Advanced Safe Harbor 401(K) Plan Designs (For The Financial Advisor)

Copyright (C) 2012 Richard A. PerryCopyright (C) 2012 Richard A. Perry

Advanced Safe Advanced Safe Harbor 401(k) Plan Harbor 401(k) Plan

DesignDesign((for the Financial Advisorfor the Financial Advisor))

Richard A. Perry, ChFC, QPA, QPFC, AIFARichard A. Perry, ChFC, QPA, QPFC, AIFA®®

CIPC Systems, Inc.CIPC Systems, Inc.250 Hampton Street250 Hampton StreetAuburn, MA 01501Auburn, MA 01501

FOR FINANCIAL PROFESSIONAL USE ONLY FOR FINANCIAL PROFESSIONAL USE ONLY - NOT FOR DISTRIBUTION TO THE PUBLIC- NOT FOR DISTRIBUTION TO THE PUBLIC

DisclaimerDisclaimer

This presentation may cause: Dizziness; drowsiness (including This presentation may cause: Dizziness; drowsiness (including daytime drowsiness); "drugged" feeling; dry mouth; headache; daytime drowsiness); "drugged" feeling; dry mouth; headache; nausea; nose or throat irritation; sluggishness, stomach upset, nausea; nose or throat irritation; sluggishness, stomach upset, or weakness. Seek medical attention right away if any of these or weakness. Seek medical attention right away if any of these

SEVERE side effects occur: Severe allergic reactions (rash; SEVERE side effects occur: Severe allergic reactions (rash; hives; itching; difficulty breathing; tightness in the chest; hives; itching; difficulty breathing; tightness in the chest;

swelling of the hands, legs, mouth, face, lips, eyes, throat, or swelling of the hands, legs, mouth, face, lips, eyes, throat, or tongue; throat closing; unusual hoarseness); abnormal tongue; throat closing; unusual hoarseness); abnormal

thinking; behavior changes; chest pain; confusion; decreased thinking; behavior changes; chest pain; confusion; decreased coordination; difficulty swallowing or breathing; fainting; fast coordination; difficulty swallowing or breathing; fainting; fast or irregular heartbeat; hallucinations; memory problems (eg, or irregular heartbeat; hallucinations; memory problems (eg,

memory loss); mental or mood changes (eg, aggression, memory loss); mental or mood changes (eg, aggression, agitation, anxiety); new or worsening depression; severe agitation, anxiety); new or worsening depression; severe

dizziness; shortness of breath; suicidal thoughts or actions; dizziness; shortness of breath; suicidal thoughts or actions; vision changes.vision changes.


ObjectivesObjectives

Understand plan design to better advise:Understand plan design to better advise: ProspectsProspects ClientsClients

Types of designs:Types of designs: Permitted Disparity (Social Security Integration) Permitted Disparity (Social Security Integration) Age-WeightedAge-Weighted Cross TestedCross Tested Triple Stacked MatchTriple Stacked Match

Not to become a TPANot to become a TPA


Safe Harbor 401(k) PlansSafe Harbor 401(k) Plans

Small Business Job Protection Act of Small Business Job Protection Act of 1996 (“SBJPA”)1996 (“SBJPA”)

Effective post-1998 plan yearsEffective post-1998 plan years That is, plan years beginning on or after That is, plan years beginning on or after

January 1, 1999January 1, 1999

Small Plans Small Plans Large PlansLarge Plans

McDonald’sMcDonald’s


401(K) Plan Issues401(K) Plan Issues

Average Deferral Percentage Test Average Deferral Percentage Test (ADP)(ADP)

IRC §401(k)IRC §401(k)

Average Contribution Percentage Test Average Contribution Percentage Test (ACP)(ACP)

IRC §401(m)IRC §401(m)

Top HeavyTop Heavy IRC §416(g)(1)IRC §416(g)(1) EGTRRA (Top Heavy Exemption)EGTRRA (Top Heavy Exemption)


401(k) Plan Limits – 401(k) Plan Limits – IRC §402(g)(1)IRC §402(g)(1)

$17,000 (2012)$17,000 (2012) Indexed for Cost of Living increasesIndexed for Cost of Living increases $5,500 Catch-Up provisions (2012)$5,500 Catch-Up provisions (2012)

Age 50 or older at any time during the yearAge 50 or older at any time during the year


ADP & ACP TestADP & ACP Test

Highly Compensated Employees (HCEs)Highly Compensated Employees (HCEs) Owns Owns more thanmore than 5%5% of the voting shares of of the voting shares of

the company stock (includes family the company stock (includes family attribution)attribution)

