Traditional 401(k)
Roth 401(k)
Safe Harbor 401(k)
Profit Sharing Plans
Cash Balance Plan/Defined Benefit Plans
Davis Bacon Prevailing Wage Plan
Traditional 401(k)
There are many types of 401(k) plans to fit a clients specific needs. 401(k) plans allow for the employee and the employer to save their own money as well as receive employer contributions which can be subject to a vesting schedule. In a traditional 401(k) plan, the employer would choose whether or not to make matching contributions. A traditional 401(k) plan is often combined with other types of plans to enhance employee benefits and employer needs. These plans are subject to testing (ADP, ACP, Top Heavy, etc…) which can make it difficult for the employer to receive a maximum benefit.
Roth 401(k)
A Roth 401(k) is very similar to a traditional 401(k), allowing the employee to make individual contributions on a post-tax basis. Saving on a post tax basis is a good option for people that believe their tax rate in the future will higher than it is today. If money is invested as Roth, when an employee takes a distribution, they do not have to pay taxes on the money or interest.
Safe Harbor 401(k)
A Safe Harbor 401(k) is a plan that has required employer contributions that are fully vested at the time they are made. There are two types of Safe Harbor plans, a Safe Harbor Match or a Safe Harbor Non-Elective. In a Safe Harbor match plan, the employer must match 100% of the first 3% of the participants contributions as well as 50% of contributions made between 3-5%. In a Safe Harbor Non-Elective plan, the employer will give a 3% contribution to every active eligible participant, and this contribution is 100% vested, there is usually no additional match. There are many benefits to a Safe Harbor plan, it is not subject to ADP or ACP testing, meaning that the highly compensated employees (HCEs) can contribute the maximum amount without having the burden of possible refunds from their account. Safe Harbor plans are normally the most efficient ways to get HCEs and owners a maximum deduction each year.
Profit Sharing Plans
A Profit Sharing plan allows employers to contribute to the retirement accounts of their employees. Although the contribution is discretionary it must pass regulatory testing to make sure that it is not discriminatory towards the business’s employees. There are several types of calculations that a Profit Sharing plan can follow, including:
- Comp-to-Comp
- Integrated by Social Security
- Age-Weighted
- Cross Tested
Comp-to-Comp gives the same percentage to all employees who are eligible for a contribution. Integrated gives a higher contribution to the participants that make over the Social Security Wage base. The Age-Weighted Profit Sharing plan will give a higher percentage of compensation to employees that are closer to retirement. Profit Sharing plans are typically combined with other types of plans to enhance benefits to the employees and the owners. New Comparability (Cross Tested) profit sharing plans provide the most flexibility of any of the Profit Sharing plans. This plan allows the employer to make a different contribution to the highly compensated employees than the rest of the participants as long as you can pass the 401(a)(4) General Discrimination testing. This plan design works well with employers that are generally older than their staff. If Cross Testing works for a client, the owner would be able to get 3x the amount of contributions more than they give to their staff. This type of Profit Sharing plan is often combined with a Safe Harbor plan for clients looking to maximize their contributions from year-to-year.
Cash Balance Plan/Defined Benefit Plans
A Cash Balance plan is usually an extension of a company’s 401(k) Profit Sharing retirement plan. A Cash Balance Plan is intended to give the employer additional savings towards retirement. This type of plan will normally work for Clients that are receiving a maximum benefit under the New Comparability/Cross Tested formula. Cash Balance plans are only intended for Owners looking to save nearly three times the 415(c) limit. These are intended to be long-term plans with a mandatory annual contribution which employer’s should expect to make for at least 3-5 years to avoid penalties.
Davis Bacon Prevailing Wage Plan
Named after the Davis Bacon Act of 1931, the Act states that any contractor bidding on a Government job must pay the workers at prevailing wage union rates, even if the employees are Non-Union employees. These prevailing wages are based on the area wages and fringe benefits of each job. Typically these fringe benefits are paid out in compensation, but prevailing wage retirement plans allow the leftover fringe benefits to be put into a retirement plan, saving the employer from paying FICA taxes, Federal and State Unemployment taxes, as well as Workers Compensation. Fringe benefits may also be used to satisfy matching and non-elective contributions for the employee’s retirement plan. The tax benefits for installing a Prevailing Wage retirement plan is substantial. Prime Benefits encourages employers receiving Prevailing Wage jobs to speak to one of their plan administrators.