PFPL540–Retirement Planning & Employee Benefits

Week 7 Module 8 Assignment (50 Pts)

All answers must come from the textbook, slides, or other course material. Any other answers that do
not come from these sources will be counted as incorrect.

5 points per question,

A part of this assignment deals with recommending a retirement plan for a given employer. Answering
these questions is cumulative for Weeks 1-7.

1. Brandin, age 40, owns a sole proprietorship. He is the only employee. His revenues were $100,000
and his expenses were $34,000. His wife makes $400,000 and they would like to save more for their
retirement. His total SECA was $9,326. (5 points)

A. How much would Brandin be allowed to contribute to a SEP-IRA for this year? Show your\
work. (2.5 pts)
100,000 – 34,000 = 66,000 then we adjust for taxes since he is self employed → 66k / 2 x 15.3%
(.153) 66,000 x .25 - $16,500 per year to a SEP IRA
B. Is there another type of retirement plan that has traditionally been common for small businesses
to use as their initial retirement plan (found in Module 4) that would allow Brandin to save more
while still being easy to administer and low cost? If so, how much could be contributed into this
account (total) for 2024 if this plan only had the normal contribution rules (instead of adding any
new employer options? (2.5 pts)
Another type of plan that could be commonly seen here would be a regular/solo 401k plan. This would
allow for both employee/employer contributions, which in this case would be $22,500 plus the
previously calculated retirement allotment for this IRA (16,500) for a total of $39,000.

2. List four factors an advisor should consider when determining which type of retirement plan an
owner should select for their small business. Give the factors in their order of importance and briefly
explain why you selected that factor in you given order.
a. Factor and reasons this factor is important. Briefly, why did you list this factor first?
The structure of the clients business – I chose to delegate this one first as it directly relates to the way in
which I as a planner would approach the prospective client’s plan.
PFPL540–Retirement Planning & Employee Benefits
©2019, College for Financial Planning, all rights reserved. 1
 b. Factor and reasons this factor is important. Briefly, why did you list this factor second?
Potential contribution limits - I chose to delegate this one second as it has a direct impact on the
outcome of the plan in which I feel should be chosen.
c. Factor and reasons this factor is important. Briefly, why did you list this factor third?
Complexity of Plan – I chose this one third as it will dictate if the plan should be carried through with or
not.. despite if it feels like the “right one” in the moment.

d. Factor and reasons this factor is important. Briefly, why did you list this factor fourth?
Employee Opinion/Consideration – I chose this one fourth as it has a direct impact on the potential
participation of the plan.. which is key in order to seeing the plan through.
3. Which two types of employer retirement plans are the only ones in which the employers have the
investment risk instead of the worker? (5 pts)
Defined Benefit plans/Cash Balance Plans - Defined Benefit Plans guarantee a specified monthly
retirement benefit based on salary history and employment duration, with the employer responsible
for funding and managing investments. Cash Balance Plans, a subset of defined benefit plans,
provide benefits as a hypothetical account balance and guarantee a certain return on contributions. In
both types, the employer bears the investment risk, ensuring employees receive guaranteed
retirement benefits.
A. B.

4. Bernie and Tim, both age 56, are partners in a computer software consulting firm. They have 20
employees whose average age is 25 and average length of employment is three years. The firm is
highly profitable and enjoys stable cash flows. Given only this information, which type of retirement
plan would you recommend?

