By: Bryan Uecker, QPA, QPFC, AIF, AIFA

Defined Benefit (DB) plans are a cornerstone of retirement planning for many employers and employees. These plans promise a specific benefit amount to participants upon retirement, making them a reliable source of income. However, maintaining a DB plan requires careful attention to funding levels, as both minimum and maximum funding requirements are heavily regulated to ensure solvency and compliance with federal laws. In this article, we’ll explore the concepts of minimum and maximum funding levels, why they matter, and how they impact plan sponsors.

Minimum Funding Levels: Ensuring Plan Solvency

What Are Minimum Funding Requirements?

Minimum funding levels are the least amount of contributions that an employer must make to a DB plan to ensure it remains solvent and capable of meeting its future obligations. These requirements are governed by the Employee Retirement Income Security Act (ERISA) and enforced by the IRS. The goal is to protect plan participants by ensuring that the plan has enough assets to pay promised benefits

How Are Minimum Contributions Calculated?

Minimum contributions are determined based on actuarial calculations that
consider:

• The present value of future benefits owed to participants.
• The plan’s current assets.
• Assumptions about factors like interest rates, employee turnover, and life expectancy.

For example, the Pension Protection Act of 2006 (PPA) requires plans to become 100% funded over time, meaning the plan’s assets must equal its liabilities. If a plan falls below this threshold, the employer must make additional contributions to close the funding gap.

Consequences Of Falling Below Minimum Funding

If a DB plan is underfunded, the employer may face:

• Excise taxes for failing to meet minimum funding requirements.
• Increased premiums to the Pension Benefit Guaranty Corporation (PBGC), which insures private-sector DB plans.
• Potential restrictions on benefit accruals or lump-sum distributions until the funding shortfall is addressed.

Maximum Funding Levels: Avoiding Overfunding

What Are Maximum Funding Limits?

While minimum funding ensures solvency, maximum funding limits prevent employers from over-contributing to a DB plan. Overfunding can lead to tax complications, as contributions to a DB plan are tax-deductible only up to certain limits. The IRS sets these limits to prevent excessive tax sheltering.

How Are Maximum Contributions Determined?

The maximum funding level is based on the actuarial value of the plan’s liabilities and the IRS-imposed limits on benefits. For 2025, the maximum annual benefit for a participant is the lesser of:

• 100% of the participant’s average compensation for their highest three consecutive years, or
• $280,000 (adjusted annually for inflation).

Employers must work closely with actuaries to ensure contributions do not exceed these limits.

What Happens If A Plan Is Overfunded?

Overfunding can create challenges for plan sponsors, especially if the plan is terminated. Excess assets in the plan may be:

• Reallocated to participants in a non-discriminatory manner, though owners may not benefit if their formula is maxed out.
• Transferred to a 401(k) plan and used as profit-sharing contributions for up to seven years.
• Reverted to the employer, but this triggers taxation as corporate income and an excise tax of 20-50%.

Balancing Minimum And Maximum Funding

Why Is Balancing Funding Levels Important?

Striking the right balance between minimum and maximum funding is critical for plan sponsors. Underfunding can jeopardize the plan’s ability to meet its obligations, while overfunding can lead to inefficiencies and tax penalties. Proper funding ensures:

• The plan remains solvent and compliant with regulations.
• Contributions are optimized for tax efficiency.
• The employer avoids unnecessary financial strain.

Strategies For Managing Funding Levels

• Regular Actuarial Reviews: Actuaries can help monitor funding levels and adjust contributions as needed.
• Liability-Driven Investing (LDI): This investment strategy matches plan assets with liabilities, reducing volatility and maintaining consistent funding levels.
• Funding Relief Measures: Legislation like the American Rescue Plan Act (ARPA) and the Infrastructure Investment and Jobs Act (IIJA) has provided funding relief by lowering minimum contribution requirements and extending interest rate smoothing provisions.

Conclusion

Defined Benefit plans require careful management of funding levels to ensure compliance with federal regulations and the long-term stability of the plan. Minimum funding levels protect participants by ensuring the plan can meet its obligations, while maximum funding limits prevent over-contributions and tax inefficiencies. By working with actuaries, leveraging modern investment strategies, and staying informed about legislative changes, plan sponsors can effectively manage their DB plans and provide valuable retirement benefits to their employees.

