Small Business Retirement Options

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uclalien
Posts: 61
Joined: Tue Dec 23, 2014 9:13 pm

Small Business Retirement Options

Post by uclalien » Tue Dec 05, 2017 1:12 pm

For the last five years, my small firm has operated as a partnership and utilizing an individual 401(k) retirement plan. In doing so, we were able to max out both employer and employee contributions. Our firm needs to grow to keep up with demand for our business. New hires will likely be brought in as employees, which eliminates the individual 401(k) option.

I am looking to draw from the collective wisdom of this forum to see what options may be available going forward, assuming we hire employees. We want to maximize tax deferred retirement contributions and minimize overhead/investment costs.

The tricky part is that the partners will not want to max out the employer contribution for employees. In doing so, it is my understanding that this also caps how much the company can contribute to each partner's retirement.

Is there a retirement plan that would allow us to apply a lower employer contribution rate to these employees vs. the partners?

Thanks.

smitcat
Posts: 762
Joined: Mon Nov 07, 2016 10:51 am

Re: Small Business Retirement Options

Post by smitcat » Tue Dec 05, 2017 1:19 pm

uclalien wrote:
Tue Dec 05, 2017 1:12 pm
For the last five years, my small firm has operated as a partnership and utilizing an individual 401(k) retirement plan. In doing so, we were able to max out both employer and employee contributions. Our firm needs to grow to keep up with demand for our business. New hires will likely be brought in as employees, which eliminates the individual 401(k) option.

I am looking to draw from the collective wisdom of this forum to see what options may be available going forward, assuming we hire employees. We want to maximize tax deferred retirement contributions and minimize overhead/investment costs.

The tricky part is that the partners will not want to max out the employer contribution for employees. In doing so, it is my understanding that this also caps how much the company can contribute to each partner's retirement.

Is there a retirement plan that would allow us to apply a lower employer contribution rate to these employees vs. the partners?

Thanks.

Read up on "safe harbor 401K's" which allow higher earners to max out but also require that you 'match' floor contributions of any employee who chooses to participate.
We have had that in place now for maybe 4 years and it has worked out well for us - we use Employee Fiduciary for the 401K but there are other low cost supplier options as well.

uclalien
Posts: 61
Joined: Tue Dec 23, 2014 9:13 pm

Re: Small Business Retirement Options

Post by uclalien » Tue Dec 05, 2017 5:29 pm

smitcat wrote:
Tue Dec 05, 2017 1:19 pm
Read up on "safe harbor 401K's" which allow higher earners to max out but also require that you 'match' floor contributions of any employee who chooses to participate.
We have had that in place now for maybe 4 years and it has worked out well for us - we use Employee Fiduciary for the 401K but there are other low cost supplier options as well.
Thank you for the information. I have been reading about safe harbor 401(k)s. From what I've read, they are best for companies with a consistent revenue stream. Our annual revenues are fairly consistent, but we often go months without receiving income.

My primary concern is contributing as much as possible into tax deferred retirement accounts. I am not seeing any options that will get me anywhere close to the $54,000 I'm going to put in this year, unless the new employees also receive a substantial employer contribution.

niceguy7376
Posts: 1820
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Location: Metro ATL

Re: Small Business Retirement Options

Post by niceguy7376 » Tue Dec 05, 2017 5:55 pm

In a safe harbor plan, you need to match a minimum of 3% to all eligible employees (setting up eligibility criteria might force you for a custom plan instead of the standard plans that most companies offer).

That 3% match will allow you to do EmployEE contribution of 18K from your end with no issues.
Then comes the factor of how to reach the 54K limit of yours.

For this, you need to go with providers that allow after tax contributions and the subsequent conversion to Roth.

Spirit Rider
Posts: 6587
Joined: Fri Mar 02, 2007 2:39 pm

Re: Small Business Retirement Options

Post by Spirit Rider » Tue Dec 05, 2017 10:07 pm

uclalien wrote:
Tue Dec 05, 2017 1:12 pm
Is there a retirement plan that would allow us to apply a lower employer contribution rate to these employees vs. the partners
You should investigate a 401k with a "New Comparability Method" of profit sharing. This will require a higher employer contribution rate than a standard safe harbor plan, but will allow certain categories of employees (partners) to have much higher contribution rates.

I believe Employee Fiduciary will support such a plan design and administration. As will other local and national Third Party Administrators (TPAs).

smitcat
Posts: 762
Joined: Mon Nov 07, 2016 10:51 am

Re: Small Business Retirement Options

Post by smitcat » Wed Dec 06, 2017 10:22 am

Spirit Rider wrote:
Tue Dec 05, 2017 10:07 pm
uclalien wrote:
Tue Dec 05, 2017 1:12 pm
Is there a retirement plan that would allow us to apply a lower employer contribution rate to these employees vs. the partners
You should investigate a 401k with a "New Comparability Method" of profit sharing. This will require a higher employer contribution rate than a standard safe harbor plan, but will allow certain categories of employees (partners) to have much higher contribution rates.