Earnings in excess of $115,000 (2012)Earnings in excess of $115,000 (2012) Earnings indexed for Cost of Living increasesEarnings indexed for Cost of Living increases

May be limited to top 20% of employees (by May be limited to top 20% of employees (by compensation)compensation)

Look back yearLook back year



Non Highly Compensated Employees Non Highly Compensated Employees (NHCEs)(NHCEs) All other employeesAll other employees



Basic TestBasic Test Average deferral for HCEs no more than Average deferral for HCEs no more than

1.25% of average deferral for NHCEs1.25% of average deferral for NHCEs

Alternate TestAlternate Test Average deferral for HCEs no more than Average deferral for HCEs no more than

twice that of NHCEs (limit to 2% spread)twice that of NHCEs (limit to 2% spread)



NHCE AverageNHCE Average HCE MaximumHCE Maximum

1%1% 2%2%

2%2% 4%4%

3%3% 5%5%

4%4% 6%6%

5%5% 7%7%

6%6% 8%8%

7%7% 9%9%

8%8% 10%10%

9%9% 11.25%11.25%

10%10% 12.50%12.50%

Tests Identical

Alternate Test

Basic Test


Top Heavy PlansTop Heavy Plans

More than 60% of the benefits accrue to Key More than 60% of the benefits accrue to Key EmployeesEmployees

Owns Owns 5% or more5% or more of the stock of the business (including of the stock of the business (including family attribution rules)family attribution rules)

1% owner earning in excess of $150,000 (not indexed)1% owner earning in excess of $150,000 (not indexed) Officer and earns in excess of $165,000 (indexed) (2012)Officer and earns in excess of $165,000 (indexed) (2012)

Minimum required contribution for non-Key Minimum required contribution for non-Key Employees:Employees: 3% of compensation, or 3% of compensation, or If less, the amount given to the Key Employee If less, the amount given to the Key Employee

with the highest allocation rate.with the highest allocation rate.


Safe Harbor 401(k) PlanSafe Harbor 401(k) Plan

AdvantagesAdvantages No ADP or ACP TestingNo ADP or ACP Testing HCE deferral certaintyHCE deferral certainty No corrective No corrective

distributions or reportingdistributions or reporting Can be used to satisfy Can be used to satisfy

Top Heavy requirementsTop Heavy requirements

DisadvantagesDisadvantages Obligates employer to a Obligates employer to a

contributioncontribution


Top Heavy ExemptionTop Heavy Exemption

Contributions consist solely of:Contributions consist solely of: Elective DeferralsElective Deferrals ADP Safe Harbor ContributionsADP Safe Harbor Contributions Matches that satisfy ACP safe harbor rulesMatches that satisfy ACP safe harbor rules

Cannot consider deferrals in excess of 6% of safe harbor Cannot consider deferrals in excess of 6% of safe harbor compensation.compensation.

Rate of match cannot increase as deferrals increase.Rate of match cannot increase as deferrals increase. No HCE can have a rate of match in excess of the rate of No HCE can have a rate of match in excess of the rate of

match of match of anyany NHCE. NHCE. Discretionary match amount cannot exceed 4% of Safe Discretionary match amount cannot exceed 4% of Safe

Harbor Compensation.Harbor Compensation.


Top Heavy ExemptionTop Heavy Exemption

Top Heavy Exemption does not apply Top Heavy Exemption does not apply if:if: Forfeitures are allocated to accountsForfeitures are allocated to accounts Nonelective discretionary contributions Nonelective discretionary contributions

are allocatedare allocated Longer eligibility is required for the Safe Longer eligibility is required for the Safe

Harbor contribution that elective deferralsHarbor contribution that elective deferrals



Non-elective contributionNon-elective contribution QNECQNEC Flexible Safe Harbor PlanFlexible Safe Harbor Plan

Plan document states plan may be amended Plan document states plan may be amended during the year (at least 30 days prior to plan during the year (at least 30 days prior to plan year end) to become safe harboryear end) to become safe harbor

Supplemental notice requiredSupplemental notice required

Eligible matching contributionEligible matching contribution



Non-elective contribution equal to 3% Non-elective contribution equal to 3% of compensationof compensation All employees eligible by age and serviceAll employees eligible by age and service Employee need not make elective deferral Employee need not make elective deferral

contributioncontribution



Matching contribution equal to at least:Matching contribution equal to at least: Basic Safe Harbor MatchBasic Safe Harbor Match

100% of the first 3% of an employee’s elective 100% of the first 3% of an employee’s elective deferrals, plusdeferrals, plus

