What happens if I quit working before my plan's retirement date?
Your plan can generally be terminated at any time. Upon termination, each participant can either have an annuity purchased to pay his/her benefit, or can receive a lump sum distribution which can be rolled over to an IRA. Early planning is always helpful, so inform us as early as possible if you intend to stop working before the plan's retirement date.

Do I have to retire on the plan's specified retirement date (year)?
No. The plan's retirement date is one of the provisions used to determine the amount of money you must contribute each year. You may be able to amend your plan to change the retirement date. Let us know as soon as possible so we can work with EMJAY Retirement Plan Services, Inc. to make the appropriate amendments.

How do I terminate my plan?
You will be required to submit final filings to the IRS and the actuary calculates your benefit under the plan. Depending on how much money you have accumulated, you may have an excess or a shortfall to fund before your plan is terminated.

How do I take money out of my plan at retirement?
In a defined benefit plan, annual benefits that are distributed from the plan are included in taxable income. Typically, an annuity is purchased to pay the annual benefit. However, IRS rules generally allow plan participants at retirement, age 62 or upon plan termination to elect a lump sum distribution payout option. The lump sum distribution would be fully taxable, so participants would typically choose to roll it over into an IRA where they may continue to grow tax-deferred. Maintaining the assets in a tax-deferred IRA creates the potential for continued investment growth and opportunities for estate planning strategies to transfer wealth to younger generations.

Is the contribution mandatory?
Yes. The contribution determined by the actuary is required each year to fund the benefit promised at retirement. Within certain limitations, the plan benefit formula can be amended for future years and thus increase or decrease the contribution amount.

Is the annual contribution limited to a percentage of income like a SEP or Profit Sharing plan?
No. The annual contribution is determined based on age, compensation, investment performance, actuarial assumptions and maximum benefit allowed. An actuary calculates the amount that must be contributed each year.

When is the annual contribution due?
The deadline for pension plan contributions is no later than 8 1/2 months after the close of the plan year. For the contribution to be deductible, it must be contributed on or before the due date of your business' tax return (with extensions).

Can the contribution amount be reduced after the plan is set up?
Yes, within limitations. You can amend your plan formula down for future years (but, depending on when you amend the plan, you may still be required to make the contribution for the current year). If your compensation decreases, the annual required contribution may decrease. If the investment performance of the plan is greater than the assumed interest rate, the required contributions will also decrease.

What is the maximum amount I can contribute?
There is no specified limit — the limit is on the allowable benefit, not the contribution.

• The benefit is the amount your plan will pay out annually in retirement.
• The contribution is what you pay in each year while participating in the plan to accumulate enough to make the pre-determined annual benefit.
• The accumulation, also called the benefit commitment, is the total amount in the plan at retirement.

Unlike defined contribution plans (e.g., 401(k)s, SEPs, SIMPLEs, etc.,) which have limits on the amount that can be contributed, defined benefit plans have limits on the benefit that can be paid out.

There are two separate limits on the benefit, either of which may apply:

1. 100% of compensation, reduced pro rata for years of service less than 10.
2. $175,000, reduced pro rata for less than ten years of participation in the plan.
   • This limit is further reduced actuarially if benefits commence prior to age 62
   • This limit is increased actuarially for benefits beginning after age 65. For this reason, contributions for older participants can be much higher.

Contributions Required to Fund Maximum Benefit

* Since the participant only has 5 years of participation, the maximum benefit is limited to 50% of the maximum benefit payable at age 65 ($175,000)

How do I know how much money must be contributed each year to the Small Business Pension Program?
EMJAY Retirement Plan Services, Inc. will inform you annually of contribution requirements for the coming year. At the end of the year, EMJAY again will remind you to fully fund the contribution before filing your taxes.

What factors determine how much I can contribute in subsequent years?

• Actual investment earnings vs. the assumed interest rate
• Changes in compensation
• Changes in the maximum benefit limits

These are interdependent. For example, if assets earn more than the assumed rate (decreases the contribution) and compensation increases (increases the contribution), you may end up with the same or similar contribution amount as the previous year.

What money can I use for contributions?
Contributions must be made by the business that is sponsoring the plan. A sole proprietor may have more than one source of money, but in no event can the sole proprietor deduct more than the net income generated from the business that is sponsoring the plan.

