Plans Designed For Small Business Owners

Example 1

Using a Cash Balance and 401(k) Plan to Focus Significant Benefits on the Principals

A single practitioner dental practice — one dentist and two staff members — has had a 401(k) plan for a number of years. The dentist now wants to increase his contribution, but also wants to continue the 401(k) plan because it is important to his staff. The current design of the 401(k) plan includes salary deferrals, a safe harbor matching contribution and a profit sharing contribution and the dentist’s total contribution each year is the maximum allowable contribution ($53,000 in 2015). The 401(k) plan was redesigned to discontinue the safe harbor matching contribution and replace it with the flat 3% safe harbor contribution. The deferral and profit sharing features remain unchanged. A cash balance plan is added in which pay credits are a percentage of compensation based on employee class — 40% for dentist and 2% for staff. The contribution to the cash balance plan, while actuarially deter- mined, will approximate the amount of the pay credit to each participant for the year. In the 401(k) profit sharing plan, each participant is allocated the 3% safe harbor contribution plus a 3% regular profit sharing contribution for a total of 6% of compensation.

Example 2

Using a Cash Balance and 401(k) Plan to Focus Significant Benefits on the Principals Same Benefit Level to Principals

A small law firm with two attorneys and five employee’s would like to establish a plan in which the attorneys each receive an annual contribution of about $125,000. A cash balance plan was established in which pay credits are a percentage of compensation based on employee class — 35% for attorneys and 2% for one staff member. The contribution to the plan, while actuarially determined, will approximate the amount of the pay credit to each participant for the year. Thus, a cash balance plan can meet the needs of this firm. In addition, a safe harbor 401(k) was added. This was considered a benefit for the staff, and the safe harbor provisions allow the attorneys to maximize their salary deferrals regardless of the level of deferrals made by the staff. This design is not a safe harbor and requires annual non-discrimination testing.

Example 3

Using a Cash Balance and 401(k) Plan to Focus Significant Benefits on the Principals Same Benefit Level to Principals

A small law firm with two attorneys and five employee’s would like to establish a plan in which the attorneys each receive an annual contribution of about $125,000. A cash balance plan was established in which pay credits are a percentage of compensation based on employee class — 35% for attorneys and 2% for the staff members. The contribution to the plan, while actuarially determined, will approximate the amount of the pay credit to each participant for the year. Thus, a cash balance plan can meet the needs of this firm. In addition, a safe harbor 401(k) was added. This was considered a benefit for the staff, and the safe harbor provisions allow the attorneys to maximize their salary deferrals regardless of the level of deferrals made by the staff. This design is not a safe harbor and requires annual non-discrimination testing.

Example 4

Using a Cash Balance and 401(k) Plan a Focus Significant Benefits on the Principals with Different Benefit Levels for the Principals

A medical practice with two physicians and eighteen employee members would like to establish a plan in which one physician receives a contribution of about $125,000 and the other receives a contribution of about $70,000. A cash balance plan was established in which pay credits are based on employee class — $95,000 for Physician 1, $45,000 for Physician 2 and 2.5% of compensation for employees. A safe harbor 401(k) was also established. This plan provides for a non-elective safe harbor contribution of 3% of compensation plus additional profit sharing allocations based on employee class — Physician 1, Physician 2 and employees. In this year, profit sharing contributions (including the 3% safe harbor) are allocated; 3% to physician and 5.5% to employees. This design is not a safe harbor and requires annual non-discrimination testing.

Example 5

Using a Cash Balance and 401(k) Plan to Focus Significant Benefits on the Principals Different Benefit Levels to the Principals

A mid-sized business with two owners and thirty-three employee’s would like to establish a plan in which the principals each receive annual contributions of about $134,000. They currently sponsor a cross-tested 401(k) plan which includes a 3% non-elective safe harbor contribution. They have generally contributed about 8-10% of compensation for the employees and the maximum amount for the principals. A cash balance plan was established in which pay credits are a percentage of compensation based on employee class — 70% for attorneys and 2% for the employees. The cross-tested safe harbor 401(k) plan was continued using the same classes as the cash balance plan. The non-elective safe harbor contribution is provided to the employees only to allow for flexibility in the profit sharing allocation. A profit sharing allocation of 4% was provided to the owners and 11.75% to the employees (including the 3% safe harbor). The cash balance plan is covered by the PBGC. Therefore, the combined plan maximum deduction limits of IRC 404(a)(7) do not apply and the contributions to the profit sharing plan need not be limited.

Example 6

Using a Cash Balance and 401(k) Plan to Focus Significant Benefits on the Principals Flat Dollar Allocations

A physician whose wife works for the practice as his office manager and has eleven employees would like to establish a plan in which the physician and his wife together receive contributions totaling about $165,000. A cash balance plan was established in which pay credits are specified dollar amounts, $85,000 for the physician, $25,000 for the office manager (who is the physician’s spouse) and $850 to each staff member. The safe harbor 401(k) plan is continued using the same classes as the cash balance plan. In this year, allocations of 6% are made to all classes.

Click here to download our Plans Designed For Small Business Owners brochure.