Company 401K / Retirement Accounts -- Options?

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bogleviewer
Posts: 349
Joined: Thu Aug 25, 2011 11:01 pm

Company 401K / Retirement Accounts -- Options?

Post by bogleviewer »

I am a partner in a small business with ~15 employees. The majority of employees are hourly paid employees (paid well for hourly, but still hourly). We do not currently have any retirement options for the partners nor the employees simply due to other priorities and potential complexities with setting one up. In the past I've simply done my own Roth/Backdoor Roth.

For those of you who are familiar with administering, setting up, doing tax returns, etc or whatever in this field what would you suggest? I believe the only option is a 401K plan offering; Vanguard has such a product to setup the company with some administrative overhead annual charges ~$3500 a year and small initial setup fee. I was told it could take 30 to 60 days for Vanguard to get it all together so that our employees and partners can start contributing.

What other company wide retirement / tax deferment vehicles are there? Entity is a LLC taxed as an s-corp.
Topic Author
bogleviewer
Posts: 349
Joined: Thu Aug 25, 2011 11:01 pm

Re: Company 401K / Retirement Accounts -- Options?

Post by bogleviewer »

I just got done reading some stuff about a mega backdoor roth using a 401k.

Any suggestions fellow Boglehead's?
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: Company 401K / Retirement Accounts -- Options?

Post by Spirit Rider »

One thing to keep in mind is that the "Vanguard" small business plan is not run by Vanguard, they are only the custodian. Ascensus administers the plan. Another cheaper, but no frills option is Employee Fiduciary.

Before you look at who is going to administer your plan and what the fund lineup will be like, you have to understand some constraints of a 401k for a company like yours. With a standard 401k plan, each participant can make an employee salary deferral up to $18K/yr ($24K >= age 50). Any company match or non-elective contribution is optional.

However, a standard 401k plan requires anti-discrimination testing to ensure fairness. High Compensated Employees (HCEs) deferral percentages are limited based on what the Non-Highly Compensated Employees (NHCEs) deferral percentage is. Typically, hourly wage employees tend to have low deferral percentages. HCEs are defined as employees with >= $120K compensation and owners with >= 5% ownership. I am assuming that the partners will automatically be HCEs.

There is a way to eliminate anti-discrimination testing. This is done by adopting a "safe harbor" plan. This plan requires either matching or non-elective contributions. The matching must be a minimum of 100% of the first 3% of deferral and 50% of the next 2% of deferral, for a total of 4% of compensation. The non-elective contribution must be a minimum of 3% of compensation. Either employer contributions must be 100% immediately vested.

If the partners want to make the maximum deferral of $18K ($24K >= age 50), you really need a safe harbor plan.

P.S. To your last post, there is very little chance you will be able to make substantial Mega backdoor Roth contributions. A safe harbor plan does not prevent after-tax contributions from being subject to an Actual Contribution Percentage (ACP) test. It is highly unlikely hourly employees will take advantage of after-tax contributions.

ERISA Stone may be able to describe some profit sharing options that might provide advantage to the partners if certain demographics are present.
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