S corp - 401K plan - profit sharing

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HG01
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Joined: Thu Aug 11, 2016 2:23 pm

S corp - 401K plan - profit sharing

Postby HG01 » Thu Mar 16, 2017 2:23 pm

In 2011 we started an S-Corp with focus on software services and product development. In 2014 started a 401K with EF (based on recommendation from this forum). Currently, we have 3 founders + 5 other employees. We have a safeharbor plan for founders + employees where company has to contribute ~4% elective contribution.

In Past years we have done profit sharing with three founders as part of 401K plans. However, as we are hiring people (some of them are paid hourly W2 consultants -- technically still our employees), we haven't been able to take the profit sharing ourselves as we have to give profit sharing to all employees also. This has resulted in our entire K1 being taxable with no ability to reach the annual 401K limit for past two years.

Is there another instrument that allows the profit sharing 401K to be given to founders only (and/or select employees only)?

Vanguard Fan 1367
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Re: S corp - 401K plan - profit sharing

Postby Vanguard Fan 1367 » Thu Mar 16, 2017 3:56 pm

Would it be practical for those wanting more Safe Harbor Contributions to hire spouses. I like the Safe Harbor in my business because I can hire my spouse and both of us are eligible to put away 24k per year since we are over 50 and doing the catch up thing. Under 50 you are allowed 18k each. Your question is about profit sharing but hiring the spouse and deferring the 24 k of salary works for us.

For me and my wife that works pretty well.

Raabe34
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Re: S corp - 401K plan - profit sharing

Postby Raabe34 » Thu Mar 16, 2017 4:00 pm

The answer to that is no but depending on how wages and ages are structured you should be able to get it weighted very heavily to the insiders. A good TPA should be running different scenarios for you. If you're doing Safe Harbor matching that will help that calc also. That won't do you any good for 2017 at this point if you haven't elected it already. But you'll have to give employees something more out of it. I would call it their raise for the year.

Spirit Rider
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Re: S corp - 401K plan - profit sharing

Postby Spirit Rider » Thu Mar 16, 2017 9:05 pm

What the previous poster might be referring to, is there is a profit sharing allocation method that can possibly allow the owners to make a higher profit sharing contribution.

This is referred to as the New Comparability Method. It is based on the fact that regulations require equal outcomes not necessarily equal contributions. It would require a higher profit sharing contributions to all employees. Maybe starting at a base of a 5% profit sharing for all employees. This would more than meet the safe harbor requirements alone.

You generally need to pay the owners high salaries in conjunctions with this to maximize the benefit if you are not already. I suggest you talk to your 401k administrator and see if they offer plans that support the New Comparability Method. The advantage this is highly dependent on the census of your employees, but it is certainly worth looking into.

ERISA Stone
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Re: S corp - 401K plan - profit sharing

Postby ERISA Stone » Fri Mar 17, 2017 7:56 am

Spirit Rider wrote:What the previous poster might be referring to, is there is a profit sharing allocation method that can possibly allow the owners to make a higher profit sharing contribution.

This is referred to as the New Comparability Method. It is based on the fact that regulations require equal outcomes not necessarily equal contributions. It would require a higher profit sharing contributions to all employees. Maybe starting at a base of a 5% profit sharing for all employees. This would more than meet the safe harbor requirements alone.

You generally need to pay the owners high salaries in conjunctions with this to maximize the benefit if you are not already. I suggest you talk to your 401k administrator and see if they offer plans that support the New Comparability Method. The advantage this is highly dependent on the census of your employees, but it is certainly worth looking into.


Also, if the OP decides to amend the plan to a New Comparability method, the safe harbor contribution should probably be changed to a 3% nonelective contribution, rather than the 4% matching contribution. The reason is the 3% would go towards meeting the gateway minimum Spirit referred to (5%), whereas the matching contribution does not.

gilgamesh
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Re: S corp - 401K plan - profit sharing

Postby gilgamesh » Fri Mar 17, 2017 8:14 am

Vanguard Fan 1367 wrote:Would it be practical for those wanting more Safe Harbor Contributions to hire spouses. I like the Safe Harbor in my business because I can hire my spouse and both of us are eligible to put away 24k per year since we are over 50 and doing the catch up thing. Under 50 you are allowed 18k each. Your question is about profit sharing but hiring the spouse and deferring the 24 k of salary works for us.

