How 401(k) Profit Sharing Helps Small-Business Owners Maximize Their Savings

WASHINGTON - NOVEMBER 03: Senator Tom Harkin (...
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Plan design is critical to the success of a small business retirement plan. For a small business to attract and retain talented employees they should offer an attractive benefit package, this includes a retirement plan. These designs can allow business owners and their top employees to maximize their contributions.

Advanced Profit Sharing Enables Even More ControlWhile a standard profit sharing model is the most commonly used in a 401(k), advanced profit sharing is the preferred plan design for businesses with consistently strong profits and fewer than fifty employees. This profit sharing design enables employers to profit share different salary percentages based on unique employee groups within a company.

For example, a legal firm typically has partners, attorneys, as well as support staff that make up the practice.  Each group is distinct, has differing compensation levels and is essential to the firm’s success.  A different percent of salary can be provided as a profit share for each defined group to reward employees based on the group’s role, compensation or age.  A new comparability analysis is done by the company’s 401(k) provider or advisor to determine the optimal levels that best meet the business’ compensation objectives. This can be great for the employees and a smart way for the firm to better manage the rewards of sharing profits too.

If you already have a 401(k) plan and think this can benefit your company, talk to your provider about how you can best use the profit sharing feature to meet your business goals.  If you’re thinking of starting a 401(k) plan for 2011, you can typically purchase a plan until mid-December and you will have until near your tax deadline to make any profit sharing contributions for 2011.

This is one example of how small business owners can maximize their contributions while providing a meaningful benefit to their employees. Each owners situation is different, requiring an individual analysis.

Please comment or call to discuss how this affects you and your business.

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