Not all defined contribution plans (401(k) plans and profit sharing plans) are created equal. The ideal combination of tailored features will have a significant impact on the success of your plan. Additionally, our proactive planning will positively affect the success of your plan.
Colorblind, CPA felt good about their 401(k) profit sharing plan, but wanted to be certain they had the best plan design possible. Their current plan design utilized a safe harbor match contribution (participants who elected to defer received a matching contribution of 100% of the first 3% of compensation deferred plus 50% of the next 2% of compensation deferred). In addition, employees received a 3.25% profit sharing contribution. The total cost of these employer contributions was $92,500. The five partners also received the matching contribution and a profit sharing allocation to bring them to the maximum contribution allowed under the law. Our advice to Colorblind was to change from a safe harbor match to a safe harbor non-elective (3%) contribution. This simple change resulted in savings of over $24,000 with no decrease in the amount allocated to the owner’s accounts.
RE Development, Inc. has a 401(k) plan. Dad and Chip run RE, which was thriving in a thriving industry. As Dad and Chip’s business (and the industry as a whole) began to slow, a look forward to the future year’s budget warranted a closer look. While RE’s matching contribution was discretionary, the formula for allocating it was not. Under the formula, any matching contribution would be allocated based on annual wages and annual 401(k) elective deferrals. RE needed a formula that would allow them to cautiously make matching contributions, while having the ability to easily “turn off” those contributions at any time. The formula was amended to be based solely on the compensation and 401(k) elective deferrals made each payroll date. To allow for calculation and deposit of the matching contributions each payroll date, the plan’s requirement for employment on the last day of the plan year was removed. As the industry continued to slow, RE did elect to discontinue matching contributions after the 1st calendar quarter. They were fortunate to have the flexibility to do so.
Later in the year, RE also found it necessary to downsize much of its staff. The shift in the makeup and ratio of the company’s ownership and staff caused some concern related to their retirement plan. The ratio of account balances held by the company’s ownership relative to the overall ownership may have caused the plan to become top heavy. If this happened, RE would be required to make minimum contributions on behalf of all of the non-owners. In order to avoid this potential required contribution, Dad and Chip were advised to hold-off on making 401(k) elective deferrals in the beginning of the next calendar year until the top heavy determination can be made. Pinnacle has set a task to remind Dad and Chip in December, 2014, to change their elections, effective January 1, 2015, to 0% until further notice.
Banding Together, Inc.
Banding Together, Inc is a corporation made up of what were once six separate physician practices. Before their incorporation, each separate practice maintained its own retirement plan through which key employees at each location received benefits much to their individual liking. However, as the group formed Banding Together, Inc. and began designing its retirement plan, it became difficult to provide benefits via the profit sharing feature similar to those they had received in their prior retirement plans. The group wanted to provide its key employees with some methodology to see increased benefits in the retirement plan (if so desired) without having to worry about the additional testing a profit sharing feature required.
The design that made the most sense for this purpose was the use of two separate types of matching contributions. Using this approach, a key employee (under 50 years of age) earning $265,000 or more in 2015 could elect to defer the maximum $18,000 as a 401(k) salary deferral and would receive two matching contributions totaling $21,200. If any key employee were disinclined to receive total contributions of $39,200 for the year, s/he could simply reduce his/her 401(k) salary deferrals to meet his/her individual retirement goals.
These are just a few examples of the versatility of various plan designs as well as the importance for proactive planning. Also read the tale of two dentists which shows how using a combination of plans can help to reach your retirement plan goals. If this sounds interesting to you, please fill out the form below. Let us build a retirement plan that is as unique as your company!
Contact Our Defined Contribution Plan Team
Pinnacle Plan Design is a third-party administrator (TPA) for employer-sponsored qualified retirement plans. We specialize in retirement plan design, administration and actuarial consulting. Pinnacle has a local presence in Tucson and Phoenix, Arizona (AZ), as well as Houston, Texas (TX) and Columbus, Ohio (OH), and we proudly serve businesses nationwide.