I believe Employee Fiduciary will support such a plan design and administration. As will other local and national Third Party Administrators (TPAs).

Yes agreed - an option to check out.
From memory (may not be valid) when we checked into that option it required that 'everyone' at the company be matched at least 5% no matter what.
If you plan to have a half dozen or more employees within the next couple of years the costs can go up quickly.

betablocker
Posts: 305
Joined: Mon Jan 11, 2016 1:26 pm

Re: Small Business Retirement Options

Post by betablocker » Wed Dec 06, 2017 11:05 am

You might want to look at non qualified deferred compensation: https://www.fidelity.com/viewpoints/retirement/nqdc.

ERISA Stone
Posts: 1373
Joined: Tue Jun 24, 2014 8:54 am

Re: Small Business Retirement Options

Post by ERISA Stone » Wed Dec 06, 2017 11:15 am

smitcat wrote:
Wed Dec 06, 2017 10:22 am
Spirit Rider wrote:
Tue Dec 05, 2017 10:07 pm
uclalien wrote:
Tue Dec 05, 2017 1:12 pm
Is there a retirement plan that would allow us to apply a lower employer contribution rate to these employees vs. the partners
You should investigate a 401k with a "New Comparability Method" of profit sharing. This will require a higher employer contribution rate than a standard safe harbor plan, but will allow certain categories of employees (partners) to have much higher contribution rates.

I believe Employee Fiduciary will support such a plan design and administration. As will other local and national Third Party Administrators (TPAs).

Yes agreed - an option to check out.
From memory (may not be valid) when we checked into that option it required that 'everyone' at the company be matched at least 5% no matter what.
If you plan to have a half dozen or more employees within the next couple of years the costs can go up quickly.
It will be very difficult to max out the partners without providing at least 5% to your non-highly compensated employees (NHCEs). For the new comparability profit sharing allocation method Spirit mentioned, each NHCE must receive at least 1/3 of the nonelective contribution rate of the highest HCE, up to 5%. So if the highest HCE nonelective contribution rate were 9%, each eligible NHCE should receive at least 3%. If the highest HCE rate is 25%, each eligible NHCE should receive at least 5%. This all depends on nondiscrimination testing passing at those levels.

The good news about a 3% safe harbor nonelective contribution (vs. the safe harbor match) is the 3% can go towards meeting the minimum (lesser of 1/3 or 5%). So if you already provide a safe harbor nonelective contribution, you could give your HCEs a 6% profit sharing contribution without having to give anything additional to the NHCEs.

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: Small Business Retirement Options

Post by Spirit Rider » Wed Dec 06, 2017 11:50 am

As pointed out by ERISA Stone, the safe harbor minimum non-elective contribution is 3%. Or the safe harbor minimum match is 100% of the 1st 3% of compensation and 50% of the next 2% of compensation. Assume the average NHCE match is 3%.

If instead you pay a 5% non-elective contribution to facilitate the New Comparability Method, that just means you need to pay an additional 2% compared to the two safe harbor options. Doing this will potentially allow the partners to max out the annual addition limit (subject to cross-testing).

Sometimes you have to give something to get something. Or to quote my dearly departed mum, "share the wealth".

smitcat
Posts: 762
Joined: Mon Nov 07, 2016 10:51 am

Re: Small Business Retirement Options

Post by smitcat » Wed Dec 06, 2017 12:02 pm

Spirit Rider wrote:
Wed Dec 06, 2017 11:50 am
As pointed out by ERISA Stone, the safe harbor minimum non-elective contribution is 3%. Or the safe harbor minimum match is 100% of the 1st 3% of compensation and 50% of the next 2% of compensation. Assume the average NHCE match is 3%.

If instead you pay a 5% non-elective contribution to facilitate the New Comparability Method, that just means you need to pay an additional 2% compared to the two safe harbor options. Doing this will potentially allow the partners to max out the annual addition limit (subject to cross-testing).

Sometimes you have to give something to get something. Or to quote my dearly departed mum, "share the wealth".
On the regular safe harbor match you are only matching the 3% on the folks that elect to enroll and remain in the 401K program.
So you are typically only adding the 3% to a small percentage of employees.
In our past experience that has been between 10-20% of total employees that are eligible over these many years.

Spirit Rider
Posts: 6587
Joined: Fri Mar 02, 2007 2:39 pm

Re: Small Business Retirement Options

Post by Spirit Rider » Wed Dec 06, 2017 12:29 pm

As I pointed out the minimum safe harbor employer non-elective contribution is 3%., but the minimum safe harbor employer match is 4%. This is 100% of the 1st 3% and 50% of the next 2% = 4% on the 1st 5%.

Your experiences are an anomaly. After a dip during the great recession, recent studies have shown that > 50% of employees contribute enough to get the full employer match.

None of which negates my suggestion to share the wealth. Owners/Partners looking to reach the maximum annual addition limit, should not begrudge their lower wage earning employees a 5% non-elective contribution.