By: Bryan Uecker, QPA, QPFC, AIF, AIFA

The landscape of defined benefit plans has undergone significant transformation since American Express established the first private pension plan in 1875. Traditional defined benefit plans dominated the retirement landscape through the 1960s and 1970s, but their popularity began declining in the 1980s due to increasing administrative complexity and cost concerns.

Both traditional defined benefit plans and cash balance plans fall under the defined benefit umbrella, but they differ in key aspects:

Traditional Defined Benefit Plans

• Provide retirement benefits as monthly life annuities
• Calculate benefits using a formula based on service years and compensation
• Have declined significantly since the 1980s due to:
  • Tax Reform Act of 1986
  • Complex regulatory requirements
  • Liability volatility from interest rate fluctuations
  • Administrative costs

Cash Balance Plans

• Present benefits as account balances
• Grow through annual pay credits and interest crediting rates
• Gained legal clarity through:
  • The Pension Protection Act of 2006
  • Additional regulations in 2010 and 2014

Choosing Between the Plans

Traditional Defined Benefit Plans Best Suit:

• Smaller or owner-only operations
• Organizations requiring minimal participant communication
• Employers focused on tax deduction benefits

Cash Balance Plans Are Ideal For:

• Larger organizations needing clear participant communication
• Employers seeking predictable liabilities
• Companies wanting simpler investment management

Current Trends

Cash balance plans have seen remarkable growth, now representing nearly 50% of all defined benefit plans. Their popularity is particularly strong among small and mid-size businesses, with 92% of these plans being implemented in firms with fewer than 100 employees.
“How accurate does my valuation need to be?”

Key Considerations

Both plan types share common requirements including:

• Minimum contribution requirements
• Annual reporting obligations
• Nondiscrimination testing
• Participant notice requirements

The choice between them should align with the sponsor’s specific needs, size, and financial objectives. The trend toward cash balance plans reflects their appeal as a “rebranded” version of traditional defined benefit plans, offering similar benefits with improved clarity and predictability for both employers and employees.

This evolution in retirement plans demonstrates how the industry has adapted to meet changing needs while maintaining the core objective of providing secure retirement benefits. The success of cash balance plans, particularly in professional services sectors, shows how rebranding and restructuring can revitalize a declining product while maintaining its essential purpose.

By: Bryan Uecker, QPA, QPFC, AIF, AIFA

Introduction

If you’re using a Business Owners Retirement Savings Account (BORSA) or Rollover as Business Startup (ROBS) to fund your business dreams, you’ve probably wondered about valuation requirements. As a business owner, understanding when and how to value your BORSA/ROBS plan assets isn’t just about checking a box—it’s about protecting your investment and staying compliant with IRS regulations. Let’s break down everything you need to know about BORSA/ROBS plan valuations in plain English.

Why Valuations Matter in Your BORSA/ROBS Plan

Think of your BORSA/ROBS plan valuation like a regular health check-up for your business. It’s essential because:

• It helps ensure your retirement funds are being managed properly
• It keeps you compliant with IRS regulations
• It protects you from potential penalties and prohibited transactions
• It provides crucial information for making business decisions

When Do You Need a Formal Valuation?

The Simple Answer: It Depends on Your Activity

Not every BORSA/ROBS plan needs a formal valuation with an independent appraiser every year. Here’s when you might be able to use a less formal approach:

• You’re running a single-participant plan
• Your plan hasn’t made any contributions during the year
• You haven’t processed any distributions
• There haven’t been any investment changes
• You haven’t conducted any transactions involving employer securities

When to Get Formal

However, certain situations definitely call for a more formal valuation approach:

1. During Major Transactions
   • When making contributions to the plan
   • When processing distributions
   • During transactions involving employer securities
2. For Complex Assets
   • When dealing with hard-to-value assets
   • If you’re planning significant business changes
   • When the IRS might request additional documentation

Real-World Implications

The IRS has found that many BORSA/ROBS arrangements face challenges within their first three years. One common pitfall? Improper valuations. To avoid becoming a cautionary tale, consider these best practices:

Best Practices for BORSA/ROBS Valuations

1. Annual Review
   • Schedule regular valuations
   • Document your valuation method
   • Keep detailed records
2. Professional Support
   • Consider working with valuation experts
   • Consult with BORSA/ROBS specialists
   • Maintain relationships with financial advisors
3. Documentation Requirements
   • Keep detailed records of all valuations
   • Maintain proof of your methodology
   • Store copies of all relevant paperwork

Common Questions from Business Owners

“How accurate does my valuation need to be?”

