Survey Results of Plan Sponsors Available

CPA's may find it useful to review the results of the annual Plan Sponsor survey conducted by Plan Sponsor magazine - the survey was answered by some 5,000 plan sponsors of various sizes. Some useful comparative statistics are included in the survey results write-up.


http://www.plansponsor.com/MagazineArticle.aspx?id=6442456027

Do not pay much attention to the charts of vendor ratings - many of the good vendors do not have enough responses sent in to show up on the survey and in some cases I suspect a certain amount of "ballot box stuffing" going on by some vendors through active campaigns to get their clients to answer favorably.

2009 and 2010 Safe Harbor Cross Tested Basic Mathematics

For a business owner over age 50, one of the best designs for a 401(k) Plan where there are a number of younger employees (as compared to the age of the owner), would be a Safe Harbor Cross Tested 401(k).

Consider making a 4.42% of pay contribution for the non-owners consisting of a 3% Safe Harbor and a 1.42% additional Profit Sharing.

This will allow the business owner to do $22,000 in Salary Deferrals plus $32,500 in Profit Sharing for the $54,500 limit.  This assumes the business owner is making over $245,000 in salary or income after all contributions and that the allocations pass certain discrimination testing based on projected benefits.

See this very small case study

http://www.401kacademy.com/401kpdf/shctsmallhighearnings.pdf

Should the owner be able to afford more than the $54,500 for themself and the 4.42% contribution for the support staff, consider using a 401(k) Cash Balance Combo Plan where an owner in their 50's might be able to put away an additional $100,000 to $180,000 depending upon their age.

Submit census information consisting of name, date of birth, date of hire, ownership and annual compensation estimate to paul.carlson@plandesign.com for an illustration of what can be done.

Retirement Plan Limits for 2010 same as for 2009

Limits for 2009 and 2010 are the same

Salary deferrals if under age 50: $16,500
Over age 50 (by last day of the Calendar Year) Make-up contribution: $5,500
So, salary deferral limit for someone age 50 or more: $22,000
Annual Additions Limit (from all sources): $49,000
If over age 50, maximum Annual Additions limit: $54,500 (assuming $5,500 in deferrals)
Compensation that can be counted for plan purposes: $245,000
For more limits, see http://www.401kacademy.com/401kpdf/limitationschart.pdf

Introductory Information About New Type of Retirement Plan - the DB(k)

The Pension Protection Act of 2006 added Code Section 414(x) effective for 2010. The type of plan added by PPA of 2006 is called a DB(k) or "eligible combination plan".


The DB(k) melds a 401(k) savings plan with a small Defined Benefit promise. It contains:

(1) A defined benefit equal to 1% of final average pay for each year of the employee's service, with up to 20 years of service counted - so somebody with 20 years of service could earn a 20% of pay retirement benefit;

(2) An automatice enrollment feature for the 401(k) portion. Unless an employee specifically opts out or changes the contribution level, 4% of pay is automatically set as the employee's level of salary deferrals;

(3) An employer match of at least 50% of employee contributions, with a maximum required match of 2% of pay.

As you can see, the new DB(k) is very defined and lacks a certain amount of flexibility, but it might be attractive to certain employers. However, the IRS is just now asking for comments from the pension industry as to these types of plans to help them write the rules pertaining to them. I would guess that regulations will not be published any time soon and therefore none of the retirement plan documents providers will be able to develop plan language to implement these plans until a few months after the regulations are published. So, it might be 2011 before these plans can actually start being utilized.

We will keep you informed about the DB(k) option as it develops.

A Cash Balance 401(k) Plan Combo Case Study

Prospect told us they wanted to continue to use their 401(k) plan for their 42 employees without much change (3% Safe Harbor plus 1.5% Profit Sharing), but that they would be interested in getting more money put away for the Owners and several key people. They gave us a budget of $50,000 additional for two owners; $30,000 for the other two owners and $10,000 each for three key people or $190,000 total. They will want to do more than that when the economy recovers, but that was their budget for 2009.


We included the seven of them for the $190,000 budget and also covered their 10 lowest paid employees and the cost for them to pass all discrimination testing, etc. was only $6,300. So, $190,000 for principals of $196,300 total is 96.8%.

As a result of providing this solution, the financial advisor who brought us this prospect will end up getting the 401(k) plan too which has over $4,000,000 and will provide the investment for the Cash Balance almost $200,000 per year contribution. And in addition, now the advisor has access to some very successful individuals relative to their personal needs.

Cash Balance additions to existing 401(k)'s for highly successful professional plan sponsors is a great way to give them a legitimate tax deduction and to help them save more for the future.  Proactive CPA's should make sure that their high income clients who control their own businesses or professional practices are aware of Cash Balance 401(k) Combo plans and their very large potential contributions
 
You can go here to see how much of a deduction might be possible:
 
Cash Balance 401(k) Combo Deduction Calculator
 
If you would like for us to illustrate to a professional client, how this plan might work, get us a current census of employees (date of hire, date of birth, compensation, ownership percentages) and a printout of their allocations for the last plan year.  Email to paul.carlson@plandesign.com

In Bad Economic Times for a Client, Watch Out for Nasty Top Heavy Minimum Contribution Surprise

For relatively small employers, CPA's need to be aware of a nasty little surprise called "Top Heavy". Often people respond to this statement with "Oh, I know all about the ADP test and how there might have to be refunds of salary deferrals to some of the Highly Compensated Employees."

We are talking about a completely different subject. Suppose a company was really small for a number of years and it made recurring profit sharing contributions for its small staff of mostly key people. Yes, others shared in the Profit Sharing contributions too, but over the years most of them have left the company and have been paid-out or rolled over distributions. The result is that the plan is now "Top Heavy", meaning that the Key Employees have more than 60% of the total account balances. I won't go into it here, but the Key Employee definition is not quite the same as the definition of Highly Compensated Employees. Along the way, probably at the request of the employees, the plan has been modified allowing personal salary deferrals thereby making the plan into a 401(k) plan.

This is not problem as long as times are good and the company continues it generous ways of making Profit Sharing contributions of 3% of pay or more each year. But along comes a recession or difficult business times for the company and the management decides that they will simply skip Profit Sharing contributions for a couple of years. Profit Sharing contributions are, after all, completely discretionary, aren't they? And that is the big surprise!

If a 401(k) Plan is Top Heavy and if ANY of the Key Employees engage in salary deferrals, then the company is going to be faced with making Top Heavy minimum contributions, whether they can afford to or not. Ouch! If any of the Key Employees have made salary deferrals of 3% of pay or more, then the Top Heavy minimum contribution is 3% of the pay of all of the Non-Key Employees. So, for example, if a small company had a payroll of $1,000,000 for all of the Non-Key employees, the Top Heavy minimum contribution would be $30,000.

If the highest rate of salary deferrals is less than 3%, then that percentage becomes the Top Heavy obligation.  For example, let's suppose salary deferrals have already taken place for a couple of months before the client discovers that they are Top Heavy.  Let's further suppose there is only one Key Employee (the owner) and he or she suspends their salary deferrals after doing $1,000 and their pay for the year ends up being $100,000.  So, the salary deferrals is 1% of pay and the Top Heavy minimum contribution becomes 1% of everyone's pay.

When a small business is really struggling to survive in these kind of economic times, the business owner is going to be really upset  when they find out they have to make a Top Heavy minimum contribution that they cannot afford and they are going to blame the TPA, investment advisor and maybe even their CPA for not proactively helping this avoid this problem.  The solution is easy - don't let any Key Employees do salary deferrals for any part of the Top Heavy plan year.

It takes a bit of foward planning to avoid this situation. First, you have to be aware of whether or not the Key Employees might have more than 60% of the total assets as of the last day of a Plan Year - might be hard to know this since the year end accounting may not be available for a few weeks after the year is over. If they do have greater than 60% on the last day of a year, then the next year is Top Heavy. Second, if it appears likely that the plan will be Top Heavy, to avoid the Top Heavy Minimum, you will need to tell all of the Key Employees that you are going to cease their salary deferrals as of the first day of the Top Heavy year. They can do salary deferrals later in the year if it is determined that the company will be able to afford a Profit Sharing contribution of 3% of pay or more for everybody.

