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

WASHINGTON - NOVEMBER 03: Senator Tom Harkin (...
Image by Getty Images via @daylife

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.

  • The Inefficient Retirement Plan Design (
  • An Employer’s Guide in Choosing which Retirement Plan to set up (
  • To Safe Harbor or not Safe Harbor, that is the question (
Enhanced by Zemanta

The Inefficient Retirement Plan Design

Safe Harbor Certified Seafood
Image via Wikipedia

The design of your company qualified retirement plan should be periodically reviewed to assure plan efficiency and compliance with new regulations.

Inefficient plan design wastes money because it either makes less cost effective contributions or it doesn’t maximize tax deductible contributions to highly compensated employees. So it either wastes money in unnecessary contributions or is inefficient for tax savings.In terms of wasting money, it could be a defined benefit plan that has outlived its usefulness or it could be a 401(k) plan with a new comparability plan design and a safe harbor matching contribution (because unlike a safe harbor 3% profit sharing contribution, you cannot use the safe harbor matching to offset any new comparability contributions to non-highly compensated employees like you could with the safe harbor 3% profit sharing contribution). A plan that doesn’t maximize contributions could be a 401(k) plan that consistently fails discrimination testing and doesn’t implement a safe harbor plan design or a plan that doesn’t offer a new comparability profit sharing allocation to highly compensated employees when the plan sponsor can afford it.

Retirement plans are a great employee benefit for retirement savings, but you should never forget the tax savings component it has.

Proper plan design is critical to the success of all qualified retirement plans. If your goal is to attract and retain talented employees a top quality benefit package is necessary.

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

Enhanced by Zemanta

To Safe Harbor or not Safe Harbor, that is the question

NEW YORK - JUNE 24:  A job seeker works the ph...
Image by Getty Images via @daylife

Plan design is critical to a successful retirement plan. Not all qualified plans are created equal with the amount of alternatives seemingly endless. Each alternative has it’s own benefits and drawbacks.

Safe harbor plan design is one of the best developments in qualified plans in the last 15 years. It’s win win because the 100% vested contributions to plan participants allows the plan to get a free pass on ADP (deferral discrimination tests), ACP (matching contribution tests, if contribution made), and the Top Heavy test (making sure plan doesn’t substantially benefit Key Employees). In addition, if the plan sponsor elects the 3% non-elective safe harbor (3% of compensation contribution to participants, regardless of whether they defer or not), that 3% can also be used to satisfy the minimum gateway contribution to non-highly compensated employees in a cross-tested allocation  (which means that highly compensated employees can get up to 9% of compensation in this type of profit sharingcontribution).That being said, a plan sponsor has to be advised by their third party administration firm (TPA) and/or ERISA attorney why a safe harbor plan design might be a good idea. Here are some clues as to when plans need to go this route:

  1. Plan has failed the ADP, or ACP, or Top Heavy Test (or all of them) in the past 1-2 years.
  2. Plan has come close to failing the above tests in the plan year.
  3. Demographically, plan has non-highly compensated employees that defer at a very low percentage.
  4. Demographically, plan has a large group of highly compensated employees such as a professional practice (law firm, accounting, and medical practice).
  5. Plan already uses a cross-tested, new comparability allocation for their profit sharing contribution.

The safe harbor plan is always worth investigating. It is a win win for the employer wishing to contribute more to their personal account and for the employee needing more savings.

Please comment or call to discuss how the safe harbor plan would benefit your company.

Enhanced by Zemanta

Plan provisions that every 401(k) plan should have

Image via Wikipedia
Not all 401(k) plan service providers are created equal. Your employees and you deserve a prudent and effective plan to secure a successful retirement.

I probably have drafted and amended thousand of plan over the years and every plan has its own little quirks. When it comes to plan design, I have always believed that some of the bundled providers have it wrong. There is no cookie cutter approach to retirement plan design; so many plans being handled by bundled providers are underserved because the plan document doesn’t fit what the plan sponsors needs or wants to do. You’ll have prototype, fill-in the blank documents that doesn’t have all the choices that a plan sponsor may want or need. For years, I actually was recommended by one of the largest providers to draft amendments to their prototype documents because up until the EGTRRA restatement documents, they had no provisions for new comparability profit sharingallocation.That being said, even with prototype and non-prototype, I am often amazed on what provisions that plan sponsors don’t have. I am not talking about required contributions like safe harbor, I’m talking about provisions that are common sense and help facilitate administration. I’m talking about 401(k) plan provisions that plan sponsors eventually end up needing one day that they end up spending money to amend the plan to add these provisions. Here are some plan provisions; I like to see in every plan document:

  1. Allowing plan participants to rollover money into the plan and allow them to withdraw it at any time.
  2. In-service distribution, allowing plan participants to access their money at age 59 1/2 , even if they are still working.
  3. Loans, not a big fan of them, but participants may need it for one reason or another.
  4. Hardship provision, same view as #3.
  5. Discretionary profit sharing and matching contribution provisions. Even if a plan sponsor never wants to make one, I feel having those provisions in there are better than not and having a plan sponsor wanting to add them because with the language needed for an amendment, you’ll actually need a new document.
  6. Roth 40(k) provision. I see no reason in not offering it.