For me and my wife that works pretty well.


That's $48k for the both of you. With simple you can do $31k. Simple has zero costs, where as 401k has fees associated with it. How did you decide whether simple IRA + taxable was worse than 401k?

The $17k minus 401k cost + on withdrawal the whole thing taxed at ordinary income tax rate VS $17k minus taxes now + no taxes on basis and gains taxed as capital gains (which I intend to keep at 0).

To me, this seem to always favor Simple IRA plus taxable and not 401k. I wonder whether you did something similar.

I even factored in the added benefit of back door Roth - if I start a 401k that allows me to transfer all existing IRA into the 401k and then I can do back door roth. When I transfer all Ira into 401k my management fee also goes up unless I find a flat fee manager. This aspect goes in favor of 401k over simple IRA + taxable.

Drawing my retirement income from taxable allows me to keep my taxes low from retirement to drawing SS and thus allowing me to do Roth conversion inside the 15% tax bracket and thus the zero taxes on capital gains. This aspect goes in favor of simple IRA + taxable over 401k.

Can you tell me how much in fees you are paying for 401K? Total cost...there's lots of 'hidden' costs with 401k.

ERISA Stone
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Re: S corp - 401K plan - profit sharing

Postby ERISA Stone » Fri Mar 17, 2017 8:26 am

gilgamesh wrote:
Can you tell me how much in fees you are paying for 401K? Total cost...there's lots of 'hidden' costs with 401k.


He indicated he is with Employee Fiduciary. Their cost is $1500 annually, plus $30/participant if over 30 participants. There is also a .08% basis fee that is paid to the custodian. If he has a new comparability profit sharing contribution allocation method, that costs $750 if he requests it to be processed. There are no "hidden" fees with EF.

smitcat
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Re: S corp - 401K plan - profit sharing

Postby smitcat » Fri Mar 17, 2017 9:05 am

"To me, this seem to always favor Simple IRA plus taxable and not 401k. I wonder whether you did something similar."

Please read all the rules of the simple IRA and how it affects the company and employees before your decide on your own situation.
As one example only - if you have a simple IRA and an employee (or employees) decide not to contribute during the calendar year you still must pay the 3% matching to him/her or all of them in this situation.
The simple IRA does not allow for a mechanism to roll previous 401K's into the plan which has the investing funds of your choice.
As you point out the simple IRA will not have a mechanism for your potential mega back door Roth.

We modeled both and in our situation with pour employees it was not even close - the "safe Harbor" was the best choice.
YMMV dependent upon your company, your employees and your needs/wants.

gilgamesh
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Re: S corp - 401K plan - profit sharing

Postby gilgamesh » Fri Mar 17, 2017 9:10 am

ERISA Stone wrote:
gilgamesh wrote:
Can you tell me how much in fees you are paying for 401K? Total cost...there's lots of 'hidden' costs with 401k.


He indicated he is with Employee Fiduciary. Their cost is $1500 annually, plus $30/participant if over 30 participants. There is also a .08% basis fee that is paid to the custodian. If he has a new comparability profit sharing contribution allocation method, that costs $750 if he requests it to be processed. There are no "hidden" fees with EF.


Thank you. Is the 0.08% is for the whole portfolio including 3(38) management (if I move my IRA, I will be paying .08% annually for all that as well)? Will Employee fiduciary handle all aspects required to run a 401k? what kind of funds do they offer? I assume they do all the IRS required reporting.

What's the fee to get out of a 401k? I may only do it for 4-5 years and then switch to simple IRA.

I was told with Employee Fiduciary, fiduciary responsibilities are on my shoulders.
Last edited by gilgamesh on Fri Mar 17, 2017 10:17 am, edited 4 times in total.

gilgamesh
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Re: S corp - 401K plan - profit sharing

Postby gilgamesh » Fri Mar 17, 2017 9:14 am

smitcat wrote:"To me, this seem to always favor Simple IRA plus taxable and not 401k. I wonder whether you did something similar."

Please read all the rules of the simple IRA and how it affects the company and employees before your decide on your own situation.
As one example only - if you have a simple IRA and an employee (or employees) decide not to contribute during the calendar year you still must pay the 3% matching to him/her or all of them in this situation.
The simple IRA does not allow for a mechanism to roll previous 401K's into the plan which has the investing funds of your choice.
As you point out the simple IRA will not have a mechanism for your potential mega back door Roth.

We modeled both and in our situation with pour employees it was not even close - the "safe Harbor" was the best choice.
YMMV dependent upon your company, your employees and your needs/wants.


That's not true. I can either choose to do non-elective 2% contribution for all or 3% match for participants only.

smitcat
Posts: 365
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Re: S corp - 401K plan - profit sharing

Postby smitcat » Fri Mar 17, 2017 9:24 am

"That's not true. I can either choose to do non-elective 2% contribution for all or 3% match for participants only."

And if that works for your particular employee distribution that is great.In our case doing 2% for 'all' was an easy show stopper.
All employees current, as well as in and out of the company over the seasons vary greatly from one user to another / hence the YMMV.

Vanguard Fan 1367
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Re: S corp - 401K plan - profit sharing

Postby Vanguard Fan 1367 » Fri Mar 17, 2017 9:29 am

gilgamesh wrote:
Vanguard Fan 1367 wrote:Would it be practical for those wanting more Safe Harbor Contributions to hire spouses. I like the Safe Harbor in my business because I can hire my spouse and both of us are eligible to put away 24k per year since we are over 50 and doing the catch up thing. Under 50 you are allowed 18k each. Your question is about profit sharing but hiring the spouse and deferring the 24 k of salary works for us.

For me and my wife that works pretty well.


That's $48k for the both of you. With simple you can do $31k. Simple has zero costs, where as 401k has fees associated with it. How did you decide whether simple IRA + taxable was worse than 401k?

The $17k minus 401k cost + on withdrawal the whole thing taxed at ordinary income tax rate VS $17k minus taxes now + no taxes on basis and gains taxed as capital gains (which I intend to keep at 0).

To me, this seem to always favor Simple IRA plus taxable and not 401k. I wonder whether you did something similar.

I even factored in the added benefit of back door Roth - if I start a 401k that allows me to transfer all existing IRA into the 401k and then I can do back door roth. When I transfer all Ira into 401k my management fee also goes up unless I find a flat fee manager. This aspect goes in favor of 401k over simple IRA + taxable.

Drawing my retirement income from taxable allows me to keep my taxes low from retirement to drawing SS and thus allowing me to do Roth conversion inside the 15% tax bracket and thus the zero taxes on capital gains. This aspect goes in favor of simple IRA + taxable over 401k.

Can you tell me how much in fees you are paying for 401K? Total cost...there's lots of 'hidden' costs with 401k.



Good question. On this 401K AXA charged nothing to set it up, 25 per participant plus 3 dollars a quarter recordkeeping.

Where they make their money is the expense ratio on the invested money. The lowest is .87 percent for the S & P 500 fund, which is my choice and my recommendation for my employees.

Larry Burkett, who has now gone onto his reward, said that one shouldn't set up something to benefit you and not the employees. With 7 employees I didn't take his advice and went with the 401k thinking that would be a pretty good benefit and would only cost the 3 Percent non-elective match. I wonder what it would cost in employee contributions to give myself 31k with 7 employees.

If this is an unwelcome thread hijack maybe the mods could ask me to delete my post or I could start another thread.

smitcat
Posts: 365
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Re: S corp - 401K plan - profit sharing

Postby smitcat » Fri Mar 17, 2017 9:32 am

"Thank you. Is the 0.08% is for the whole portfolio (if I move my IRA, I will be paying .08% annually for all that as well)? Will Employee fiduciary handle all aspects required to run a 401k? what kind of funds do they offer? I assume they do all the IRS required reporting."

I suggest you visit the EF site and give them a call.
Generally (careful that this is can vary)
They supply the platform to upload your company payroll data.
They help you set up that platform and hold your hand during the first couple of entries.
They help; you choose your plan funds - up to about 30 with no extra costs.
There is a wide selection of funds - more than we needed.
They calculate year end match, IRS reporting and dovetail with your payroll service
There is boiler plate communication and update paperwork supplied for your staff.

Way too much to post here - there is no real substitute for calling them to get a feel for whether this works for you or not.
IE - we 'needed' to have a few funds that that allowed a direct transition from our last plan provider. Employee Fiduciary had no problems handing that for us which will not be an issue for you.

bsteiner
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Re: S corp - 401K plan - profit sharing

Postby bsteiner » Fri Mar 17, 2017 9:46 am

Vanguard Fan 1367 wrote:... Larry Burkett, who has now gone onto his reward, said that one shouldn't set up something to benefit you and not the employees. With 7 employees I didn't take his advice and went with the 401k thinking that would be a pretty good benefit and would only cost the 3 Percent non-elective match. I wonder what it would cost in employee contributions to give myself 31k with 7 employees. ....


Raabe34 wrote:... depending on how wages and ages are structured you should be able to get it weighted very heavily to the insiders. A good TPA should be running different scenarios for you. ...


There are lots of ways to design a retirement plan. It will depend on your employee situation (such as their ages, salaries, turnover), and your objectives. A good actuary should be able to recommend a plan that best accomplishes your objectives based on your situation.

gilgamesh
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Re: S corp - 401K plan - profit sharing

Postby gilgamesh » Fri Mar 17, 2017 9:50 am

Vanguard Fan 1367 wrote:
gilgamesh wrote:
Vanguard Fan 1367 wrote:Would it be practical for those wanting more Safe Harbor Contributions to hire spouses. I like the Safe Harbor in my business because I can hire my spouse and both of us are eligible to put away 24k per year since we are over 50 and doing the catch up thing. Under 50 you are allowed 18k each. Your question is about profit sharing but hiring the spouse and deferring the 24 k of salary works for us.

For me and my wife that works pretty well.


That's $48k for the both of you. With simple you can do $31k. Simple has zero costs, where as 401k has fees associated with it. How did you decide whether simple IRA + taxable was worse than 401k?

The $17k minus 401k cost + on withdrawal the whole thing taxed at ordinary income tax rate VS $17k minus taxes now + no taxes on basis and gains taxed as capital gains (which I intend to keep at 0).

To me, this seem to always favor Simple IRA plus taxable and not 401k. I wonder whether you did something similar.

I even factored in the added benefit of back door Roth - if I start a 401k that allows me to transfer all existing IRA into the 401k and then I can do back door roth. When I transfer all Ira into 401k my management fee also goes up unless I find a flat fee manager. This aspect goes in favor of 401k over simple IRA + taxable.

Drawing my retirement income from taxable allows me to keep my taxes low from retirement to drawing SS and thus allowing me to do Roth conversion inside the 15% tax bracket and thus the zero taxes on capital gains. This aspect goes in favor of simple IRA + taxable over 401k.

Can you tell me how much in fees you are paying for 401K? Total cost...there's lots of 'hidden' costs with 401k.



Good question. On this 401K AXA charged nothing to set it up, 25 per participant plus 3 dollars a quarter recordkeeping.

Where they make their money is the expense ratio on the invested money. The lowest is .87 percent for the S & P 500 fund, which is my choice and my recommendation for my employees.

Larry Burkett, who has now gone onto his reward, said that one shouldn't set up something to benefit you and not the employees. With 7 employees I didn't take his advice and went with the 401k thinking that would be a pretty good benefit and would only cost the 3 Percent non-elective match. I wonder what it would cost in employee contributions to give myself 31k with 7 employees.

If this is an unwelcome thread hijack maybe the mods could ask me to delete my post or I could start another thread.


0.87% in tax deferred is not bad at all, and the fees are exceptionally good. But, I can almost guarantee you with those low fees, you are the fiduciary responsibility. That I am being told can get very dicey.

gilgamesh
Posts: 725
Joined: Sun Jan 10, 2016 9:29 am

Re: S corp - 401K plan - profit sharing

Postby gilgamesh » Fri Mar 17, 2017 9:54 am

smitcat wrote:"Thank you. Is the 0.08% is for the whole portfolio (if I move my IRA, I will be paying .08% annually for all that as well)? Will Employee fiduciary handle all aspects required to run a 401k? what kind of funds do they offer? I assume they do all the IRS required reporting."

I suggest you visit the EF site and give them a call.
Generally (careful that this is can vary)
They supply the platform to upload your company payroll data.
They help you set up that platform and hold your hand during the first couple of entries.
They help; you choose your plan funds - up to about 30 with no extra costs.
There is a wide selection of funds - more than we needed.
They calculate year end match, IRS reporting and dovetail with your payroll service
There is boiler plate communication and update paperwork supplied for your staff.

Way too much to post here - there is no real substitute for calling them to get a feel for whether this works for you or not.
IE - we 'needed' to have a few funds that that allowed a direct transition from our last plan provider. Employee Fiduciary had no problems handing that for us which will not be an issue for you.


I will thanks! But, can you tell me whether they offer Fiduciary service - I want to make sure all the legal reporting etc are done properly. I was told EF may use something called RIA to act as a Fiduciary. Salespeople can easily con me, so when I call them they may tell me what I want to hear. It'll be great coming from a customer. I am being told I could be responsible if employees lose money in Investement as I picked the funds. Thanks!

P.S: I was told EF doesn't offer this....the following is what I was told

"Fiduciary services. They don't provide fiduciary services to your plan. Which services might be necessary? A 3(38) Fiduciary (investment manager) who can select investments, build model portfolios and provide plan participant education. This will also significantly limit your fiduciary liability as a plan sponsor, as well as provide better investment performance to plan participants:

EF is a great TPA and I use them for the plans I design. There are several great TPAs out there. However, let me re-frame the issue.

As a plan sponsor you have an unlimited fiduciary liability, including personal liability for your employees' investment losses. So just because you have Vanguard funds (and might I also mention DFA funds that are available to retirement plan consultants through open architecture platforms), that does not mean that you are off the hook.

There is also the issue of investment performance and how to improve the investment results for plan participants."

gilgamesh
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Re: S corp - 401K plan - profit sharing

Postby gilgamesh » Fri Mar 17, 2017 10:25 am

This is from another person who charges 0.3% not 0.08% and $1600 vs $1500 and employee fee or each. Are they both wrong about EF

"Employee Fiduciary should rename themselves ...Employer You Are the Fiduciary. Because you are. It is a DIY solution where the sponsor is, by ERISA, the Investment Manager on the plan. The CEO of Employee Fiduciary once told me, to paraphrase..."we hire young inexperienced people to take orders to keep our costs down". Which they have to do as their margins have to be even more razor thin than the typical recordkeepers. And there is no need to pay their $1500 setup fee for a basic 401k plan.

Strategic plan designs, like combining a New Comp 401k plan with a Cash Balance or DB plan is away from their expertise in house.

I wont claim that our option is be all end all, but if you are going to be about .50% on investment related fees with a DIY plan and still be the fiduciary on the plan, at .51% all in we Are the 3(38) fiduciary removing as much of your liability and responsibility as the law permits.

Over the coming months there is going to be a significant uptick in press regarding fiduciary liability on the part of plan sponsors. As was noted prior, if you do not have a named fiduciary, the DOL presumes You are the appointed expert, and therefore assume the personal liablility. Last year 3 of 4 401k plans examined by the DOL were determined to be out of compliance. Fee issues are one of 5 primary categories they examine. Total restitutions, fines, settlements etc last year were $1.79 Billion and will grow this year. We know of plans with less than 50k that were out of compliance and fined. The average fines ranged from 300k to 600K and do not necessarily correlate to the plan asset amount.

Will the DOL knock or your door..... good chance no. However if you do not clearly understand, accept and fulfill the duties required as a fiduciary to the plan you are exposed needlessly. Is this more govt bullcrap, of course. But it is the law. While in our case we provide a core list of Vanguard and DFA funds, along with 5 soon to be 6 asset allocation strategies, the fee we earn is not weighted on managing your personal portfolio or those of staff, but managing the entirety of the plan, getting that off your back. That IS worth .30%, an extremely low and reasonable sum. As can be the same with other solutions where fiduciary and non fiduciary services are clearly identified in writing. "

The above was mentioned in 2014, may be things have changed. But, thus is what worries me. Anyhow, let me do a search on EF here and study this.

smitcat
Posts: 365
Joined: Mon Nov 07, 2016 10:51 am

Re: S corp - 401K plan - profit sharing

Postby smitcat » Fri Mar 17, 2017 10:35 am

"3(38) Fiduciary (investment manager) who can select investments,"
They assist in building the fund choices.
They take your potential fund choices and compare then to the typical gvt plan selections
They take your potential fund choices and graphically show you where the plan may be over or underweighted in choices.

"provide plan participant education."
They supply written guides in all areas.
Also supply online education
Can supply additional education as needed if requested some of which may carry a fee.

"This will also significantly limit your fiduciary liability as a plan sponsor"
As an owner and initiator you are always a fiduciary.

FWIW - please remember , we have transferred from a 'full service" 401K provider before this. That plan had more costs, higher fund fees, less educational materials and a less than balanced fund offering (less funds less balance across potential investing tools).

IMHO - do the best for your employees and yourself with any of these offerings.

surveyor
Posts: 215
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Re: S corp - 401K plan - profit sharing

Postby surveyor » Fri Mar 17, 2017 11:11 am

gilgamesh wrote:0.87% in tax deferred is not bad at all, and the fees are exceptionally good. But, I can almost guarantee you with those low fees, you are the fiduciary responsibility. That I am being told can get very dicey.


As a Plan Sponsor you are always the fiduciary. You can try to buy your way out of that by using TPA, Advisor, Fund picker, etc. but at the end of the day you are the fiduciary for the plan.

gilgamesh
Posts: 725
Joined: Sun Jan 10, 2016 9:29 am

Re: S corp - 401K plan - profit sharing

Postby gilgamesh » Fri Mar 17, 2017 11:16 am

smitcat wrote:"3(38) Fiduciary (investment manager) who can select investments,"
They assist in building the fund choices.
They take your potential fund choices and compare then to the typical gvt plan selections
They take your potential fund choices and graphically show you where the plan may be over or underweighted in choices.

"provide plan participant education."
They supply written guides in all areas.
Also supply online education
Can supply additional education as needed if requested some of which may carry a fee.

"This will also significantly limit your fiduciary liability as a plan sponsor"
As an owner and initiator you are always a fiduciary.

FWIW - please remember , we have transferred from a 'full service" 401K provider before this. That plan had more costs, higher fund fees, less educational materials and a less than balanced fund offering (less funds less balance across potential investing tools).

IMHO - do the best for your employees and yourself with any of these offerings.



Thank you. The responses have been very helpful. It looks like I can get a good list of funds including money market fund, that should provide choices that will be legally binding. I might offer a 401k next year and add on profit share in 2020.

gilgamesh
Posts: 725
Joined: Sun Jan 10, 2016 9:29 am

Re: S corp - 401K plan - profit sharing

Postby gilgamesh » Fri Mar 17, 2017 11:18 am

surveyor wrote:
gilgamesh wrote:0.87% in tax deferred is not bad at all, and the fees are exceptionally good. But, I can almost guarantee you with those low fees, you are the fiduciary responsibility. That I am being told can get very dicey.


As a Plan Sponsor you are always the fiduciary. You can try to buy your way out of that by using TPA, Advisor, Fund picker, etc. but at the end of the day you are the fiduciary for the plan.


Ok! Other than offering a good list of funds, is there anything else needed of me? Any resources to study on what I need to do to be a fudicary of a 401k I offer.

ERISA Stone
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Re: S corp - 401K plan - profit sharing

Postby ERISA Stone » Fri Mar 17, 2017 12:05 pm

The .08% fee goes directly to Matrix Trust Company - the firm that houses the assets for EF clients. This is a standard fee. You either pay for it directly, like in EF's case, or it's wrapped into expense ratios.

I can only speak of my experience with EF employees:

My initial contact has over 12 years of experience in the industry, and by chance, I happen to know of her. She has a solid reputation in the industry.
My conversion specialist has over 17 years of experience in the industry.
I'm not sure about my day-to-day contact because I can't find her on linkedin. To date, she has been qualified to handle my account.
Full disclosure - I have consulted with some people who use EF and I don't agree with all advice they have given. However, I think you can find disagreement in any firm you go with. It doesn't make my opinion of EF any less.

They likely don't provide the quality of plan design that premium firms might charge, but then again, I don't think that's needed for the vast majority of plans. The highest level of complexity most plans might need is a new comparability formula, and I haven't heard anyone complain about this in relation to EF. I cannot disagree more that they are a DIY shop. That's silly competitor speak. They might outsource their new comparability calculations. Frankly, I don't care. They charge me $750 and that is a reasonable charge in my view.

It doesn't matter if you are named fiduciary or not. If you or an entity is acting in a fiduciary capacity, you are a fiduciary. Full stop. That doesn't mean you can't create layers (committees for example) to try and make it more difficult to pinpoint fiduciaries in the event of a lawsuit, but the fiduciary is the fiduciary.

One of my favorite anecdotes was I worked for a trust company who had a service called "directed trustee" and its perception was it alleviated fiduciary responsibilities of the plan sponsor. It was the exact same product as someone who didn't sign up for a directed trustee, and there was no risk mitigation because the company took direction from the plan sponsor, meaning, the plan sponsor was still on the hook for any decision made by my company.

Regarding investments, IMO, if you are trying to minimize risk exposure, your best course of action is to review the TSP and do your best to mimic it with Vanguard or Fidelity funds (there are other good fund providers, I'm just most familiar with these two). A fiduciary doesn't guarantee gains; a fiduciary makes prudent decisions on behalf of the participants. If you read the cases I think you are referring to, there were some fairly egregious practices going on (again this is my opinion, courts seem to agree).

In addition, you might want to consider not allowing self-directed brokerage accounts. I've heard differing opinions but there are enough people out there that think a fiduciary is responsible for monitoring SDBA investments that I'm not interested in taking on the risk. Also, don't get cute with investments. Don't try to buy a property in the name of the plan (or some similar investment) that might somehow be tied to you. This is what gets people in trouble. Keep it simple. Follow the TSP.

Last, every few years, audit your fees and interview vendors to determine if you can do better. You don't have to switch. You just need to show that you are looking out for the participants.

At the end of the day, you need to do what is best for you and your employees. If it makes you sleep better at night, hire a 3(38) fiduciary. I don't think it's necessary in my case.

HG01
Posts: 6
Joined: Thu Aug 11, 2016 2:23 pm

Re: S corp - 401K plan - profit sharing

Postby HG01 » Fri Mar 17, 2017 1:06 pm

More than regular employees, the question is about a class of employees who are on W2 but draw hourly salary. It is used widely in IT consulting / services firms where we hire folks for a fixed duration / assignment and once the assignment ends -- the contract terminates. In some cases these assignments go for couple of years and we don't want to give 401K or profit sharing to these types of employees.

Spirit Rider wrote:What the previous poster might be referring to, is there is a profit sharing allocation method that can possibly allow the owners to make a higher profit sharing contribution.

This is referred to as the New Comparability Method. It is based on the fact that regulations require equal outcomes not necessarily equal contributions. It would require a higher profit sharing contributions to all employees. Maybe starting at a base of a 5% profit sharing for all employees. This would more than meet the safe harbor requirements alone.

You generally need to pay the owners high salaries in conjunctions with this to maximize the benefit if you are not already. I suggest you talk to your 401k administrator and see if they offer plans that support the New Comparability Method. The advantage this is highly dependent on the census of your employees, but it is certainly worth looking into.

ERISA Stone
Posts: 1203
Joined: Tue Jun 24, 2014 8:54 am

Re: S corp - 401K plan - profit sharing

Postby ERISA Stone » Fri Mar 17, 2017 1:43 pm

Based on this post from benefitslink https://benefitslink.com/boards/index.p ... employees/ (note it's from 2009), you can likely exclude this class as long as you pass coverage. To pass coverage, at least 70% of NHCEs must benefit when compared to the % of benefitting HCEs. It might be a tight fit because you have so few participants.

I don't think you can exclude them retroactively but you should ask your consultant.

Example: if you have 3 NHCE and 2 HCEs:

2 NHCEs benefit: 67%

If both HCEs benefit, test fails (67%/100%)

If one HCE benefits, test passes (67%/50%)

For deferrals and match, if a participant has the ability to defer, they are considered benefitting, even if they don't make a deferral.

gilgamesh
Posts: 725
Joined: Sun Jan 10, 2016 9:29 am

Re: S corp - 401K plan - profit sharing

Postby gilgamesh » Fri Mar 17, 2017 5:36 pm

ERISA Stone wrote:The .08% fee goes directly to Matrix Trust Company - the firm that houses the assets for EF clients. This is a standard fee. You either pay for it directly, like in EF's case, or it's wrapped into expense ratios.

I can only speak of my experience with EF employees:

My initial contact has over 12 years of experience in the industry, and by chance, I happen to know of her. She has a solid reputation in the industry.
My conversion specialist has over 17 years of experience in the industry.
I'm not sure about my day-to-day contact because I can't find her on linkedin. To date, she has been qualified to handle my account.
Full disclosure - I have consulted with some people who use EF and I don't agree with all advice they have given. However, I think you can find disagreement in any firm you go with. It doesn't make my opinion of EF any less.

They likely don't provide the quality of plan design that premium firms might charge, but then again, I don't think that's needed for the vast majority of plans. The highest level of complexity most plans might need is a new comparability formula, and I haven't heard anyone complain about this in relation to EF. I cannot disagree more that they are a DIY shop. That's silly competitor speak. They might outsource their new comparability calculations. Frankly, I don't care. They charge me $750 and that is a reasonable charge in my view.

It doesn't matter if you are named fiduciary or not. If you or an entity is acting in a fiduciary capacity, you are a fiduciary. Full stop. That doesn't mean you can't create layers (committees for example) to try and make it more difficult to pinpoint fiduciaries in the event of a lawsuit, but the fiduciary is the fiduciary.

One of my favorite anecdotes was I worked for a trust company who had a service called "directed trustee" and its perception was it alleviated fiduciary responsibilities of the plan sponsor. It was the exact same product as someone who didn't sign up for a directed trustee, and there was no risk mitigation because the company took direction from the plan sponsor, meaning, the plan sponsor was still on the hook for any decision made by my company.

Regarding investments, IMO, if you are trying to minimize risk exposure, your best course of action is to review the TSP and do your best to mimic it with Vanguard or Fidelity funds (there are other good fund providers, I'm just most familiar with these two). A fiduciary doesn't guarantee gains; a fiduciary makes prudent decisions on behalf of the participants. If you read the cases I think you are referring to, there were some fairly egregious practices going on (again this is my opinion, courts seem to agree).

In addition, you might want to consider not allowing self-directed brokerage accounts. I've heard differing opinions but there are enough people out there that think a fiduciary is responsible for monitoring SDBA investments that I'm not interested in taking on the risk. Also, don't get cute with investments. Don't try to buy a property in the name of the plan (or some similar investment) that might somehow be tied to you. This is what gets people in trouble. Keep it simple. