flexible than a Profit Sharing Plan or Defined Benefit Pension Plan, but is quite manageable provided you plan way in advance to change the contribution percentage.

A little extra word on Profit Sharing Plans and 401k Plans is called for here, a little beyond just contribution levels. Profit Sharing Plans are quite easy to understand, especially for employees. A contribution is made by your business, of up to 25% of the total Compensation of you and the eligible employees. We then allocate this contribution to the Account Balance for each participant. There are 4 sub-types of Profit Sharing Plan to do this allocation...(i)by Compensation; (ii)by Social Security Integration; (iii) by Age-Weighted; and finally (iv)by New Comparability. Each of the four types allocates the contribution to participants in a different way. The "by Compensation" way being what is generally offered in Standardized plan documents. The Age Weighted and New Comparability types allocate the largest shares to the owners, i.e. you. For example, as we saw in the last Section a common New Comparability setup might call for establishing 2 classes of participants, let's say (a) Owners and (b) Participants Other Than Owners. The allocation of contributions might be 15% of Compensation for Owners, and 5% of Compensation for Participants Other Than Owners. On the other hand, in the "by Compensation" setup offered in Standardized plans from mutual fund houses, brokerage houses,andbanks, the allocation of contributions would be the same percentage of Compensation for all participants. OK, we now have the contribution allocated. Let's look at the investments. 1) The monies can be invested as a pool, in which case each participant gets their share of the total investment earnings each year. 2) Or, if you prefer ( and certainly most employees would prefer), you can go to a mutual fund family or stockbrokerage house and open up separate accounts for each participant, letting participants choose from say 7-10 or so funds. Here, the participants get to move their investments around from fund to fund anytime they want, and know at all times what they have in their account. Incidentally, with any of the four Profit Sharing Plan types, you the owner can choose different contribution levels each year ( or zero contribution).

By the by, a 401k Plan is just a Profit Sharing Plan, with a piece built on top that allows employees to defer, each payday, part of their own salary into the plan (called Employee Deferrals), and also allows you as an employer to put in a Match contribution (if you want to; you don't have to) that is related by some formula to the Employee Deferrals. There are specialized tests for this type of plan..ADP, ACP. 401k plans are extremely popular with employees. They do require an extra level of work from you as the owner, however, to get each participant to fill in the proper paperwork, and also you need to calculate and send in the deferrals and matches each payday PROMPTLY and without fail. We very commonly set up 401(k) Plans (as a vehicle for Employee Deferrals) which use a New Comparability feature (for the company contribution).

Summary of Desired Contribution Level Discussion :

Use a Defined Benefit Pension Plan if you want the opportunity to contribute much higher amounts in good years than the Profit Sharing Plan will allow (25% of Compensation, maximum $40,000), and be able to cut way back in bad years. For example, you might start out with contributions of $20,000, but have the option in later years to increase to $40,000 or more, if business conditions allow. These plans generally allow the highest level of pension contribution available, but are quite flexible as to changes year to year in your contribution levels. They are a little more expensive than Profit Sharing or Money Purchase plans to administer.

Use a Profit Sharing Plan if your long term needs are satisfied by a contribution of 0% to 25% of your current Compensation, to a maximum of $40,000 in 2002. This is the simplest, and least expensive of all plans to maintain, which can be an attractive feature.

We use Money Purchase Pension Plans fairly rarely. You need to be committed to a contribution, or amend the plan early in the plan year to lower the contribution. However, be aware that a Money Purchase Pension Plan will let you contribute up to the lesser of 25% of current Compensation or $40,000 per year. Some business owners are keen on the $40,000 per year, and don't mind the commitment. We also use Money Purchase Pension Plans in situations where a "frozen" plan is required, i.e., in which there will be no future contributions ever.

If you have employees, Defined Benefit Pension Plans, Profit Sharing Plans, and Money Purchase Pension Plans can be tailor-made to meet your objectives by using our own Non-Standardized plan documents and having expert advice. If You Have Employees

You choose what level of contributions you want, and reserve the right to change these goals each year. As your co-pilots, we'll help you look at your options each year, and navigate changes as necessary, all the while looking towards the big picture of your retirement fortune. We've sat in the same co-pilot seat many times before, and it's nice to have a little different trip each time

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