50% of the next 2% of an employee’s elective 50% of the next 2% of an employee’s elective deferralsdeferrals

Enhanced Safe Harbor MatchEnhanced Safe Harbor Match 100% of the first 4% of an employee’s elective 100% of the first 4% of an employee’s elective

deferralsdeferrals

Safe Harbor 401(k) PlanSafe Harbor 401(k) PlanEmployee Elective Employee Elective

DeferralDeferral““Basic” Safe Basic” Safe

Harbor MatchHarbor Match

““Enhanced” Safe Enhanced” Safe Harbor MatchHarbor Match

1%1% 1%1% 1%1%

2%2% 2%2% 2%2%

3%3% 3%3% 3%3%

4%4% 3.5%3.5% 4%4%

5%5% 4%4% 4%4%

6%6% 4%4% 4%4%

7%7% 4%4% 4%4%

8%8% 4%4% 4%4%

9%9% 4%4% 4%4%

10%10% 4%4% 4%4%


Match vs. Non-ElectiveMatch vs. Non-Elective

MatchMatch No employer contribution No employer contribution

if employee does not if employee does not deferdefer

Possible lower employer Possible lower employer costscosts

Higher employer cost if Higher employer cost if most employees defer at most employees defer at maximummaximum

HCE contribution HCE contribution flexibilityflexibility

““Stacking” match may Stacking” match may allow greater HCE allow greater HCE deferrals at lower costsdeferrals at lower costs

Non-ElectiveNon-Elective Possible higher costs – Possible higher costs –

all employees get at least all employees get at least 3%3%

Costs more predictableCosts more predictable May use rate group May use rate group

testingtesting Minimum gateway in Minimum gateway in

cross tested planscross tested plans


Safe Harbor Plan DesignsSafe Harbor Plan Designs

Increase contributions for owners and Increase contributions for owners and key employees:key employees: Permitted Disparity (Social Security Permitted Disparity (Social Security

integration)integration) Age-Weighted PlansAge-Weighted Plans Cross Tested PlansCross Tested Plans Triple Stacked MatchTriple Stacked Match


Annual Additions Limit –Annual Additions Limit –IRC §415(c)(1)(A)IRC §415(c)(1)(A)

2012 Limits2012 Limits Lesser of:Lesser of:

$50,000 ($55,500 if age 50 or older*)$50,000 ($55,500 if age 50 or older*) 100% of compensation100% of compensation

* Using $5,500 “catch-up” amount* Using $5,500 “catch-up” amount


Deferral & Match (Only)Deferral & Match (Only)

NameName

Gross Gross CompensationCompensation DeferralsDeferrals

Safe Harbor Safe Harbor MatchMatch

Total Total AllocationAllocation

Owner 1Owner 1 $250,000$250,000 $22,500$22,500 $10,000$10,000 $32,500*$32,500*

Owner 2Owner 2 $250,000$250,000 $17,000$17,000 $10,000$10,000 $27,000*$27,000*

Employee AEmployee A $50,000$50,000 $2,500$2,500 $2,000$2,000 $4,500$4,500

Employee BEmployee B $45,000$45,000 $2,000$2,000 $1,675$1,675 $3,675$3,675

Employee CEmployee C $40,000$40,000 $1,500$1,500 $1,350$1,350 $2,850$2,850

Employee DEmployee D $35,000$35,000 $0$0 $0$0 $0$0

TotalsTotals $670,000$670,000 $45,500$45,500 $25,025$25,025 $70,525$70,525

*Each HCE $23,000 less than allowed under IRC §415(c)*Each HCE $23,000 less than allowed under IRC §415(c)


Safe Harbor 401(k) with Safe Harbor 401(k) with Integrated Profit SharingIntegrated Profit Sharing

NameName

Gross Gross Comp.Comp. DeferralsDeferrals


IntegratedIntegrated

Profit Profit SharingSharing


Owner 1Owner 1 $250,000$250,000 $22,500$22,500 $10,000$10,000 $23,000$23,000 $55,500$55,500

Owner 2Owner 2 $250,000$250,000 $17,000$17,000 $10,000$10,000 $23,000$23,000 $50,000$50,000

Employee AEmployee A $50,000$50,000 $2,500$2,500 $2,000$2,000 $2,895$2,895 $7,395$7,395

Employee BEmployee B $45,000$45,000 $2,000$2,000 $1,675$1,675 $2,606$2,606 $6,281$6,281

Employee CEmployee C $40,000$40,000 $1,500$1,500 $1,350$1,350 $2,316$2,316 $5,166$5,166