What happens if the plan's investment performance is greater than the actuarial assumed interest rate?
If the investments grow faster than expected, you will be required to put less money into the plan to achieve the investment goal.

Is there a ceiling (or a floor) on how much plan investments can earn?
Your plan places no restrictions on investment volatility. You as the employer are responsible for selecting and managing the plan's investments. If the investments earn above the assumed rate of return, the required contributions will decrease. If they earn below the assumed interest rate, the required contributions will increase.

I have employees other than myself. Do I have to cover them in the Plan?
All eligible employees must be included. Selecting a one-year/1000 hours entry requirement will prevent any part-time employees working less than 1,000 hours from entering the plan.

I own more than one business. Do I have to cover employees in both businesses?
Generally, yes. If you own other businesses and you are considered part of a controlled group or affiliated service group, then all businesses must be covered under the plan.

I already participate in a plan sponsored by another company where I am employed. Can I participate in both plans?
You can participate in both plans if the two companies are not part of a controlled group - that is, two or more firms controlled by the same 5 or fewer people.

In the past, I have had a Profit Sharing Plan for my business. Can I now terminate that plan and set up a Small Business Pension Program?
Yes. Your existing profit sharing plan can be terminated and you can set up a Small Business Pension Program. However, if you have already made your profit sharing contributions for the current plan year, those contributions might not be deductible if the Small Business Pension Program is established for the same year. In any year in which an employer maintains a Small Business Pension Program (defined benefit plan) and a defined contribution plan, the maximum deductible limit for both plans is the GREATER OF (1) 25% of total compensation, or (2) the amount necessary to fund the defined benefit plan. Usually, the contribution amount for the defined benefit plan exceeds 25% of total compensation, so any employer contribution to the defined contribution plan might not be deductible this year. Please talk to your tax advisor and refer to IRS Publication 560 concerning deductibility and carryovers to future years.

Can I maintain both a 401(k) plan and a Small Business Pension Program?
Yes. Elective deferral contributions do not count against the deductible limit described above. As long as the 401(k) is a deferrals only plan, contributions can be made to both plans.

The Small Business Pension Program is a defined benefit plan. What is a defined benefit plan?
A defined benefit plan is a qualified retirement plan in which the employer sets a target retirement benefit - the amount you want plan participants to have when they retire; then annual contributions are calculated to provide that benefit. Contributions are based on current age, the average of the three highest consecutive years of income, the planned retirement age, and in subsequent years, the balances that have accumulated in the plan. Annual contributions are mandatory and a higher benefit will result in higher annual contributions. Contributions will increase or decrease as the four factors mentioned above change.

Can a defined benefit plan be amended?
Yes. Generally, the employer can amend the plan to increase the benefit formula or decrease the formula. However, the employer cannot amend up, then amend down, then amend up, then amend down, etc., since this may be viewed by the IRS as abusive.

Following are some of the changes that can be made:

• Change the plan's benefit formula. You can decrease or, if you qualify increase your benefit formula, thereby changing the contribution amount.
• Change the retirement date or age at retirement, if permitted.

Are loans or hardship withdrawals allowed?
The plan does not permit hardship withdrawals. Participant loans are available if the employer chooses this feature.

What laws changed to make defined benefit plans more attractive for small business owners?

• Section 415(e) of the Tax Code was repealed. Because of the repeal, a business owner can now use a defined benefit plan to build assets without taking into consideration money already accumulated in other retirement plans.
• Section 415(b)(1)(A) was amended to increase the maximum retirement benefit allowed.
• Section 415(b)(2)(C) was amended to lower the age at which the maximum retirement benefit could be received.

Together, these changes allow small business owners to now contribute more to a defined benefit plan.

Are takeovers of existing defined benefit plans permitted?
Yes, but the benefit from the prior plan will need to be considered in the determination of the new benefit.

What is the role of EMJAY Retirement Plan Services, Inc.?
EMJAY is the third party plan administration and actuarial firm. It provides the plan document, the actuarial calculations, prepares all tax forms and answers any questions that you may have. It does not provide investment or tax advice. UBS Financial Services Inc. does not have any ownership or other affiliation with EMJAY Retirement Plan Services, Inc. other than for the services offered in this program.