Pension Plans and Planning

Get Practiced Assistance in Choosing the Right Approach

Let Pension Management Consultants guide you through the world of pension plans and help you find the setup that works best for you and your employees.

Our fully credentialed staff draws on over 150-plus years of combined experience to lay out all available options and then offers sound advice on your new or existing plans.

We are Member of NIPA (National Institute of Pension Administration.) Call us for a FREE consultation.

Reward Your Employees With Profit-Sharing Plans

You may want to establish a profit-sharing plan if you are an employer interested in sharing the company profits with your employees.

One of the nice things about a profit-sharing plan is that the employer may make contributions to the plan regardless of whether or not the employer has current or accumulated profits. Nonetheless, the plan may fix the amount of the contribution as a percentage of profits or as a percentage of compensation, or the employer, at his discretion, may annually determine the amount of its contribution.

The employer is allowed to contribute and deduct from 0 to 25% of total eligible compensation into a profit-sharing account. Profit-sharing contributions are allocated to participants based on several different formulas.

The different types of formulas are as follows:

Pro Rata - This traditional profit-sharing plan has a pro-rata allocation formula. If the company contributes 10% of compensation to the plan, each eligible employee will receive a contribution of 10% of their compensation.

Integrated - With the integrated formula, the plan weights contributions in favor of the more highly compensated employees. This concept permits an employer to contribute an additional amount for persons earning in excess of the “integration level” without discriminating in favor of these more highly compensated participants.

The plan’s integration level may be the Social Security wage base or a lesser amount, such as a specified percentage of the Social Security wage base. Determining the integration level requires a balancing of employee compensation levels and anticipated employer contributions.

New-Comparability – This popular plan gives the company flexibility in funding. This formula allows the employer to separate employees into different groups or individual classifications. For example, a company may wish to contribute 15% of pay for owners, 6% of pay for clerical staff, and 5% of pay for janitorial staff.

The groups or individuals can be determined based on several factors, including job descriptions, length of service, performance, etc. The groups are classified in ways to allow for the various contribution levels while still ensuring the plan remains nondiscriminatory based on the definitions provided by the Internal Revenue Service.

Age-Weighted – This formula uses age and compensation to allocate plan contributions among eligible employees. Non-discrimination is proved based on the benefits the employees receive at retirement age.

Older employees have less time to accumulate contributions before retirement, therefore they will receive higher allocations than the younger employees.

Profit-sharing plans normally utilize a vesting schedule to limit the benefits to short-term employees. A vesting schedule results in the forfeiture of a part of the benefits due to a participant if the participant terminates employment before working a specified period. This provides a greater benefit to long-term employees by rewarding them for their loyalty.

Select From a Range of 401(k) Plans

401(k) Plans are popular retirement savings vehicles for small businesses to attract and retain quality employees. Many employees now consider a 401(k) plan to be a standard benefits package when considering a new job.

The current annual limit on employee deferrals is $19,000. Employees 50 and older may contribute an additional $6,000 in catch-up contributions. Contributions are withheld from the eligible employee’s payroll on a pre-tax basis and deposited into a Trust.

Traditional 401(k) – Traditional 401(k) plans allow employees to save for retirement while deferring income taxes on the saved money or earnings until withdrawal. The employee elects to have a portion of his or her compensation paid directly, or “deferred”, into his or her 401(k) account on a pre-tax basis.

There are non-discrimination testing requirements that apply to 401(k) elective deferrals. The IRS has concluded that even though all employees who are classified as Highly-Compensated have a greater opportunity to participate due to their higher levels of income.

Each traditional 401(k) Plan is required to comply with the Average Deferral Percentage test on an annual basis.

Roth 401(k) – Employers may also offer a Roth 401(k) feature as part of their 401(k) Plan. The Roth 401(k) is similar to the Roth IRA in that after-tax money is saved and grows tax-free.

Roth 401(k) deferrals are subject to the same 401(k) rules under ERISA and must be tested in addition to the Traditional 401(k) deferrals.

Safe Harbor 401(k) – The IRS has recognized that the special nondiscrimination testing requirements of Traditional and Roth 401(k) can be onerous to small businesses.

The Safe-Harbor 401(k) plans were created to help companies whose employees do not wish to participate by deferring their compensation into the plan. Under the Safe Harbor arrangement, the non-discrimination testing requirement is waived in lieu of mandatory company contributions which are 100% fully vested.

There are two ways to satisfy the safe harbor requirement, either by making a Safe Harbor Non-Elective contribution of 3% of compensation to all eligible employees or by making a Safe Harbor Match contribution to all eligible employees who deferred into the plan.

With the Safe Harbor 401(k) plan there are special notice requirements for all eligible employees that must be met on an annual basis.

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