Employee DEmployee D $35,000$35,000 $0$0 $0$0 $2,027$2,027 $2,027$2,027

TotalsTotals $670,000$670,000 $45,500$45,500 $25,025$25,025 $55,844$55,844 $126,369$126,369

Total employee cost of $14,869Total employee cost of $14,869


Safe Harbor 401(k) with Safe Harbor 401(k) with Integrated Profit SharingIntegrated Profit Sharing

Using safe harbor matchUsing safe harbor match Could use non-elective (QNEC) to satisfy Could use non-elective (QNEC) to satisfy

safe harborsafe harbor Need to allocate QNEC before integrated profit Need to allocate QNEC before integrated profit

sharing sharing


Cross Tested Profit Sharing Cross Tested Profit Sharing FormulasFormulas

Cross Tested Plan Formulas:Cross Tested Plan Formulas: Age-WeightedAge-Weighted Cross-TestedCross-Tested

Classification FormulasClassification Formulas New ComparabilityNew Comparability ““Super” IntegratedSuper” Integrated



Allowed under IRC §401(a)(4)Allowed under IRC §401(a)(4) Precursor was Rev. Ruling 81-202Precursor was Rev. Ruling 81-202

In many instances replace integrated In many instances replace integrated formulasformulas

Since EGTRRA they are allowed in Since EGTRRA they are allowed in prototype plan documentsprototype plan documents

Typical designs are:Typical designs are: Age weighted formulasAge weighted formulas Classification formulasClassification formulas


Cross Tested Profit Sharing PlansCross Tested Profit Sharing Plans

IRC §401(a)(4)IRC §401(a)(4) An employee benefit plan shall not An employee benefit plan shall not

discriminate on the basis of benefits, discriminate on the basis of benefits, rights or features.rights or features.

Treasury Regulation 1-401(a)(4)-1Treasury Regulation 1-401(a)(4)-1 300+ pages300+ pages


Cross Tested Profit Sharing PlansCross Tested Profit Sharing Plans

IRC §401(a)(4)IRC §401(a)(4) ““A trust created or organized in the United States and A trust created or organized in the United States and

forming part of a stock bonus, pension, or profit sharing forming part of a stock bonus, pension, or profit sharing plan of an employer for the exclusive benefits of its plan of an employer for the exclusive benefits of its employees or their beneficiaries shall constitute a qualified employees or their beneficiaries shall constitute a qualified trust under this section if the contributions or benefits trust under this section if the contributions or benefits provided under the plan do not discriminate in favor of provided under the plan do not discriminate in favor of highly compensated employees (within the meaning of highly compensated employees (within the meaning of §414(q)). For purposes of this paragraph, there shall be §414(q)). For purposes of this paragraph, there shall be excluded from consideration employees described in excluded from consideration employees described in §410(b)(3)(A) and (C).”§410(b)(3)(A) and (C).”

Treasury Regulation 1-401(a)(4)-1Treasury Regulation 1-401(a)(4)-1 300+ pages300+ pages



GatewaysGateways Broadly Available Allocation RatesBroadly Available Allocation Rates Gradual Age/Service SchedulesGradual Age/Service Schedules



GatewaysGateways Treasury Regulation 1.401(a)(4)-2(c)(2)Treasury Regulation 1.401(a)(4)-2(c)(2) Allocation rate for Allocation rate for eacheach benefitingbenefiting NHCE must be NHCE must be

greater than or equal to the lessor of:greater than or equal to the lessor of: 1/3 the highest allocation rate of any HCE benefiting 1/3 the highest allocation rate of any HCE benefiting

under the planunder the plan 5% of IRC §415(c)(3) pay5% of IRC §415(c)(3) pay

Can use any IRC §414(s) definition of compensationCan use any IRC §414(s) definition of compensation Most commonly use W-2 wagesMost commonly use W-2 wages



Broadly Available Allocation RatesBroadly Available Allocation Rates Each allocation rate must meet the Ratio Each allocation rate must meet the Ratio

Percentage Test or both parts of the Percentage Test or both parts of the nondiscriminatory classification testnondiscriminatory classification test

Assuming plan’s testing group meets Average Assuming plan’s testing group meets Average Benefits Percentage Test (ABPT) this design Benefits Percentage Test (ABPT) this design would pass the general test on a would pass the general test on a contributioncontribution basisbasis

Therefore, no need to cross-testTherefore, no need to cross-test Very limited applicabilityVery limited applicability



