One of the benefits of being the business owner is that you get to decide what kind of retirement plan to offer. If you’re like most business owners in the early years you are doing all that you can to keep the company afloat. Retirement planning typically takes a backseat to more immediate concerns.
Getting your retirement savings back on track
Fortunately there are ways to potentially increase your retirement savings down the road. Let’s examine a hypothetical case with a two owner firm where the owners are over 50 years old. The Employee Retirement Income Security Act allows them to defer up to $56,000 in a combination of 401(k) and profit sharing contributions. The road to getting there isn’t so straight forward. (There’s yet another opportunity to save more than that which we will discuss in a future blog.)
They start by taking advantage of the 401k deferral and the catch-up contribution ($22,500). Next, they evaluated their options for allocating their profit sharing contributions-equal shares or new comparability. Using the equal shares method, in order to reach the individual max retirement savings of $56,000 they would have to provide a 10.3% share to all employees.
Finding the Right Retirement Savings Design for You
The “New Comparability” method allows for different profit sharing allocations based on each employee’s classification within the plan. Each individual’s profit sharing is based on their classification and age. Using an assumed rate of interest, the future value of the contribution is determined for each participant at the plan’s normal retirement or testing age. This future value (benefit) is then compared to demonstrate that plan is not discriminatory in favor of the owners and other “highly-compensated” employees. In this case, the owner’s still receive a 10.3% share, but the employee allocation is reduced to 5%.
This is but one of the profit sharing retirement savings methods available to owners to evaluate. It is important to seek the advice of a qualified retirement plan administrator to find the one that best meets your objectives. When combined with a Safe Harbor 401(k), the plan sponsor achieves the contribution flexibility they desire and their employees have the ability to chart their own retirement future through retirement savings from elective deferrals.