Income Tax Reduction with IRS Approval

Client Perceptions – Whether justified or not, clients frequently gauge their accounting and financial advisors by how much income tax they pay and how their advisors help them reduce their taxes.

Higher Income Tax Rates – Especially with increased income tax rates, the ability to make tax-deductible contributions to a well-designed qualified retirement plan is one of the most advantageous tax benefits available to your clients under the Internal Revenue Code.

The MandMarblestone Group offers the two most powerful, IRS-approved qualified retirement plan designs available today:

  • Cash Balance Pension Plans – A cash balance pension plan, most often in combination with our OCPP® 401(k) profit sharing plan, is for those business owners who want to deduct more than $59,000 per year, while still controlling their employee contribution expense. We have designed many successful, IRS-approved cash balance plans that generate owner contributions in excess of $250,000 per year. Click on the above paragraph heading to view a short Q and A on cash balance pension plans.
  • OCPP® 401(k) Profit Sharing Plan – Our “one category per participant” 401(k) defined contribution plan design maximizes tax-deductible contributions to owners, family members and other favored employees, while allowing year-to-year flexibility and control of the employee contribution expense.
  • Combined Contribution Limits – Here are maximum, annual contribution estimates for a combination cash balance/defined benefit – 401(k) profit sharing plan available at the following ages:

                                            Age                 Maximum Annual Contribution

                                              45                                       $145,900
                                              50                                       $182,900
                                              55                                       $223,900
                                              62                                       $300,900

In-House Enrolled Actuary – While MandMarblestone has worked effectively for many years with independent consulting actuaries, given the increasing frequency of cash balance and traditional defined benefit pension plans (as part of a qualified retirement plan program to generate substantial income tax reductions), we now have a robust, in-house actuarial department.

Director of Actuarial Services – Virginia Wentz, E.A., our Director of Actuarial Services, has more than 30 years of actuarial experience, with an emphasis on plan design for small to mid-size companies in which benefits may be skewed to owners and valuable employees. Virginia’s expertise and practical experience has enhanced our ability to deliver qualified retirement plans that align with owners’ tax and financial planning objectives.

Track Your Valued Clients – With the ongoing preparation of 2014 income tax returns and/or the annual financial review for many of your clients, consider listing those clients who may be able to reduce their income taxes by efficiently designed qualified retirement plans that target larger contributions to the favored group.

Then, don’t hesitate to contact Bob Mand, Ken Marblestone, Ian Haring or Mike O’Connell at 215-222-5000 to explore these tax reduction opportunities, or email us at: or

Complimentary Plan Design Analysis – There is no fee for a complimentary analysis that compares your client’s current plan contributions to an alternative, more powerful and flexible plan design that better aligns with an owner’s contribution objectives.

Non-Compliant Plan Remediation – MandMarblestone has a history of success with the IRS in remediating non-compliant retirement plans.

Mergers & Acquisitions – MandMarblestone provides limited scope legal consulting services in connection with the treatment of qualified retirement plans in mergers and acquisitions.

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The MandMarblestone Group, LLC (“MandMarblestone”) announced today that it has expanded its Philadelphia and Boston operations to include in-house actuarial services, enabling the company to continue to provide its clients with the full spectrum of retirement plan legal, consulting, actuarial and administration services. Virginia Wentz, an Enrolled Actuary and Fellow of the Society of Pension Actuaries, has joined the firm and will lead this effort as Director of Actuarial Services.

“We have experienced double digit growth in demand for new defined benefit plans and expect this trend to continue. Defined benefit plans require an actuary’s certification for reporting both to the IRS and the financial community,” said Kenneth Marblestone, Partner. Marblestone added, “Historically, we have met our needs for actuarial services through outsourcing, but the demand is such that bringing this capability in-house is considered a core competency going forward.”

“Virginia brings thirty years of pension plan experience, covering plan design and administration for defined benefit and cash balance pension plans. She is a nationally recognized expert in this area, and we very much look forward to working with her to continue to grow this aspect of our business,” said Ian Haring, Partner.

“The opportunity to lead and grow the defined benefit and cash balance pension business by working with such a well-respected and trusted team of professionals was a powerful motivating force for me in deciding to join MandMarblestone,” said Virginia Wentz.