Gradual Age/Service SchedulesGradual Age/Service Schedules Each band not greater than the prior band by more than 5% Each band not greater than the prior band by more than 5%

nor twice that prior bandnor twice that prior band Ratio of band to preceding band cannot exceed ration of the Ratio of band to preceding band cannot exceed ration of the

two immediately preceding bandstwo immediately preceding bands Minimum allocations (for example Top Heavy) generally Minimum allocations (for example Top Heavy) generally

permitted as long as contribution to lowest band is at least 1%permitted as long as contribution to lowest band is at least 1% Each band (other than the highest) must be the same lengthEach band (other than the highest) must be the same length If lowest band starts at age 25 it can be deemed to start at any If lowest band starts at age 25 it can be deemed to start at any

prior age and still satisfy the same length requirementprior age and still satisfy the same length requirement


Cross Tested Profit Sharing Cross Tested Profit Sharing Formulas Formulas

Gradual Age/Service ScheduleGradual Age/Service Schedule

AgeAge ContributionContribution % Difference% Difference RatioRatio

< 28< 28 1.25%1.25% N/AN/A N/AN/A

28 – 3528 – 35 2.50%2.50% 1.25%1.25% 200%200%

36 – 4336 – 43 5.00%5.00% 2.50%2.50% 200%200%

44 – 5144 – 51 10.00%10.00% 5.00%5.00% 200%200%

52 – 5952 – 59 15.00%15.00% 5.00%5.00% 150%150%

≥ ≥ 6060 20.00%20.00% 5.00%5.00% 133%133%



Gradual Age/Service SchedulesGradual Age/Service Schedules Works well for:Works well for:

Transient populationsTransient populations Small groupsSmall groups

Can reduce staff contributions to:Can reduce staff contributions to: Nearly 3% if Top HeavyNearly 3% if Top Heavy Below 3% if not Top HeavyBelow 3% if not Top Heavy

Schedule must be specified in plan Schedule must be specified in plan documentdocument


Safe Harbor 401(k) with Age Safe Harbor 401(k) with Age Weighted Profit SharingWeighted Profit Sharing

NameName



Age Age WeightedWeighted



Owner 1Owner 1 $250,000$250,000 $22,500$22,500 $10,000$10,000 $23,000$23,000 $55,500$55,500

Owner 2Owner 2 $250,000$250,000 $17,000$17,000 $10,000$10,000 $6,770$6,770 $33,700$33,700



Employee CEmployee C $40,000$40,000 $1,500$1,500 $1,350$1,350 $479$479 $3,329$3,329

Employee DEmployee D $35,000$35,000 $0$0 $0$0 $948$948 $948$948

TotalsTotals $670,000$670,000 $45,500$45,500 $25,025$25,025 $39,950$39,950 $110,405$110,405



Safe Harbor 401(k) with Age Safe Harbor 401(k) with Age Weighted Profit SharingWeighted Profit Sharing

NameName



Age Age WeightedWeighted



Owner 1Owner 1 $250,000$250,000 $22,500$22,500 $10,000$10,000 $23,000$23,000 $55,500$55,500

Owner 2Owner 2 $250,000$250,000 $17,000$17,000 $10,000$10,000 $6,770$6,770 $33,700$33,700



Employee CEmployee C $40,000$40,000 $1,500$1,500 $1,350$1,350 $479$479 $3,329$3,329

Employee DEmployee D $35,000$35,000 $0$0 $0$0 $948$948 $948$948

TotalsTotals $670,000$670,000 $45,500$45,500 $25,025$25,025 $39,950$39,950 $110,405$110,405



Safe Harbor 401(k) with Cross Safe Harbor 401(k) with Cross Tested Profit SharingTested Profit Sharing

NameName



Cross Cross TestedTested



Owner 1Owner 1 $250,000$250,000 $22,500$22,500 $10,000$10,000 $23,000$23,000 $55,500$55,500

Owner 2Owner 2 $250,000$250,000 $17,000$17,000 $10,000$10,000 $23,000$23,000 $50,000$50,000





TotalsTotals $670,000$670,000 $45,500$45,500 $25,025$25,025 $51,950$51,950 $122,475$122,475



Safe Harbor 401(k) with Cross Safe Harbor 401(k) with Cross Tested Profit SharingTested Profit Sharing

NameName



Cross Cross TestedTested



Owner 1Owner 1 $250,000$250,000 $22,500$22,500 $10,000$10,000 $23,000$23,000 $55,500$55,500

Owner 2Owner 2 $250,000$250,000 $17,000$17,000 $10,000$10,000 $23,000$23,000 $50,000$50,000





TotalsTotals $670,000$670,000 $45,500$45,500 $25,025$25,025 $51,950$51,950 $122,475$122,475