Your valuation needs to reflect the true fair market value of your business assets. This isn’t about guesswork—it’s about using legitimate, defensible methods.

“What happens if I get it wrong?”

Incorrect valuations can lead to:

• IRS penalties
• Compliance issues
• Potential plan disqualification
• Tax complications

Tips for Success

1. Stay Organized
   • Keep a calendar of valuation deadlines
   • Maintain clear documentation
   • Track all business changes that might affect valuations
2. Plan Ahead
   • Budget for professional valuations when needed
   • Consider timing of major business decisions
   • Think about future exit strategies

Conclusion

While BORSA/ROBS plan valuations might seem daunting, they don’t have to be. The key is understanding when you need a formal valuation and when a less formal approach will suffice. Remember, the goal is to protect your investment while staying compliant with IRS requirements.

Take Action

1. Review your BORSA/ROBS plan’s current valuation status
2. Schedule any needed valuations
3. Consult with professionals if you’re unsure
4. Document your valuation process

Remember, your BORSA/ROBS plan is more than just a funding mechanism—it’s a crucial part of your business and retirement strategy. Treating valuations with the attention they deserve will help ensure your long-term success.

By: Bryan Uecker, QPA, QPFC, AIF, AIFA

Social Security remains a critical topic of discussion due to ongoing concerns about its solvency and future. Recent expert panels have examined the program’s state and potential improvements.

Public Support and Confidence

Research by the National Institute on Retirement Security (NIRS) shows strong public support for Social Security, with many considering it a crucial government program. However, confidence in benefit delivery varies, with older generations generally more confident than younger ones.

Key Challenges

Gopi Shah Goda of the Brookings Institution outlined four main challenges:

1. Financial shortfalls
2. Program rigidity
3. Inadequate coverage of elderly financial risks
4. Persistent poverty among survivors

Proposed Solutions

Experts suggest reforming rather than replacing Social Security. Recommendations include:

1. Increased funding through dedicated tax flows
2. Indexing benefits to longevity
3. Expanding private retirement plans
4. Establishing a commission for thorough examination

Broader Implications

Discussions also touched on whether Social Security should primarily serve as income replacement or an anti-poverty safety net. Consensus remains on its critical role in retirement security for most Americans.

Moving forward, addressing these challenges while preserving Social Security’s core mission will require thoughtful, bipartisan efforts.

By: Bryan Uecker, QPA, QPFC, AIF, AIFA

Defined Benefit (DB) Plans are an essential component of retirement planning, offering predictable income streams for participants. However, staying compliant with government regulations is critical for plan sponsors. One of the key compliance requirements is the periodic restatement of plan documents to reflect legislative and regulatory changes. We’re currently in the Cycle 3 Restatement period for DB Plans, and plan sponsors should ensure they meet the deadlines and requirements to remain compliant.

What Are Cycle Restatements?

Cycle restatements are part of the IRS’s pre-approved plan document program. Every few years, the IRS requires plan sponsors of retirement plans—such as Defined Contribution (DC) and Defined Benefit (DB) Plans—to restate their plan documents. These restatements incorporate recent legislative and regulatory updates to ensure the plan operates in compliance with current laws.
For DB Plans, the current restatement period, known as Cycle 3, opened August 1, 2023 and will close on March 31, 2025. Plan sponsors must adopt the updated Cycle 3 document within this window.

What’s New in Cycle 3 Restatements for DB Plans?

Cycle 3 restatements incorporate a variety of regulatory and legislative updates enacted since the last restatement cycle. Some key updates include:

1. SECURE Act
   The Setting Every Community Up for Retirement Enhancement (SECURE) Act introduced provisions to expand access to retirement savings and increase flexibility. Employers must ensure their DB Plans reflect these changes, such as updated rules for required minimum distributions (RMDs).
2. Bipartisan Budget Act of 2018
   This legislation introduced changes to hardship withdrawals and other plan operations that may need to be reflected in the updated document.
3. Other IRS Guidance
   Recent IRS procedures and notices have clarified certain operational requirements for DB Plans, which should now be incorporated into the Cycle 3 restatements.