Don't forget to tell the person handling payroll to actually cease the deferrals for the Key Employees as of the first day of the new year.

If the plan is close to being Top Heavy, you may want to routinely cease the salary deferrals of all Key Employees at the beginning of each plan year until you can determine if that year is going to be Top Heavy or not.

Cash Balance 401(k) Combo's - Maximizing Contributions and Deductions

Many professionals (surgeons, attorneys, accountants, engineers, successful business owners) would like to put away more than the $54,500 that is allowed in 2009 for a 401(k) plan. With a Cash Balance 401(k) Combo, they might be able to shelter an additional $100,000 to $200,000 per partner or owner without increasing the cost for employees by a large percentage. Think of the employee cost not being worse that 7.5% of compensation plus about $1,000 - and it could be quite a bit less in the right circumstances. Many of these types of firms may already spend that much on contributions for employees in their 401(k) plan, so there may be no increase in costs.

Our TPA firm, Plan Design Consultants, Inc. can work with you to get illustrations for your clients.

Recently Failed ADP Show the Need for New Solutions

Most 401(k) plans are run on a Calendar Year basis. Unless the plan is a Safe Harbor plan, the infamous ADP test is performed in the first couple of months following plan year end. So, most plan sponsors have recently been informed as to whether or not the test was passed. If you are not familiar with the annual ADP test, see our 401k) Primer at http://www.401kacademy.com/401kpdf/401kalternativesprimer.pdf

If it was not passed, then they will have to either return salary deferrals to some of their most important employees or make additional contributions for the Non-Highly Compensated Employees. Either way, the Plan Sponsor is not happy. And that creates an opportunity for us to help your clients take a look at new solutions.
The possible solutions (and it may take several) are adding automatic enrollment, considering a small incentive match, re-energizing the employees by having some really effective enrollment meetings, explaining why now is the ideal time to get a lot of money into to the market at the low point (or is it?), working with a good TPA to see exactly why the test failed and what might be done about it. It might be even time to change the entire program to a new, more exciting vendor - reboot the plan by making some major changes.

Of course, the most obvious solution is to convert the plan into a Safe Harbor plan - see the Primer mentioned above to educate yourself on the Safe Harbor options. The Plan Sponsor will not be able to implement a Safe Harbor in the middle of a year, so that might only work for 2010 at this point.

A proactive CPA who finds out that their important client employees are not able to max out their salary deferrals because of a failed ADP test will encourage their clients to seek new help with their plan.

How To Improve Upon an SEP or SIMPLE

Many small business owners would do much better by using a Safe Harbor Cross Tested 401(k) instead of a SIMPLE or SEP. For example, suppose the business owner of a corporation takes $245,000 in compensation and wants the maxium contribution of $49,000 in an SEP. That would be a 20% of compensation contribution. In an SEP, if you want to put away 20% for the owner, you generally have to contribute 20% of salary for each eligible employee. If you had just two employees making $50,000 each, that would be $10,000 each or $20,000 total in contributions for them.

Alternatively, with a Safe Harbor Cross Tested 401(k), it might be possible to contribute 5% of pay or less for the support staff while still maxing out for the owner. Go to the 401(k) Academy Website and navigate to the Materials page and then take a look at the five case studies that illustrate the concept. The SEP is an okay solution for many companies but the Safe Harbor Cross Tested 401(k) might be a far better solution for many others. Even with only one or two support employees, the savings could be thousands of dollars. In our example, if the contribution was 5% for each employee, the total would be $5,000. This would be $15,000 in savings. Yes, you would have to pay to administer the 401(k) plan, but if that was $2,000 a year you would still have $13,000 per year in savings. For the concept to work, we need about half of the employees to be somewhat younger than the business owner.

http://www.401kacademy.com/supportmaterials.htm

We can do illustrations for your client if you will send us the client's census (date of birth, date of hire, compensation of each employee, hours typically worked).  Email the census to paul.carlson@plandesign.com.