Stacked Match Formulas - Stacked Match Formulas - ObjectivesObjectives

Provide HCEs with contributions totaling the Annual Provide HCEs with contributions totaling the Annual Additions Limit – IRC §415(c)(1)(A)Additions Limit – IRC §415(c)(1)(A)

Limit the plan contributions to elective deferrals and Limit the plan contributions to elective deferrals and matching contributions which satisfy ADP and ACP matching contributions which satisfy ADP and ACP safe harborssafe harbors

Qualify the plan for the Top Heavy exemptionQualify the plan for the Top Heavy exemption Impose a 6-year graded vesting schedule to the Impose a 6-year graded vesting schedule to the

greatest extent possiblegreatest extent possible Maximize employer contribution flexibility as much Maximize employer contribution flexibility as much

as possibleas possible Minimize employer contribution to NHCEs as much Minimize employer contribution to NHCEs as much

as possibleas possible


Triple Stacked MatchTriple Stacked Match

Four part contributionFour part contribution Employee Elective DeferralsEmployee Elective Deferrals Safe Harbor MatchSafe Harbor Match

Basic Safe Harbor Match or Enhanced Safe Harbor MatchBasic Safe Harbor Match or Enhanced Safe Harbor Match Must be 100% vestedMust be 100% vested

Discretionary MatchDiscretionary Match Can be subject to vestingCan be subject to vesting Match up to 4% of first 6% of elective deferralsMatch up to 4% of first 6% of elective deferrals

Cannot match deferrals beyond 6%Cannot match deferrals beyond 6% Cannot have a discretionary match greater than 4%Cannot have a discretionary match greater than 4%

Fixed MatchFixed Match Can be subject to vestingCan be subject to vesting Based on first 6% of deferralsBased on first 6% of deferrals Specified in plan documentSpecified in plan document


Matching Contribution Matching Contribution RequirementsRequirements

All matches must meet ADP/ACP Safe Harbor All matches must meet ADP/ACP Safe Harbor requirementsrequirements Discretionary match limited to 4% of payDiscretionary match limited to 4% of pay Cannot match deferrals in excess of 6%Cannot match deferrals in excess of 6% Match % cannot increase as deferrals increaseMatch % cannot increase as deferrals increase Match rate for any HCE cannot exceed rate for Match rate for any HCE cannot exceed rate for

NHCENHCE No last day of plan year or hours of service No last day of plan year or hours of service

requirementsrequirements


Triple Stacked Match – Step ATriple Stacked Match – Step A

Basic match equals 100% of the first 3% the employee defers, plus 50% of the Basic match equals 100% of the first 3% the employee defers, plus 50% of the next 2% the employee defers.next 2% the employee defers.

NameName

GrossGross

Comp.Comp. DeferralsDeferrals

BasicBasic

MatchMatch

Owner 1Owner 1 $250,000$250,000 $22,500$22,500 $10,000$10,000

Owner 2Owner 2 $250,000$250,000 $17,000$17,000 $10,000$10,000

Employee AEmployee A $50,000$50,000 $2,500$2,500 $2,000$2,000

Employee BEmployee B $45,000$45,000 $2,000$2,000 $1,675$1,675

Employee CEmployee C $40,000$40,000 $1,500$1,500 $1,350$1,350

Employee DEmployee D $35,000$35,000 $0$0 $0$0

TotalsTotals $670,000$670,000 $45,500$45,500 $25,025$25,025


Triple Stacked Match – Step BTriple Stacked Match – Step B

Add Discretionary Match equal to 2/3 of deferrals up to 6% of compensation.Add Discretionary Match equal to 2/3 of deferrals up to 6% of compensation. Discretionary Match cannot exceed 4% of compensationDiscretionary Match cannot exceed 4% of compensation Discretionary Match is flexibleDiscretionary Match is flexible Discretionary Match can be subject to a vesting scheduleDiscretionary Match can be subject to a vesting schedule

NameName

GrossGross


BasicBasic

MatchMatch

Discretion. Discretion.

MatchMatch

Owner 1Owner 1 $250,000$250,000 $22,500$22,500 $10,000$10,000 $10,000$10,000

Owner 2Owner 2 $250,000$250,000 $17,000$17,000 $10,000$10,000 $10,000$10,000





TotalsTotals $670,000$670,000 $45,500$45,500 $25,025$25,025 $24,000$24,000


Triple Stacked Match – Step CTriple Stacked Match – Step C

Owners (HCEs) need an additional allocation of $13,000 each to reach Owners (HCEs) need an additional allocation of $13,000 each to reach maximum account Annual Additional Limits under IRC §415(c)(1)(A).maximum account Annual Additional Limits under IRC §415(c)(1)(A).