Why Are Restatements Important?

Plan restatements aren’t just a bureaucratic requirement—they’re essential for maintaining the tax-qualified status of your DB Plan. A failure to restate the plan document by the deadline can result in significant penalties, including the potential loss of tax benefits for both the employer and plan participants. Regular updates also help ensure the plan is operating as intended and providing the intended benefits.
If you have questions about Cycle 3 restatements or need assistance navigating the process, don’t hesitate to reach out to DRDA as your TPA . Compliance may seem complex, but with proper guidance, it’s entirely manageable!

By: Bryan Uecker, QPA, QPFC, AIF, AIFA

Under the SECURE 2.0 Act, a new feature allows employees to access emergency savings within their 401(k) plans. This is designed to provide workers with more flexibility to cover unexpected expenses without needing to resort to high-interest loans or credit cards. Here’s a breakdown of the potential benefits and drawbacks of incorporating emergency savings accounts inside a 401(k) plan:

Pros:

1. Accessibility for Employees:

• Emergency Fund Access: Employees can set aside up to $2,500 in an emergency savings account within their 401(k). This provides a quick and easy way to access emergency funds without having to worry about depleting personal savings or taking on high-interest debt.
• Early Withdrawals without Penalty: If structured correctly, employees may withdraw emergency funds without incurring the 10% early withdrawal penalty (though income tax may still apply).

2. Tax-Advantaged Growth:

• Tax-Deferred Contributions: Contributions to the emergency savings account within the 401(k) plan grow tax-deferred. This can be an attractive option for employees, as the funds will accumulate without being subject to annual income taxes.
• Potential for Employer Contributions: Employers may be able to match emergency savings contributions, further boosting employees’ savings potential.

3. Encouragement of Savings:

• Automatic Payroll Deductions: Employees may be able to set up automatic contributions directly from their paychecks. This can help establish the habit of saving for unexpected expenses, even if it’s just a small amount each pay period.
• Financial Security: Access to emergency savings in a 401(k) plan gives employees peace of mind, knowing that they have a built-in safety net to deal with unforeseen financial burdens.

4. Enhanced Retirement Contributions:

• Employees may contribute to their emergency savings and retirement savings simultaneously, allowing for the long-term benefits of retirement planning while addressing short-term liquidity needs.

Cons:

1. Limited Emergency Fund Access:

• Withdrawals Are Still Subject to Income Tax: While the penalty is waived, emergency fund withdrawals are still subject to income tax, which may reduce the amount of the funds employees actually receive.
• Limits on Withdrawals: Withdrawals from the emergency savings account are restricted to specific qualifying circumstances. Employees may not have the same flexibility as they would with a regular savings account, and not all emergencies may qualify.

2. Reduced Contributions to Retirement Fund:

• Emergency Savings Could Impact Retirement Contributions: If employees are putting funds into their emergency account within the 401(k), it may reduce their ability to maximize contributions to their retirement savings. This could impact long-term financial planning for retirement.
• Potential for Missed Investment Growth: While the funds in emergency savings are protected from market volatility, they may also miss out on the higher returns associated with more aggressive investments in the main portion of the 401(k) plan.

3. Complexity and Administration:

• Additional Administration for Employers: Employers will need to track both regular 401(k) contributions and emergency savings contributions. This adds another layer of complexity to plan administration and may require additional time and resources.
• Employee Confusion: Employees may be confused about how their emergency savings are structured within their 401(k) and how this fits into their overall retirement planning strategy. Clear communication and guidance from employers will be necessary to avoid confusion.

4. Potential for Overuse:

• Overreliance on Emergency Savings: Employees might be tempted to use emergency funds more frequently, draining the emergency savings account. This can reduce the funds available for true emergencies, potentially leaving employees without the necessary resources when they need them the most.

5. Impact on Future Withdrawals:

• Tax Implications: Since the emergency savings are inside the 401(k), any withdrawals from this account will still count toward the total 401(k) balance, potentially increasing the taxable amount when the employee retires or takes distributions.