Also joining the actuarial services team at MandMarblestone is Desiree Schloendorn, who comes to the firm with nine years of defined benefit plan administration experience.

Founded in 1975, the MandMarblestone Group, LLC is one of the oldest and most trusted providers of ERISA-based retirement plan designs in the country. Based in Philadelphia and Boston, the company provides retirement plan design and administration services for more than 900 qualified retirement plans, covering over 24,000 participants. Additionally, MandMarblestone provides legal counsel to retirement plans and their sponsors, including representation before regulatory agencies such as the Internal Revenue Service and the Department of Labor, and consulting on retirement plan issues in mergers and acquisitions.

For more information contact Kenneth Marblestone, Esq. (215) 222-5000 or

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Know Your Own Limits – Your 415 Limits

A defined contribution plan must limit the annual additions that are allocated to a participant’s account. The limit (known as the “415 limit” for the Internal Revenue Code section containing the rules) is the lesser of 100% of a participant’s compensation or the dollar limit in effect for that year. For 2014, the dollar limit is $52,000. For 2015, the limit is $53,000. Annual additions include employer contributions, 401(k) elective deferrals and forfeitures. However, 401(k) deferral catch-up contributions for participants over age 50 ($5,500 in 2014, $6,000 in 2015) are disregarded when applying the 415 limits.

If an employer maintains more than one defined contribution plan (including 401(k), profit sharing and money purchase plans), a participant’s annual additions to each plan are aggregated to determine if the participant’s limit has been exceeded. If the employer is part of a related group of businesses, meaning a controlled group or an affiliated service group, then the plans maintained by all related group members are aggregated to determine if a participant has exceeded his or her 415 limit. However, if an individual works for two unrelated companies, then the individual will have two separate 415 limits. Contributions to a SEP are considered annual additions for purposes of the 415 limit.

A section 403(b) plan (a plan sponsored by a tax-exempt organization or municipality) is treated as maintained by the individual employee for purposes of the 415 limit. Also, a 403(b) plan and a qualified plan are generally not aggregated under the annual addition limit. For example, a tax-exempt private hospital offers a section 403(b) plan to its employees. The hospital also sponsors a profit sharing plan. A doctor defers $17,500 into the 403(b) plan, receives a $4,000 match and also receives a $35,000 discretionary contribution under the profit sharing plan. Even though the doctor has a combined total annual addition of $56,500, his/her 415 limit is not exceeded. This is because the 403(b) plan is treated as maintained by the doctor, while the profit sharing plan is maintained by the hospital.

However, if a participant is in control of an employer, then for that individual, aggregation is required between the 403(b) plan and all plans maintained by the employer. For example, if a doctor works for a hospital, which sponsors a 403(b) plan, and the doctor also owns a practice which sponsors a 401(k) plan, the 403(b) plan and the 401(k) plan must be combined to determine if the doctor’s 415 limit has been exceeded. For this purpose, the doctor will be deemed to control the practice if he/she owns more than 50% of the practice.

As you can see, the annual addition rules can be quite confusing, especially for someone who participates in both a 403(b) plan and a defined contribution plan, and for someone who works for two different companies. If the individual is not careful, the section 415 limit could be unwittingly violated. In these types of situations, it is best to consult a professional to make a proper determination.

– Glenn Bowman, Service Team Leader

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The Safe Harbor Option – A Useful Design Strategy

As we approach the beginning of a new plan year for most of our 401(k) plan clients, we review their plans to determine a 401(k) safe harbor strategy for 2015. If an employer wants to implement a 401(k) safe harbor for its retirement plan, the two main strategies are either a 3% non-elective safe harbor contribution or a safe harbor matching contribution. The safe harbor contribution, either the 3% non-elective or the match, will eliminate the necessity for nondiscrimination testing on deferrals (ADP) and matching contributions (ACP).

The safe harbor match, which is a contribution of 100% of the first 3% of compensation deferred, then 50% on the next 2% deferred, needs to be in place at least 30 days before the beginning of the plan year. This means that the document must state, usually by plan amendment, that the employer will provide a safe harbor match and that the participants must receive a notice of this election. The safe harbor matching contribution also may be enhanced, meaning the match is either the same or greater at every point than the regular safe harbor matching formula.