Given that Bernie and Tim are 56 and own a profitable consulting firm with stable cash flows, a Safe
Harbor 401k plan would be a good recommendation in this case. This plan allows for higher
contribution limits, which can benefit the partners as they approach retirement, while also providing
opportunity for their younger employees. The Safe Harbor provision ensures that the plan meets
non-discrimination requirements, making it good for a partnership structure with younger employees
who may have lower salary levels.
5. Joe, age 52, has just started a consulting company. He currently employs six people, who range in
age from 22 to 31 years old. Joe estimates the average employment period for his employees will be
approximately three years and would like to implement a retirement plan that will favor older
participants while including an appropriate vesting schedule. In addition, Joe would like the
employees to bear the risk of investment performance within the plan. Finally, he wants the
discipline of the plan having mandatory annual contributions. Which type of retirement plan would
you recommend? (5 pts)
PFPL540–Retirement Planning & Employee Benefits
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 In Joes situation, a Profit-Sharing Plan with a 401k aspect would be an suitable here. This plan
allows for mandatory annual contributions, ensuring consistent funding while favoring older
participants through discretionary contributions that can be tailored based on their age. Additionally,
since the employees will manage their own investments through the 401(k) aspect, it aligns with
Joe's desire for them to bear the investment risk. A vesting schedule can be implemented to
incentivize retention while accommodating the younger workforce's shorter employment periods.

6. What is UBTI and what difference does it make? Does having UBTI invalidate a retirement plan?
Unrelated Business Taxable Income (UBTI) refers to income generated by a tax-exempt
organization, such as a retirement plan, from activities unrelated to its primary purpose. UBTI is
subject to taxation, which can reduce the overall returns for retirement plans that invest in certain
assets, like limited partnerships or certain types of real estate. However, having UBTI does not
invalidate a retirement plan; it simply means that the plan may incur tax liabilities on that income.
Understanding UBTI is crucial for managing the tax efficiency of retirement investments.

7. Alice participated in a qualified retirement plan at work. The plan provided Alice with life insurance
inside the retirement plan. Unfortunately she passed away last week. Explain to her spouse how the
life insurance will be treated inside her retirement plan.

In Alice's qualified retirement plan, the life insurance component will typically be treated as an asset
of the plan. Upon her passing, the death benefit from the life insurance will be paid to the designated
beneficiaries, which may include her spouse. However, the amount of the death benefit that is
payable may be subject to specific tax rules and could affect the overall tax treatment of the
retirement plan's assets. It's important for her spouse to review the plan's details to understand any
potential tax implications and how the benefits will be distributed.

8. Name a type of investment that is common for high income taxpayers, especially in states with high
state income taxes that should NEVER be invested in a retirement plan (at least in the CFP World).
(The answer is NOT any type of annuity.) Why did you pick this investment to exclude from
retirement investing?
A common investment that high-income taxpayers, especially in states with high income taxes,
should avoid in retirement plans is municipal bonds. These bonds are often favored for their tax-
exempt interest at the federal level and sometimes at the state level. However, when held within a
retirement plan, the tax advantages are negated because the income generated will be taxed upon
withdrawal, diminishing the benefits of investing in municipal bonds. Therefore, it’s more
advantageous for high-income individuals to hold these investments outside of retirement accounts
to maximize their tax benefits.
9. Richard participates in a defined benefit pension plan at his place of employment. His projected

PFPL540–Retirement Planning & Employee Benefits

In a defined benefit pension plan, the maximum death benefit that can be provided is generally
limited to the lesser of $1,000 or the present value of the participant's accrued benefit. Since
Richard's projected monthly benefit is $1,000, the maximum death benefit under the plan would
typically be capped at this amount. However, if the plan specifies a different structure or additional
provisions for life insurance, those would need to be considered as well. Overall, the death benefit
should not exceed the plan's limits while ensuring compliance with IRS regulations.

10. Jeanette uses the serial payment approach to calculate the amount she must save each year to
accumulate her desired retirement income fund. She assumes an annual inflation rate of 4%, and an
annual investment rate of return of 7%. If she determines that she must save $10,000 at the end of
the first year, how much must she save at the end of the second year to meet her goal?

Using the serial payment approach, if Jeanette saves $10,000 at the end of the first year and assumes
an inflation rate of 4%, she will need to increase her savings to maintain the same purchasing power.
To find the amount she must save at the end of the second year, she can calculate it by adjusting the
first year's savings for inflation by taking the second year savings as x, saying x= first year savings
(1+ inflation % of 0.04)= 10,000(1.04) = $10,400

PFPL540–Retirement Planning & Employee Benefits