Conclusion:

The inclusion of emergency savings accounts within a 401(k) plan under SECURE 2.0 offers significant benefits, particularly in providing employees with an accessible, tax-advantaged way to manage unexpected expenses. However, it also comes with challenges related to tax implications, withdrawal restrictions, and the potential for reduced retirement savings growth.

Employers and employees must carefully weigh the pros and cons, ensuring they balance short-term financial flexibility with long-term retirement planning goals. With proper structure and communication, emergency accounts within 401(k) plans can be an excellent tool for enhancing financial security and preparedness.

By James Barrera

Before moving forward put together a business plan. It’s not necessary to expend a lot of time on this document, as long as you can clearly state your intended strategy and clearly define the scope of your intended sales, marketing, and financing efforts.
Starting a business at any age can be a daunting experience, but doing so after age 50 offers its own challenges and opportunities. The risk factor is as high as it is for a business owner of any age. On the other hand, you have a depth of experience and knowledge that is not present in most budding 25-year entrepreneurs.
If you are considering a startup of some kind in your fifties or later be sure you can answer the following questions.

Are you prepared?

This is no time to jump into the marketplace just to see what happens. If you think you have a great business idea then test it against a thorough market analysis. You need to know who your potential competitors and customers are, but even more critically, if there’s likely to be a genuine demand for your product or service.
Before moving forward put together a business plan. It’s not necessary to expend a lot of time on this document, as long as you can clearly state your intended strategy and clearly define the scope of your intended sales, marketing, and financing efforts.

Do you have passion?

For business owners aged 50 and older, there is no getting around a simple fact: you’re just not as young as you used to be. Starting a business requires the stamina to put in many long hours upfront. Not everyone can meet the physical demands of hard work and lack of sleep. You must have passion for this new business. Making money cannot be your sole motivator – since you may not see profits in the early stages.

Have you looked at the costs?

You are going to need start up funds. Whether you put up your hard dollars, obtain a loan for financing, or tap into your retirement funds tax and penalty free you need to find an accountant experienced in new business ventures to realistically assess the likely startup costs. The plus side here is that by age 50 or greater many have managed to put away a substantial amount of money in their 401k/IRA accounts. DRDA’s self-directed 401k program – the BORSA Plan – would give you access to these funds without tax or penalty erosion.

How can you build on your experience?

Starting a business later in life gives you the unique opportunity to draw on a lifetime of experience. By now you have a much better sense of your strengths and weaknesses. Chances are you have also accumulated a network of contact who can help you along the way, either directly or through referrals to people who can help you.

Are you considering business ownership at age 50+? One of our Business Consultants would be happy to offer you a free initial consultation. Give us a call at 281-488-2022.

By: Bryan Uecker, QPA, QPFC, AIF, AIFA

The IRS has announced the 2025 contribution and benefit limits in Notice 2024-80, released on November 1.

Key Contribution Limits for 2025:

• 401(k), 403(b), 457, and Thrift Savings Plans: The standard contribution limit for these plans increases to $23,500, up from $23,000 in 2024.
• Catch-Up Contributions for Ages 50 and Over: The catch-up contribution limit remains at $7,500, allowing individuals aged 50 and older to contribute up to $31,000 across 401(k), 403(b), most 457 plans, and the Thrift Savings Plan.
• Special Catch-Up Contributions for Ages 60 to 63: SECURE 2.0 introduced an additional catch-up provision for individuals ages 60 through 63. In 2025, this special catch-up amount is $11,250 for 401(k), 403(b), and most 457 plans, allowing for a total contribution limit of up to $34,750 for these participants.
• Defined Benefit and Contribution Plans (IRC Section 415): The annual benefit limit for defined benefit plans rises to $280,000 (up from $275,000), and the limit for defined contribution (DC) plans increases to $70,000 (up from $69,000).

Other Key Adjustments:

• Annual Compensation Limits: The maximum compensation considered for qualified plans is now $350,000 (up from $345,000).
• Top-Heavy Plan Key Employee Definition: Limit increased to $230,000 (up from $220,000).
• Highly Compensated Employee Definition: Raised to $160,000 from $155,000.

These 2025 updates, including special catch-up contributions for ages 60-63, provide increased flexibility and savings opportunities for retirement planning.