Am I a Good Candidate For a New Plan?

The government has very generous tax savings opportunities for companies who sponsor and contribute to qualified retirement plans. The following list contains questions to ask business owners to determine if their company is a good candidate for a qualified retirement plan:

1. Does your business provide enough cash flow to support contributions to a retirement plan in addition to annual living expenses?
2. Do you or any of the other owners feel you are behind on retirement savings?
3. Is the ratio of owners to nonunion employees working at least 20 hours per week less than 1 to 10?
4. Is the ratio of owners to nonunion employees working at least 20 hours per week less than 1 to 5?
5. Is the ratio of owners to nonunion employees working at least 20 hours per week less than 1 to 2?
6. Can you support a salary or net earnings from self employment of at least $150,000 per year?
7. Are you, your spouse, your children, and/or your parents the only employees of the company?
8. Are you at least 10 years older than your youngest non-owner employee?
9. Are profits going to be stable enough for the next 3 to 5 years to commit to funding a retirement plan?
10. Is someone at your company willing to spend up to 5 hours per year to deal with retirement plan related issues?
11. Are your employees or potential employees requesting a retirement plan?
12. Do you feel that a retirement plan would help you recruit and retain the best employees?
13. Are you desperately looking for additional tax deductions?

If the answer to the first question is yes and you can answer affirmatively to any four of the remaining twelve questions you are a good candidate for a plan. The higher the score, the better the candidate you are.

Here is an example of the tax savings created by a combination of a 401(k) Profit Sharing Plan and a Cash Balance Plan. Think of this example as your dentist's office or a small law firm. All of the contribution numbers listed below are tax deductible to either the owner or the company. The last two columns are the most important when evaluating the tax benefits of putting a plan like this in place. The far right column is the percentage of contributions going to each employee. Generally with tax rates for high income earners being in the 30%-50% range any percentage greater than 80% makes for a good plan design. The second column from the right is the tax deduction for each person and also the amount of money that will need to be contributed to the plan to get that deduction. In this first example if we assume a 40% combined tax rate for the owner and spouse that would equate to a tax savings of over $105,000 per year after subtracting the employee contributions from the tax savings. Also, the employees of the company are getting a benefit which could be factored into their total pay package.

CONTRIBUTION OPPORTUNITY REPORT FOR A 401(k) PROFIT SHARING PLAN
WITH SUPPLEMENTAL CASH BALANCE PLAN

							SAFE	PROFIT		CASH		TOTAL
DIV		NAME		AGE	COMP	401(K)	HARBOR	SHARING		BALANCE		ALLOCATIONS		PERCENT
HCE'S
1	1	Owner		64	245,000.00	22,000.00	0.00	13,475.00		220,500.00		255,975.00		87.00%
2	2	Spouse		59	24,500.00	22,000.00	0.00	1,506.75		2,450.00		25,956.75		8.82%
NHCE'S
1	3	Employee A		25	26,605.87	0.00	798.18	1,024.32		532.12		2,354.62		0.80%
2	3	Employee B		47	51,616.92	0.00	1,548.51	1,987.25		1,032.34		4,568.10		1.55%
3	3	Employee C		37	18,503.93	0.00	555.12	712.40		370.08		1,637.60		0.56%
4	3	Employee D		26	20,433.90	0.00	613.02	786.70		408.68		1,808.40		0.61%
5	3	Employee E		42	21,664.32	0.00	649.93	834.08		433.29		1,917.30		0.65%
	OWNER HCE'S=				269,500.00	44,000.00	0.00	14,981.75		222,950.00		281,931.75		95.82%
	NHCE'S =				138,824.94	0.00	4,164.76	5,344.75		2,776.51		12,286.02		4.18%
	TOTAL =				408,324.94	44,000.00	4,164.76	20,326.50		225,726.51		294,217.77		100.00%
CONTRIBUTION LIMITATION (GREATER OF 31% AND CASH BALANCE + 6%)								$250,226.01					Profit Sharing	Cash Balance
	DEDUCTIONS AS ILLUSTRATED								Div # 1		Owner Dentists		5.50%	90.00%
	PROFIT SHARING CONTRIBUTION							$24,491.26	Div # 2		Other Owners		6.15%	10.00%
	RECOMMENDED CASH BALANCE CONTRIBUTION*							$225,726.51	Div # 3		Employees		6.85%	2.00%
	TOTAL TAX DEDUCTION (NOT INCLUDING DEFERRALS)							$250,217.77

 

Below this paragraph is an example of the tax savings created by a combination of a 401(k) Profit Sharing Plan and a Traditional Defined Benefit Plan for a business with no employees. Think of this example as a consultant who performs work on the side of his regular job or the spouse of a wealthy executive who has his or her own small business. It can be any business owner who doesn't have any employees and who doesn't need all of the income the business is generating to live on. Plans like this have always been popular and will continue to be as long as business owners with no employees are making money they don't need to pay the bills every year. Keeping money in qualified retirement plans keeps it protected from creditors as well as compounding without the earnings being taxed each year. However, it doesn't keep it from being taxed forever. Some of the money must be withdrawn each year after reaching age 70 ?.

CONTRIBUTION OPPORTUNITY REPORT FOR A 1 PERSON COMPANY 401(k) PROFIT SHARING PLAN
WITH SUPPLEMENTAL DEFINED BENEFIT PLAN
 

							SAFE	PROFIT	DEFINED		TOTAL
DIV		NAME		AGE	COMP	401(K)	HARBOR	SHARING	BENEFIT		ALLOCATIONS	PERCENT
HCE'S
1	1	Owner		40	75,000.00	22,000.00	0.00	4,500.00	48,375.00		74,875.00	100.00%
NHCE'S
None					0.00	0.00	0.00	0.00	0.00		0.00	0.00%
	OWNER HCE'S=				75,000.00	22,000.00	0.00	4,500.00	48,375.00		74,875.00	100.00%
	NHCE'S =				0.00	0.00	0.00	0.00	0.00		0.00	0.00%
	TOTAL =				75,000.00	22,000.00	0.00	4,500.00	48,375.00		74,875.00	100.00%
CONTRIBUTION LIMITATION (GREATER OF 31% AND DEFINED BENEFIT + 6%)								$52,875.00			Profit Sharing	Defined Benefit
	DEDUCTIONS AS ILLUSTRATED								Div # 1	Owners	6.00%	64.50%
	PROFIT SHARING CONTRIBUTION							$4,500.00
	RECOMMENDED DEFINED BENEFIT CONTRIBUTION							$48,375.00
	TOTAL TAX DEDUCTION (NOT INCLUDING DEFERRALS)							$52,875.00

The amounts shown in the two samples above assume the maximum contributions going in for the owners and the minimum for the rest of the employees. The owner may always choose to design the plan with contributions lower than the maximum if they'd like to. These are just two examples of popular plan designs using both a 401(k) plan and some sort of Defined Benefit Plan. There are many more options for any company from those who only want to put in a little money all the way up to large companies looking for multi-million dollar tax deductions.