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Steidle Pension Solutions tailors their services to the meet the objectives of the small to mid size business employer. By providing a streamlined process, we simplify plan design, helping to provide a low, flat-rate out-of-pocket price to our clients. 

A small dental practice with a Safe Harbor 401(k) Plan approached Steidle Pension Solutions, LLC (SPS) and inquired about ways to lower the required contributions to non-owner employees while still allowing the owner to maximize his salary deferrals to the Plan.  The Plan used a 3% Safe Harbor Non-Elective contribution so that the owner could make the maximum allowable income deferral contribution and the contribution looked like this:

Name: Age: Compensation for Testing: 401(k) Salary Deferral: 3% Non-Elective     Safe Harbor:
Owner 54 $180,000 $18,000 $5,400
JM 45 $61,000 $2,440 $1,830
CB 28 $44,000 $0 $1,320
DO 22 $36,000 $600 $1,080


The company contribution to non-owner employees was $4,230 with the original Plan design.  The total contribution to the owner was $23,400.  SPS suggested that the Plan Sponsor consider changing from the 3% Non-Elective Safe Harbor contribution to the Basic Safe Harbor Match.  The Basic Safe Harbor Match is a matching contribution of 100% of the participants’ salary deferral up to 3% of pay and 50% of any pay deferred from 3-5% and would allow the owner to continue to make the maximum income deferral contribution.  After the change, the Plan calculation looked like this:

Name: Age: Compensation for Testing: 401(k) Salary Deferral: Basic Safe Harbor Match:
Owner 54 $180,000 $18,000 $7,200
JM 45 $61,000 $2,440 $2,440
CB 28 $44,000 $0 $0
DO 22 $36,000 $600 $600


The Plan Design change not only increased the tax deductible contribution to the owner’s account by $1,800, but also reduced the required contributions to non-owners by $1,190.  The older non-owner participant, who was already saving for her retirement, also received an increase in her company contribution.

Because of the cost reduction, the Employer was able to continue to offer this valuable benefit to his employees.



The 401(k) committee of a small manufacturing firm asked SPS for assistance with their 401(k) Plan design.  The Plan had 72 participants, 16 of which were Highly Compensated Employees (HCE) earning in excess of $120,000.

The Plan had previously failed the 401(k) Average Deferral Percentage (ADP) test and many HCEs had to take back part of their tax deductible contributions to the Plan.  The company did not have the budget for a full Safe Harbor Match, and instead, offered a discretionary match of 50 cents on the dollar to 4% of compensation (maximum 2% of pay).  Prior to the corrective measure of returning contributions to the HCE, the Plan testing looked like this:

Employee Class: Number of Employees in Class: ADP of Class Prior to Corrective Distribution: ADP After Corrective Distribution:
HCE 16 7.8%* 4.2%
Non-HCE 56 2.2% 2.2%

 

*Because of the Test failure, contributions equal to 3.6% of compensation had to be returned to the HCEs so that the average deferral did not exceed 2% + the average deferral of Non-Highly Compensated Employees.  In total, HCEs lost the opportunity to defer more than $70,000 in tax deductible contributions.

SPS reviewed the Plan Design, Documents and Demographics, and made several recommendations.  SPS suggested changing the match formula to 25 cents (25%) on the dollar up to 8% of compensation.  With this formula, the company budget remained stable (2% of pay) and the NHCE were incentivized to increase their savings.  SPS recommended adding a Loan Provision to the Plan.  Because many of the NHCE were young, they were weary of saving into a Plan that they could not access before retirement.  The Loan Provision gave participants the ability to access savings for emergencies or opportunities.

After the Amendments were drafted and announcements distributed, an Employee Educational meeting was held and participants were allowed to change their deferral percentages.  The following year, the Plan passed the ADP Non-Discrimination Test when the deferrals looked like this:

Employee Class: Number of Employees in Class: ADP of Class:
HCE 16 8.1%*
Non-HCE 56 6.4%

 

*Because the ADP of the HCE did not exceed the ADP of the NHCE by more than 2%, the HCE did not have to take back any of their tax deductible contributions to the Plan and the ADP Compliance Test passed.  NHCE were incentivized to save more now which will lead to better retirement outcomes in the future. 



A 57-year-old small business owner with one part-time employee working 25 hours per week asked SPS to review her SEP-IRA Retirement Plan because she was concerned she was not saving enough for retirement even though she was maximizing her SEP-IRA contribution.  Her previous year’s SEP-IRA contribution looked like this:

Name: Age: Compensation for Testing: SEP-IRA Contribution:
Owner 57 $95,000 $23,750
SV 40 $31,000 $7,750


SPS recommended, in lieu of the SEP, installing a 401(k) Profit Sharing Plan with a Safe Harbor provision and New Comparability formula for the Profit Sharing Contribution allocation.  With this Plan Design, the contribution calculation ultimately looked like this:

Name: Age: Compensation for Testing: 401(k) Salary Deferral: SH & PSP Contribution: Total:
Owner 57 $95,000 $24,000 $26,850 $47,750
SV 40 $31,000 $930 $3,100 $4,030

 

SPS helped the Plan Sponsor increase her tax deductible retirement contribution to her own account by $24,000 while allowing the cost of the required contribution to the non-owner participant to be reduced by $3,720.

The non-owner employee now had the added benefit of being able to make pre-tax contributions from his pay.  Salary Deferral was not available with the SEP Plan.  The Plan Sponsor added a Loan Provision to the 401(k) Plan, which was also not available with the SEP.  This allowed the employee to access his retirement savings without penalty to buy his first home.  SEP assets can be transferred into a 401(k) Plan via a tax free rollover if the Plan Document of the Plan receiving the assets provides for it.

The names, ages, compensation and other information in the above case studies have been altered to protect confidentiality.  Plan limits have been updated to 2016 limits to provide current examples.  Prepared by Keith Steidle, QKA.

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