Use an additional Fixed Match.Use an additional Fixed Match.

NameName

GrossGross


BasicBasic

MatchMatch


MatchMatch

FixedFixed

MatchMatch

TotalTotal

AllocationAllocation

Owner 1Owner 1 $250,000$250,000 $22,500$22,500 $10,000$10,000 $10,000$10,000 $13,000$13,000 $55,500$55,500

Owner 2Owner 2 $250,000$250,000 $17,000$17,000 $10,000$10,000 $10,000$10,000 $13,000$13,000 $50,000$50,000





TotalsTotals $670,000$670,000 $45,500$45,500 $25,025$25,025 $24,000$24,000


Triple Stacked Match – Step CTriple Stacked Match – Step C

Cannot consider deferrals in excess of 6% of Safe Harbor Compensation.Cannot consider deferrals in excess of 6% of Safe Harbor Compensation. Fixed match equals 86.67% of deferrals up to 6% of compensation Fixed match equals 86.67% of deferrals up to 6% of compensation

($13,000/$15,000 = 86.67%).($13,000/$15,000 = 86.67%). Employee Cost = $14,225.Employee Cost = $14,225.

NameName

GrossGross


BasicBasic

MatchMatch


MatchMatch

FixedFixed

MatchMatch

TotalTotal


Owner 1Owner 1 $250,000$250,000 $22,500$22,500 $10,000$10,000 $10,000$10,000 $13,000$13,000 $55,500$55,500

Owner 2Owner 2 $250,000$250,000 $17,000$17,000 $10,000$10,000 $10,000$10,000 $13,000$13,000 $50,000$50,000

Employee AEmployee A $50,000$50,000 $2,500$2,500 $2,000$2,000 $1,667$1,667 $2,167$2,167 $8,334$8,334

Employee BEmployee B $45,000$45,000 $2,000$2,000 $1,675$1,675 $1,333$1,333 $1,733$1,733 $6,741$6,741

Employee CEmployee C $40,000$40,000 $1,500$1,500 $1,350$1,350 $1,000$1,000 $1,300$1,300 $5,150$5,150

Employee DEmployee D $35,000$35,000 $0$0 $0$0 $0$0 $0$0 $0$0

TotalsTotals $670,000$670,000 $45,500$45,500 $25,025$25,025 $24,000$24,000 $31,200$31,200 $125,725$125,725


Triple Stacked Match – Worst Case Triple Stacked Match – Worst Case ScenarioScenario

Employee Cost = $17,596Employee Cost = $17,596

NameName

GrossGross


BasicBasic

MatchMatch


MatchMatch

FixedFixed

MatchMatch

TotalTotal


Owner 1Owner 1 $250,000$250,000 $22,500$22,500 $10,000$10,000 $10,000$10,000 $13,000$13,000 $55,500$55,500

Owner 2Owner 2 $250,000$250,000 $17,000$17,000 $10,000$10,000 $10,000$10,000 $13,000$13,000 $50,000$50,000




Employee DEmployee D $35,000$35,000 $1,400$1,400 $1,225$1,225 $933$933 $1,213$1,213 $4,771$4,771

TotalsTotals $670,000$670,000 $46,900$46,900 $26,250$26,250 $24,933$24,933 $32,413$32,413 $130,496$130,496


Triple Stacked Match – “True” Worst Triple Stacked Match – “True” Worst Case ScenarioCase Scenario

Each employee deferring minimum of 6% of compensationEach employee deferring minimum of 6% of compensation Employee Cost = $22,440Employee Cost = $22,440

NameName

GrossGross


BasicBasic

MatchMatch


MatchMatch

FixedFixed

MatchMatch

TotalTotal


Owner 1Owner 1 $250,000$250,000 $22,500$22,500 $10,000$10,000 $10,000$10,000 $13,000$13,000 $55,500$55,500

Owner 2Owner 2 $250,000$250,000 $17,000$17,000 $10,000$10,000 $10,000$10,000 $13,000$13,000 $50,000$50,000




Employee DEmployee D $35,000$35,000 $2,100$2,100 $1,400$1,400 $1,400$1,400 $1,820$1,820 $6,720$6,720

TotalsTotals $670,000$670,000 $49,700$49,700 $26,800$26,800 $26,800$26,800 $34,840$34,840 $138,140$138,140


Triple Stacked Match – Flexible Triple Stacked Match – Flexible FormulaFormula

Each employee deferring minimum of 6% of compensationEach employee deferring minimum of 6% of compensation Employee Cost = $22,440Employee Cost = $22,440

NameName GrossGross

Comp.Comp.

