I’m always happy when someone is taking steps to provide for their future through a retirement plan. I’m often surprised, though, about how many times I learn that the business owner isn’t getting all that he or she might be able to out of their plan. They may have rushed to put in a plan to help reduce their taxes one year, or they may have put in a plan to appease their employees. In these circumstances, I love the opportunity to illustrate to clients how we might be able to create some powerful retirement solutions for the business owner using pension administration design techniques.
Case study 1 – small professional practice
The professional put in a Simplified Employee Pension (SEP-IRA) last year to help reduce income taxes. He was able to contribute 25% of his pay to the plan. This year, 2 employees will become eligible for the SEP. If he contributes 25% of his pay to his SEP this year, he will also have to contribute 25% of pay to each of his employees.
We showed him how the current SEP would compare to a 401(k) profit sharing plan. We were able to reduce the contribution being allocated to his employees from $11,600 in the SEP to $2,700 in the 401(k) while still providing the professional with his maximum $50,000 annual contribution.
Case study 2 – law firm partnership
Three attorneys are partners in a boutique firm. They have an associate attorney, and five support staff. The partners range in age from 42-62. The youngest of the partners is putting kids through private school, and has a lot of personal expenses. The oldest of the partners is looking to save as much as possible for her retirement. Their current plan calls for a contribution that allocates the same percentage of pay to all employees with a small additional contribution for pay over $110,100.
We pulled out our pension administration toolkit and recommended that they restructure their existing plan, and add a pension plan called a Cash Balance plan. Under the current 401(k) all employees can save what they wish out of their own paycheck. There is a 3% Safe Harbor contribution to all employees, and a 4.5% profit sharing contribution to the five support staff. Under the Cash Balance plan the oldest partner elects to have a contribution of $150,000, the youngest partner elects $50,000, and the third partner elects $100,000. The associate attorney is excluded, and the staff people receive $1,000 each.
Case study 3 – service company
A family-owned company has about 150 employees, a majority of which are covered by a collective bargaining agreement. The company provides a 401(k) plan with a match, but many of the young employees do not participate. The family members are limited as to how much they can put into the plan due to the low participation rates of the employees
Our solution to this pension administration challenge is to perform the 401(k) testing for the non-union employees only. The Regulations allow us to exclude union employees from compliance testing. As a result, we were able to increase the contributions available to the family members without any additional cost to the company.
Pension administration is certainly a science, but we like to bring some artistic retirement solutions to the table for our clients. When the plan is designed to provide the desired level of contributions to the business owner(s), provide an opportunity for the employees to save for their future, all for a cost that makes sense to the company, we have a win-win design.
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