Building your program
First Stage: Employee Pre-Tax Contributions
With business conditions changing daily, it is often not possible to project
how much money a company will have available in the future for its retirement
program. On the other hand, in a tight labor market like today's, businesses
often find that they must be able to offer some type of retirement program in
order to be able to compete for the best employees. Allowing employee pre-tax
contributions through either a 401(k) or a 403(b) plan is a great way to offer
some type of benefit without the need to commit to a company contribution.
The maximum contribution an employee can make in any calendar year is currently $14,000. An employee who is 50 or older may contribute an additional $4,000. Certain employees participating in 403(b) plans who have not contributed the maximum amount in prior years are eligible to make additional contributions. There are, however, a few caveats. First, 403(b) plans are only available to certain types of non-profit organizations. Second, contributions by "Highly Compensated Employees" to a 401(k) plan are limited by what the Non-Highly Compensated Employees contribute. Finally, if 60% or more of the plan assets (adjusted for distributions within the last 5 years) belong to 'Key Employees", then the plan is deemed to be "Top-Heavy". Under a Top-Heavy plan, the company is required to make a contribution for all employees in any year in which a Key Employee contributes. For this purpose Key Employees are those who meet certain compensation and ownership criteria and are either Officers, Owners, or certain family members of Owners.
Second Stage: Adding an Employer Match
By matching a set percentage of the employee contributions, an Employer
accomplishes two important goals. First, a match makes the overall retirement
program package more competitive with programs offered by other companies.
Second, it encourages employees to contribute to the plan and as a result, makes
it easier to pass the 401(k) non-discrimination test.
Matching contributions must pass a non-discrimination test similar to the one
used for 401(k) contributions. There is also a third test which must be passed
which combines both matching and 401(k) contributions.
These non-discrimination tests can be bypassed by using either a SIMPLE Plan
or a Safe Harbor 401(k) Plan. SIMPLE Plans are only available to very small
employers and the maximum anyone can contribute to them is $10,000 (plus $2,000 for those over the age of 50). Under this plan, the employer must either match a significant percentage of the employee contributions or agree to make an across the board contribution for all eligible employees. Safe Harbor 401(k) Plans are similar but they can be used by any size employer, the maximum contribution is $14,000 (plus $4,000 for those over the age of 50), and the employer matching or across-the-board contribution requirements are stricter.
Third Stage: Profit Sharing Plan
The employer has the option of contributing additional amounts to the retirement program on a purely discretionary basis. The decision does not have to be made until the company files its tax return and the contribution does not have to be deposited until the due date for that return. The maximum amount which can be contributed for any individual, including 401(k) and matching contributions, is the lesser of $42,000 or 100% of pay. In some cases, however, it may not be possible to contribute the maximum for an individual as there are also limits on the amount which a company can claim as a tax deduction. The employer contribution must be allocated in a manner which passes a complex set of Non-Discrimination rules. Plans which utilize those rules by making different levels of contributions for different categories of employees are called New Comparability Plans.
.
Forth Stage: Traditional Defined Benefit or Cash Balance Plan
For individuals who have attained age 40 (lower in some cases), the maximum
amount which can be contributed to a Defined Benefit Plan is greater than
$42,000. Recent changes in law have also eliminated some of the restrictions
involved with maintaining multiple plans. Thus, for companies who are looking to
increase their retirement plan deposits, Defined Benefit Plans are often the
answer. Whether a traditional plan or a Cash Balance Plan is used depends upon
the composition of the staff and the objectives of the employer.
The cost of maintaining a retirement program with a Defined Benefit Plan is
higher and contributions are required and can only be adjusted through plan amendments.
For companies willing to accept the
fixed commitment and higher fees, the reward is a substantially higher level of
deposits, frequently exceeding $150,000 for the highest paid employees.
If you would like us to demonstrate this approach for either you or your
client, we can prepare a free Express Study. Just
answer a few questions and we will provide you with a confidentialL analysis of
your best options.