If they use the minimum safe harbor employer match of 4%. Then that is what they also get. This thread is about partners wanting to maximize their tax-advantaged contributions. It is only right that they share some of that benefit with their employees.

smitcat
Posts: 762
Joined: Mon Nov 07, 2016 10:51 am

Re: Small Business Retirement Options

Post by smitcat » Wed Dec 06, 2017 12:47 pm

Spirit Rider wrote:
Wed Dec 06, 2017 12:29 pm
As I pointed out the minimum safe harbor employer non-elective contribution is 3%., but the minimum safe harbor employer match is 4%. This is 100% of the 1st 3% and 50% of the next 2% = 4% on the 1st 5%.

Your experiences are an anomaly. After a dip during the great recession, recent studies have shown that > 50% of employees contribute enough to get the full employer match.

None of which negates my suggestion to share the wealth. Owners/Partners looking to reach the maximum annual addition limit, should not begrudge their lower wage earning employees a 5% non-elective contribution.

If they use the minimum safe harbor employer match of 4%. Then that is what they also get. This thread is about partners wanting to maximize their tax-advantaged contributions. It is only right that they share some of that benefit with their employees.
In both large and small companies I have seen the enrollment much lower - typically mmirroring the stats you see for what % of folks have XXX$ saved for retirement.
In the past we had used all kinds of tools to try and get better participation - before and after the safe harbor was even an option.
- education
- auto enroll
- small match to everyone even if they do not participate
- and we also tried bonus's handed out not attached to any plans as they just receive the money (good years they were significant)
Some folks used the 401K well and also utilized their bonus 's in what we would consider well balanced ways.

But a larger majority either did not use the plans or they got themselves into deeper trouble having access to the money.
Did we give up the cause? No , not yet we are still trying to get decent opportunities to most of our folks.

Many stories but here is the most recent - Unexpected bonus handed to employee in early Feb of 2017 at about 12% of salary.
She uses that to purchase a 2017 Dodge Diesel Crew Cab on credit for her husband. Looks like it will be reposed shortly as the end chapter.
Last year had an employee take their 401k balance out to the max (matched and all) to put a down payment on a boat - now they are dealing with both the tax implications as well as the payments

This line that you wrote - "recent studies have shown that > 50% of employees contribute enough to get the full employer match."
Of the employees that enroll in our program more than 50% go for the full match or higher.
That does not change the fact that the overall enrollment remains very low no matter what we have tried.

uclalien
Posts: 61
Joined: Tue Dec 23, 2014 9:13 pm

Re: Small Business Retirement Options

Post by uclalien » Thu Dec 07, 2017 3:55 pm

Spirit Rider wrote:
Wed Dec 06, 2017 12:29 pm
As I pointed out the minimum safe harbor employer non-elective contribution is 3%., but the minimum safe harbor employer match is 4%. This is 100% of the 1st 3% and 50% of the next 2% = 4% on the 1st 5%.

Your experiences are an anomaly. After a dip during the great recession, recent studies have shown that > 50% of employees contribute enough to get the full employer match.

None of which negates my suggestion to share the wealth. Owners/Partners looking to reach the maximum annual addition limit, should not begrudge their lower wage earning employees a 5% non-elective contribution.

If they use the minimum safe harbor employer match of 4%. Then that is what they also get. This thread is about partners wanting to maximize their tax-advantaged contributions. It is only right that they share some of that benefit with their employees.
I fully agree. I wouldn't expect the firm to contribute anything less than 5% to NHCEs. In fact, I would be surprised if we don't ultimately elect to contribute something closer to 10% with no employee contribution requirement.

KSActuary
Posts: 172
Joined: Fri Jan 13, 2012 10:53 pm

Re: Small Business Retirement Options

Post by KSActuary » Fri Dec 08, 2017 12:36 am

Vanguard charges an extra $775 annually to perform the New Comparability test for the profit sharing contribution. Employee Fiduciary will do the same but I can't remember the additional charge off the top of my head.

ERISA Stone
Posts: 1373
Joined: Tue Jun 24, 2014 8:54 am

Re: Small Business Retirement Options

Post by ERISA Stone » Fri Dec 08, 2017 1:22 am

KSActuary wrote:
Fri Dec 08, 2017 12:36 am
Vanguard charges an extra $775 annually to perform the New Comparability test for the profit sharing contribution. Employee Fiduciary will do the same but I can't remember the additional charge off the top of my head.
Employee Fiduciary charges $500. I don't know how many scenarios that includes.

KSActuary
Posts: 172
Joined: Fri Jan 13, 2012 10:53 pm

Re: Small Business Retirement Options

Post by KSActuary » Fri Dec 08, 2017 3:39 pm

The Vanguard approach is to offer several testing scenarios but not unlimited attempts to refine or maximize results as this can take up a lot of their time. After several scenarios, Vanguard goes to an hourly rate which is high enough to scare most off.

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