There are two ways to implement the 3% non-elective safe harbor contribution election. The first way is the exact same way as the safe harbor match contribution: amendment of the document and advance notice of the election to participants. However, the second way is called a safe harbor option. In order to have a safe harbor option in place, the employer must give a notice to the participants at least 30 days in advance of the plan year, indicating they may provide a 3% safe harbor contribution. The employer will then have until 30 days before the end of the plan year (i.e., by December 1 for a calendar year plan) to decide if it wants to exercise the option.

If the employer does decide to exercise the option, the plan must be amended to so provide, and the participants must receive a notice of the employer’s intent to exercise the option. If it decides not to exercise the option, then no further action is required. However, if the option is not exercised, the employer will be subject to the ADP and ACP tests for the entire plan year, and the testing must be performed on a current year basis.

The purpose of the option is to give the employer more time and flexibility in making the decision. If by November of the plan year, the employer realizes it will fail the ADP test, the option may be exercised. Conversely, if it is confident the ADP test will pass, there would be no need to exercise the option. A situation in which the option is very valuable is when the plan is top heavy and the business is not sure twelve months in advance if it can afford an employer contribution. If by November, the owners realize they can afford a contribution, they would have the company exercise the option and then defer the maximum amount into the plan. If they cannot afford a contribution, the business would not exercise the option, and the “key employees” would not make 401(k) contributions to the plan, thus avoiding the requirement for top heavy minimum contributions. Accordingly, the safe harbor option can be a very powerful planning tool, especially for small business owners.

– Glenn Bowman, Service Team Leader

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IRS Announces 2015 Plan Limitations

The IRS has now announced the qualified plan limitations for 2015. These limitations are determined based on annual increases in the cost of living index. Although the increase in the index is about 1.5%, plan limits go up only in increments of $500, $1,000 or $5,000, depending upon the limit in question.

Staying the same in 2015:

  • The maximum annual benefit payable from a defined benefit plan remains at $210,000.
  • The definition of “key employee” will include an officer making more than $170,000.

Increasing in 2015:

  • The 401(k) deferral limit will increase from $17,500 to $18,000.
  • The catch-up contribution for participants who have attained age 50 will increase from $5,500 to $6,000.
  • The compensation-based definition of highly compensated employee (HCE) will increase from $115,000 to $120,000.  Thus, an employee who earns more than $120,000 in 2015 will be deemed an HCE in 2016.
  • The maximum amount of compensation taken into account for plan purposes will increase from $260,000 to $265,000.
  • The maximum amount that can be contributed by and for a participant to a defined contribution plan (i.e. profit sharing or 401(k) plan) increases from $52,000 to $53,000 (this amount does not include catch-up contributions).

In addition, the Social Security taxable wage base will increase from $117,000 to $118,500.  Though not a qualified plan limitation per se, this will have an effect on the calculations in a plan that uses permitted disparity as the allocation methodology.

Please contact us if you have any questions about how this may affect your own qualified plan.

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Yes Virginia, there is still time to establish a 401(k) plan for 2014

As most are aware, a 401(k) feature in a profit sharing plan is a very effective funding component when the contribution objective is to maximize a business owner while keeping the staff contribution costs as low as possible.  If an owner can maximize his or her 401(k) deferral, that reduces the amount needed to contribute to the profit sharing component to achieve the maximum annual addition, thus lowering the required contribution for the staff of Non-Highly Compensated Employees (NHCEs).

For example, a maximized 2014 annual addition of $52,000 for an owner with at least $260,000 in compensation requires a profit sharing allocation rate of 20% ($52,000/$260,000). A maximized 401(k) deferral reduces the owner’s profit sharing allocation rate to 13.26% (($52,000-$17,500[deferral] = $34,500)/$260,000), thus reducing the NHCE staff profit sharing allocation rate required to support it.  In addition, the introduction of an employer match with favorable demographics can further enhance the leverage on the profit sharing equation.

But 401(k) features come with their own complexities, namely the requirement that the NHCE staff have deferrals sufficient to support the owner’s maximized deferrals. Generally, if the owner’s and other Highly Compensated Employees’ (HCEs) Actual Deferral Percentage (ADP) is more than 2% greater than the ADP of the NHCEs, the owner’s deferrals can be limited, sometimes substantially.

