The 401(k) market is one of the fastest growing segments of the insurance industry. Plan designs are becoming more sophisticated and the margins (administrative fees) being charged are gradually being reduced.
Great companies are taking care of their employees by investing in 401(k)s that allow their workers to contribute a portion of their paycheck with pre-tax dollars to a retirement fund. As an employer who matches 401(k) investment contributions you not only increase your employees’ future financial stability, but are seen as having a credible and trustworthy reputation among businesses.
Under a traditional pension plan, workers are paid a fixed rate after retirement. This is usually a percentage of their income at retirement. It is usually based on their number of years of service and salary. The employer decides how the money is invested. When an employee changes jobs, the pension benefits may be lost if the employee has not worked enough years to become “vested”. Moreover, pension plans are intended be continuous. You are expected to make contributions every year whether you have been profitable or not.
Under a 401(k) plan the employee elects how the money is to be invested among the choices offered by the company, such as mutual funds, money market accounts, and other investments such as company stock. By matching or contributing to a 401(k) plan you can help multiply tax-deferred savings for your employees’ future! There is a max 401(k) contribution limit, in addition to a myriad of other factors that we can help you leverage.
In addition, 401K’s are employee deferrals. The company match and or profit sharing contribution is discretionary. You have no obligation to make a contribution.
For smaller employers 401K’s and Profit Sharing plans can be a very tax efficient way to differ money for the owners and provide a benefit for the employees with the tax dollars you save.
Let us show you how you can save money for your retirement and provide a tax free benefit for your employees. Please provide us with your contact information (above) and one of our professionals will contact you to let you know what information we will require to show you if one of these plans will work for you.
We will also analyze which 401K investment provider best meets your situation! Custom Employee Benefits Insurance Services, Inc. has the expertise to assist you with your plan design and administration.
Custom Employee Benefits Insurance Services, Inc., works with our plan administrators to design a 401(k) Plan and Profit Sharing Plan that is the most tax efficient program for your firm. We modify the plan as required to comply with the ever-changing tax laws. We can show you how to use your Profit Sharing Plan instead of a deferred compensation plan for bonuses for your non-highly compensated employees. The contributions you make will be fully deductible to your company, tax deferred to your employees, subject to the vesting schedule of your Profit Sharing Plan, and accessible to your employees for up to 50% of the vested portion of the plan (up to $50,000).
To assure you the best value we request quotes from many investment providers. They include, but are not limited to:
Primary 401(k) AND Profit Sharing Affiliations
- John Hancock
- Mutual of Omaha
- Transamerica, and many more
Employees aged 21 and older are eligible, although they can be younger. Minimum length of service is usually between three and 12 months. Different waiting periods can be established for employee and employer contributions. Special testing rules apply if the waiting period is less than 12 months. Employees who meet eligibility requirements enter the plan at defined dates. The plan will have no less than two entry dates.
Generally, the plan must cover 70% of the non-highly compensated work force. It is possible to cover a smaller group under certain conditions.
Employees may make maximum contribution (deferrals) of lesser of 100% of compensation or $13,000 (combined with any contribution from employer). Employees who have attained age 50 can make an additional $3,000 “catch-up” contribution. Employers may match contributions but this is optional and can be at the discretion of the Plan Sponsor.
- Standard Allocation method – e.g. 3% of compensation
- Tiered Allocation method – e.g. 9% class A, 3% class B
- Safe Harbor Matching and Non-elective contributions can be made as well.
Employees may make maximum contribution (deferrals) of the lesser of 100% of compensation or $17,000 for 2012 (plus any contribution from the employer). Employees who have attained age 50 can make an additional $5,500 “catch-up” contribution as of 2012. Employers may match contributions but this is optional and can be at the discretion of the Plan Sponsor.
Employer contributions can be subject to a vesting schedule. IRS guidelines will dictate the maximum vesting schedule that can be used. Vesting generally includes all years of service. In some situations, only service from the effective date of the plan is considered. The non-vested portion of the participant’s account becomes a forfeiture at a time specified in the plan. Forfeitures may be reallocated to participant’s accounts or used as an employer credit.
PLAN TESTING REQUIREMENTS
The purpose of this test is to ensure that highly compensated employees do not make disproportionately large deferrals compared to non-highly compensated employees (NHC). In essence, the deferrals of the highly compensated employees are controlled by the deferrals of the non-highly compensated employees.
Highly Compensated Employees (HCE’s) are individuals with greater than 5% ownership. This includes spouses, children, parents and grandparents by attribution. They are also employees who earn more than the applicable threshold. This varies by company and is always over $115,000 per year for 2012. When the key employees account values exceed 60% of the total plan’s value, the sponsoring company may be required to make additional minimum contributions. Key employees are defined as follows:
- Individuals with greater than 5% ownership (in current or previous plan year).
- Individuals with greater than 1% ownership with compensation more than the applicable limits.
- Officers with compensation in excess of the applicable threshold.
- Lineal descendents (fathers Sons Daughters Mothers) of Shareholders may be considered highly compensated due to “Attribution”.
Top heavy testing is performed annually at the plan’s year end.
Safe Harbor plans allow the highly compensated employees to contribute to the plan and eliminates discrimination testing.
There are two types of safe harbor contributions:
- You can make a 3% fully vested contribution for each eligible employee, or;
- You can match 100% of the first 3% the employee contributes to the plan plus 50% of the next 2% the employee contributes to the plan.