This article is a continuation of our most recent blog post, "The Best Pension Plan for each Company Type - Part 1." We are going beyond just plan types, but into situational solutions to give you a glimpse into what we consider when discussing plan design with a business owner.

RESTAURANTS or RETAIL ORGANIZATIONS

Some companies have a lot of staff that is not very highly paid, and that turns over with regularity.  These companies often have trouble passing 401(k) compliance testing that compares the rate of deferrals of the Highly Compensated Employees (owners), and the staff.  The best pension plan may be one of two different options that we often introduce to owners of these companies:

1. SIMPLE 401(k).  For a relatively small employer contribution, the SIMPLE 401(k) offers the employees to make an elective deferral of $11,500.  The company makes a matching contribution of 3% of pay to those who defer at least 3% of their pay; or
2. 401(k) plan excluding Highly Compensated Employees.  If the Highly Compensated Employees (owners) are excluded from the plan, then the business owner can have a plan available for his employees without having to make any employer contributions. 

The SIMPLE 401(k) has the advantage of a longer eligibility period (2-years), but there is no hours restriction for eligibility.  All employees, including the owners, can participate at the start of their third year of employment.

Since the 401(k) plan in option 2 excludes the Highly Compensated Employees the advisor may recommend a non-qualified deferred compensation plan or other cash incentive plan for the Highly Compensated Employees. 

NON-PROFITS

Non-profit companies that have §501(c)(3) status have several options for retirement.  The best pension plan choice for them might depend on their demographics.

1. 403(b) – These are individual account plans that allow for elective deferrals, they can be designed to allow for pre-tax and/or Roth deferrals.  Deferral-only plans are NOT subject to ERISA, so there is no testing or Form 5500 filing necessary.
2. ERISA 403(b) – If the agency makes a contribution to the account of the employees, then testing and filing requirements will apply.  This means that all accounts registered to the name of the plan must be reconciled and included on the Form 5500 filing, and if the agency has more than 100 employees eligible for the plan, they will also have a CPA audit requirement. 
3. 401(k) – Many large agencies that would have an audit requirement for their 403(b) opt for a 401(k) plan instead.  The trust established by a 401(k) plan makes the accounting, reporting, and potential audit much more manageable
4. 457(b) – In some cases, the executive director of the non-profit has her contributions restricted due to testing requirements.  The 457(b) allows for another $17,500 contribution limit that can be funded by the employer or employee or both.  This is a non-qualified plan, but it sometimes offers a creative and simple solution to testing challenges.

If you have a non-profit client who would like to explore the different options, click here for more information.

COMPANY IN TRANSITION

A strong company can continue to be strong even in transition.  It is important for the business owner to consider its alternatives in advance for the transition to be smooth.  The best pension plan to transition the company to the employees may be an Employee Stock Ownership Plan (ESOP). 

ESOPs work for many different sized companies, but the ones that we work with are typically between 50-100 employees.  The steps for a leveraged transaction are summarized here:

1. The company hires an independent valuation firm to provide a stock price. 
2. The Plan arranges to borrow money from a bank to buy the shares from the departing shareholder at the stock price determined by the independent valuation firm.  The Company guarantees this loan.
3. The Plan uses the money from the loan to buy the shares from the departing shareholder.  These shares are held in suspense and released as the loan is paid off.
4. The company makes deductible profit sharing contributions to the Plan in cash. 
5. The plan contributions are allocated to the Plan participants.
6. The Plan uses the cash to pay back the bank.  As the bank loan is paid, the cash in the participant accounts is exchanged for shares that are in suspense.

ESOPs are extremely complicated vehicles that involve significant testing and valuation every year.  They are the only way that a company can deduct both principal and interest paid on a loan.  If a company is 100% owned by an ESOP, and the company is an S-Corp, then since all taxes pass through to the shareholders and the shareholder is a tax exempt entity (ESOP), then the company can completely eliminate corporate taxes!  We are just touching the surface with the description outlined here.  Click here if you would like to learn more about ESOPs and how you or your client may be able to take advantage of this vehicle.

SUMMARY

There is so much more to finding the best pension plan for your clients than 401(k).  At Benefit Resources we pride ourselves in working with our advisor partners to help them truly find the right solution in every situation.  We can also administer every type of plan we have discussed here, so we will continue to provide the service and oversight that is so critical to a successful plan.  Click here and we will schedule a call so that you can learn more about our services and how we can help you build your retirement plan assets under management.