Plan sponsors need to understand that all 401(k) service providers are not all alike. Your company sponsored retirement plan is a benefit to your employees that is essential to their financial future.

Please comment or call rto discuss how this affects you and your company plan.

  • Safe Harbor 401(k) Deadline Looms for Small Business (
  • Plan “Symptoms” that it’s time for a Review (
  • Five more trends for 401(k) Plans. (
Enhanced by Zemanta

Now is the Time for Retirement Plan Decisions

These hybrid retirement plans offer the business owner the opportunity to deduct income beyond the defined contribution limits. At the same time you will attract and retain talented employees.

Many successful companies (especially professional firms like medical groups and law firms) are considering whether to increase retirement plandeductions for 2011. This post highlights the action steps to take while there’s still time.Note: We’ll be focusing on cross-tested profit sharing plans and cash balance plans. These plans allow owners to make large tax-deferred retirement contributions in exchange for providing a generous employee retirement allocation (usually 5% of pay if there’s only a profit sharing plan, or 7.5% of pay if there’s a cash balance plan too).

Since the Pension Protection Act of 2006 there are numerous alternatives for deducting beyond the defined contribution limits. This can be a win win for both the employer and their employees.

Please comment or call to discuss how these hybrid plans might work for your company.

  • Retirement Plans (
  • Employees Want a More Pension Fund Like Plan. (
  • Retirement Rules for Small Business Clients (
Enhanced by Zemanta

Hybrid Pension Plans on the Rebound

WASHINGTON, DC - MARCH 24:   Republican member...
Image by Getty Images via @daylife
The cash balance plan works very well with companies experiencing steady cash flow. This can be a differentiator when looking to attract and retain talented employees. Given the recent volatility many employees are seeking stability. The cash balance plan can provide this stability.

Hybrid plans have become more popular because they offer employees the security of an old-fashioned DB plan and the portability of a 401(k).”The trend over the past 20-plus years, particularly the last 10 years, was for sponsors to move away from traditional defined-benefit plans because of the volatility of cost and the volatility of the effect on their financial balance sheet,” Young says.

With the significant market declines over the past decade, many employers have switched primarily to 401(k)s. But now that the hybrid regulations have been clarified, employers may give pension plans a second look — in the new, improved form of the < cash-balance plan.

The portability of the hybrid plan is especially popular with a mobile, younger work force.

“Over the past decade, there has been more movement job-to-job and the idea of portability is important. An account plan allows you to move money,” says Glickstein.

“[The hybrid account] is portable,” he says. “[Younger workers] can take it with them. … It’s really appealing to employees that change jobs often. … A lot of traditional plans don’t allow you to take a lump sum

The cash balance plan works well when converting a current defined benefit plan. There are other attractive uses for the cash balance plan. Professional services firms, closely held family owned businesses among others can work very well combined with a 401(k)/profit sharing plan.

Please comment or call discuss how the cash balance plan might work in your organization.

Enhanced by Zemanta

Need to Catch Up on Retirement Savings?

Retirement savings for various periods with sq...
Image via Wikipedia

The events of the last few years have had a profound
effect on many executives, professional and business owner’s ability to retire
on schedule.  The market volatility may
have decimated their 401k and other retirement accounts.  Along with this problem there continues to be
a threat of increased taxes to pay for the deficits.

Enter the cash balance plan where pre tax contributions
can be as much as $220,000 per year plus your 401k and profit sharing
contributions.  The cash balance
contribution limit is based on the participant’s age.  Each principal participant is able to
determine their own level of contribution.

As a hybrid plan, the cash balance plan design includes
features of defined contribution (401k) and defined benefit (pension
plan).  They are best suited for
companies enjoying stable, high incomes.
The contribution levels must be continued for at least 2 to 3
years.  There is more flexibility than
the traditional defined benefit plan and there should be an analysis performed
to determine feasibility.

Enhanced by Zemanta