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.
Thursday, April 30, 2009
Tuesday, April 28, 2009
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.
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.
Thursday, April 16, 2009
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.
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.
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