In programs where the objective is to maximize the owner at as low a staff cost as possible, the solution to this problem is typically a 3% Non-Elective Safe Harbor election. This annual election treats the first 3% of the NHCE staff’s profit sharing allocation as a Safe Harbor contribution with special vesting and eligibility requirements. As a result, the plan is not subject to the non-discrimination (ADP) testing on the 401(k) deferrals. Accordingly, the owner enjoys maximized deferrals (and perhaps an efficient employer match), without regard to what the NHCE staff defers.

A Safe Harbor election is a prospective election, meaning there must be a written commitment prior to the beginning of the year for which it is elected, together with advance notification to participants of the election.  For a new plan or new 401(k) feature added to an existing profit sharing plan, a Safe Harbor election must be in operation for at least three months in the first plan year.  For example, if a 401(k) feature is added to a calendar year profit sharing plan, it must be adopted and the Safe Harbor election in place prior to the first October payroll of that year.  After that, by law, the opportunity for operating with a Safe Harbor during that first year is lost.

As it is now past October 1, 2014, is all hope lost in adopting a 2014 401(k) plan or feature?

No, a 401(k) plan or feature can still be established for 2014, but without a Safe Harbor election. Surely however, the staff can not be expected to have substantial deferral percentages in the last three months, particularly when applied to full-year compensation.  Logic tells us this would certainly result in a very low staff ADP, resulting in a seriously restricted 2014 deferral for the owner.

All of this is true, but there is an effective strategy for this situation; however, it requires careful planning and execution.

Applicable law and regulations permit ADP non-discrimination testing to be based on prior year NHCE staff deferrals or current year NHCE staff deferrals, assuming the determination is properly documented. Because this is the first year of the plan and there is no prior year ADP, the law provides that a plan may assume a NHCE 3% ADP as well as a 3% matching or Actual Contribution Percentage (ACP) rate for the prior year.  This is called the “first year rule”, which allows the owner to defer 5% and receive a 5% match for the first year, based on full year compensation, even if the plan is operationally in effect for just a fraction of the plan year.  For an owner with annual compensation of $260,000, that results in a $13,000 deferral as well as a $13,000 match.  That is half of the owner’s 2014 annual addition of $52,000, and only $26,000 of the annual addition needs to be achieved through the profit sharing component of the plan.

Generally speaking, the staff should be permitted ample time to defer during the first year, meaning the plan installation should not be constructed in a way to include opportunities for only the owner to defer.  For example, it would be disingenuous to notify the staff of the opportunity to defer when they have no practical ability to do so, such as restricting deferrals to a year-end bonus. Our policy with 401(k) installations is that all participants should have the opportunity to defer for at least one month and for at least two periodic payrolls.

Please note that it is important to make sure the plan is documented to elect current year testing for the 2015 plan year and to provide a 2015 Safe Harbor election to participants. If either of these time-sensitive steps is missed, serious operational issues will occur in the 2015 plan year.

So, there is still time to take advantage of a 2014 401(k) opportunity, but not much.  If interested, contact the partners or case managers at MMG as soon as you can, as this opportunity will fade very quickly around Thanksgiving.

– Ken Schneider, Service Team Leader

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Family Business Succession Planning Alternative

Almost every financial professional, including accountants, financial advisors and attorneys, have been challenged with assisting family business owners develop a business succession plan for their company.

While there are many subjective aspects to creating and implementing a successful family business succession plan, one recurring issue is providing funds to the senior (retiring) family member from the younger family member who will be taking over the business.

Consider a Defined Benefit Pension Plan

In virtually all family businesses, the retiring owner has years of employment (compensation) history. By using historical salary as the basis for a retirement benefit, and with the retiring owner remaining as a part time employee, the company may fund substantial tax deductible amounts each year to a defined benefit pension plan, with the retiring owner being able to defer the receipt of the funds until age 70 ½, and even longer.

Read about the Details

Click on this link to the MandMarblestone website to read a white paper with details about this IRS-approved planning technique.

Using Tax Qualified Retirement Plans For Family Business Succession Planning 

Contact Information – Don’t hesitate to contact Bob Mand, Ken Marblestone, Ian Haring, or Mike O’Connell at 215-222-5000 to explore these tax reduction opportunities, or email us at:, or

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