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How to Close Retirement Income Gaps for High Comp Employees - YouTube
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[Music]
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hi my name is jeremy green director of
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advanced playing for cbs brokers she'll
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be discussing the topic of retirement
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planning for highly compensated
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employees using non-qualified executive
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compensation plans
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for small businesses so this is the
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first in a five part sorry the third of
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in five part series the first was on how
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to have this conversation of small
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business planning
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the second is on uh compensation
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planning using long-term incentive plans
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this will be on retirement planning
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using non-qualified executive plans
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and the final two will be on executive
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benefit planning for
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non-profits and for profits oftentimes
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using split dollar plans and alternative
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designs
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so before we want before we get into
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non-qualified executive
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compensation planning we need to
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understand the differences and the
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limitations of qualified plans
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so retirement plans that are erisa
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overseas that needs to have
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a couple things it can't benefit
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disproportionately highly compensated
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executives over non-highly compensated
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and so there's often times
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not only is there limitations for how
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much you can contribute but there's
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there's discrimination testing to make
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sure that it didn't
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disproportionately benefit the highly
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compensated executives
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which sometimes limits the amount even
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further than even more than what the
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the actual limitations are the amount
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that a highly compensated executive
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could contribute so you can see
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that in 2021 the max that a person could
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contribute is 25
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500 of their own income if you're over
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age 50 and with the employer
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contributions let's say profit sharing
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what not the max could be 58 000. now if
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you were making 400 000 a year
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even with the defined benefit plan that
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was designed to give you 230 000 in
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retirement
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and you were making 400 000 and your
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target was to replace 80
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of your income that this wouldn't be
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enough there'd be a gap in your need for
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retirement planning
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um the ir the irs discerns
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who is a highly compensated executive by
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a dollar amount of 130
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000 so if you make more than 130 000
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they're going to con they're going to
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put you in that category
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and so if you have enough of those
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people or you don't have enough of the
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of of the highly compensated
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contributing you might be limited by how
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much you can actually contribute
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to the qualified plan so this chart
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shows the percentage of income you might
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want to replace
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and obviously the the current amount
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income down below
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the less you make the more your social
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security and qualified plans would
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replace of that eighty percent you might
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be targeting
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and the more you make to the right um
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you see that there's a wider gap between
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the ability to fund your retirement plan
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your retirement needs
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um using qualified plans of social
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security alone and that's the
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opportunity with non-qualified plans
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because there's not a limitation on how
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much you can save
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and you can you don't have to contribute
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year by year and there's not
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discrimination testing
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so it's also a way for the business to
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both
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keep the executives they have currently
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as a benefit and also
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attract and new uh executives to the
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firm
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now there's a couple different designs
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but before we get to that i want to make
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sure that
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we cover two other things there's
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another reason why people look at
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non-qualified executive compensation
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plans
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in a year executive made a ton of money
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let's say or more than normal
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they can contribute to an unqualified
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executive compensation plan
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and basically be able to defer some of
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that income so that's one of the reasons
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why it's attractive another thing is
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that for an owner of a business who
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let's say isn't publicly traded
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you could have notional value like
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phantom stock or actual stock
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that you could contribute to this plan
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to also keep to motivate or incentivize
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employee executives
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now there's four different types of
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plans here for non-qualified executive
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compensation if you're not familiar with
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these types of plans
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this stuff can get kind of confusing but
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basically the top two boxes the salary
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reduction and bonus deferral
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are employee contributed meaning they
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either contribute some of their salary
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and reduce it year by year and
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contribute to the plan
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or they take some of their bonus the
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bottom two are generally
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employer paid which is sometimes called
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top hat or
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serp or supplemental executive
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retirement plans and excess benefit
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plans
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so just you can have plans that are
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contributed by both by the way
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so um what dictates that is
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what it depends on what the business is
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trying to do and the resources
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of the firm
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so how they decide to fund these plans
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besides determining you know who's going
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to pay for the plan
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um the the funding mechanism is
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important a lot of times a corporation
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doesn't choose to actually fund the plan
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upfront they pay it when it's due
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and part of the reasons they don't get
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any deduction until the until the
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employees actually earned
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the benefit so usually have a vesting
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schedule so if the firm puts aside money
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they don't get a deduction for the money
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they set aside for the plan
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now the reason why they would set aside
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money for a plan
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is that it's more attractive the
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executives see that money has actually
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been set aside
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um because it's also an asset of the
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company so it's available to the
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creditors
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so the the you've probably seen this
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before this is a three bucket approach
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to looking at resources
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of funds in retirement but obviously
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qualified plans follow the before a tax
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bucket
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uh after tax investments like brokerage
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would fall over here and then there's a
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very few things we can put in tax-free
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things like munis roth iras roth 401ks
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and life insurance and so
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so often is the case that what to the
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extent that these plans are funded
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they're using corporate owned life
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insurance
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something without sometimes surrender
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charges and also because
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um they defers any of the growth inside
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the county since it's funded
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and it's another resource for the
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retirement
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the executive in retirement to diversify
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whether their tax situation
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so some of the decisions that have to be
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made um in terms of
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of putting in together this or funding
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the plan is who's going to be
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participating in the plan identifying
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the gap the percentage of income that
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you're targeting to replace and thus the
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gap that exists
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and you can use any number of things to
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do that you could use you know some of
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the financial planning tools you have
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excel whatever and then finally deciding
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who's going to pay for that
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um and then a vesting schedule and
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finally you do have to find one a risk
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of requirement is they need to file a
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form
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notifying the irs of the existence of
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this plan and you may want a record
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keeper depending on the complexity of
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the number of participants and so forth
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and what they want to be able to see for
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terms of records electronically
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tax considerations i already said you're
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not going to get a deduction until it
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is vested to the employee um the
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at the time the employee so if you fund
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a plan you get no deduction upfront but
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you get it once it's paid out to the
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employee
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and the employee then has a taxable
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income at that time on w2
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and for accounting purposes this is
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though it is a liability it's not set
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aside as a liability
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or consider a liability until it's
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invested to the employee
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in terms of employment taxes none of
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this is due until the employee invests
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that either
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now if you have any cases like to
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discuss please look us up on the web
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cbsbrokers.net or if you have my contact
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information here
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i hope this has been helpful to you
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thank you so much for listening
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you
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