DeferralsDeferrals BasicBasic

MatchMatch


MatchMatch

90%90%

FixedFixed

MatchMatch

TotalTotal


Owner 1Owner 1 $250,000$250,000 $22,500$22,500 $10,000$10,000 $9,500$9,500 $13,500$13,500 $55,500$55,500

Owner 2Owner 2 $250,000$250,000 $17,000$17,000 $10,000$10,000 $9,500$9,500 $13,500$13,500 $50,000$50,000




Employee DEmployee D $35,000$35,000 $2,100$2,100 $1,400$1,400 $1,330$1,330 $1,890$1,890 $6,720$6,720

TotalsTotals $670,000$670,000 $49,700$49,700 $26,800$26,800 $25,460$25,460 $36,180$36,180 $138,140$138,140


Stacked Match Formulas - Stacked Match Formulas - ObjectivesObjectives

Design achieves all objectives:Design achieves all objectives: Not subject to ADP and ACP testingNot subject to ADP and ACP testing No non-elective contributions to test under IRC No non-elective contributions to test under IRC

§401(a)(4)§401(a)(4) Not Top Heavy because of the “safe harbor” Not Top Heavy because of the “safe harbor”

exemptionexemption Designed to comply with IRC §415(c)(1)(A)Designed to comply with IRC §415(c)(1)(A) Only testing needed is coverage under IRC Only testing needed is coverage under IRC

§410(b) – design is “bullet proof” from a testing §410(b) – design is “bullet proof” from a testing standpointstandpoint

A true “players only” designA true “players only” design If an employee defers nothing, the employee gets If an employee defers nothing, the employee gets

nothingnothing


Stacked Match FormulasStacked Match Formulas

AdvantagesAdvantages HCE flexibilityHCE flexibility Increased disparityIncreased disparity Potential to reach Potential to reach

IRC §415(c) limits IRC §415(c) limits with lower costswith lower costs

Not age sensitiveNot age sensitive Top Heavy exemptTop Heavy exempt No ADP/ACP testsNo ADP/ACP tests

DisadvantagesDisadvantages Fixed matching Fixed matching

costscosts Employer costs Employer costs

dependent on dependent on actions of NHCEsactions of NHCEs

Match at 200+% of Match at 200+% of deferrals on first 6% deferrals on first 6% of compensationof compensation

No allocation No allocation conditionsconditions


Stacked Match FormulasStacked Match Formulas

Attractive for:Attractive for: Smaller employersSmaller employers Less sophisticated Less sophisticated

work forcework force Need for owner Need for owner

flexibilityflexibility

Less Attractive for:Less Attractive for: Larger employersLarger employers Sophisticated Sophisticated

employeesemployees Employer wants to Employer wants to

provide a minimum provide a minimum benefit for all benefit for all employeesemployees


SummarySummaryPlan DesignPlan Design NHCE Employee CostNHCE Employee Cost

Integrated Profit Integrated Profit SharingSharing

$14,869$14,869

Age Weighted Profit Age Weighted Profit Sharing Sharing

$15,205$15,205

Cross-Tested Profit Cross-Tested Profit SharingSharing

$10,975$10,975

Stacked Match 401(k)Stacked Match 401(k) $14,225/$17,596/$22,440$14,225/$17,596/$22,440

* Problem of disparate allocations for the two HCEs* Problem of disparate allocations for the two HCEs


Design SummaryDesign Summary

Don’t ignore Social Security Integration as a Don’t ignore Social Security Integration as a plan design.plan design. May still be a viable design alternativeMay still be a viable design alternative

Cross-Tested and Stacked Match designs Cross-Tested and Stacked Match designs very dependent on:very dependent on: Employee demographicsEmployee demographics Levels of employee elective deferralsLevels of employee elective deferrals

Look at all optionsLook at all options Need for good plan design studiesNeed for good plan design studies

Understand plan design basicsUnderstand plan design basics Partner with a good Partner with a good locallocal TPA TPA

Questions?Questions?

Richard A. Perry, ChFC, QPA, QPFC, AIFARichard A. Perry, ChFC, QPA, QPFC, AIFA®®

CIPC Systems, Inc.CIPC Systems, Inc.250 Hampton Street250 Hampton StreetAuburn, MA 01501Auburn, MA 01501

Tel: (508) 832-2299 Fax: (508) 832-9885Tel: (508) 832-2299 Fax: (508) [email protected]@cipcsystems.com

Documents

Advanced Safe Harbor 401(K) Plan Designs (For The Financial Advisor)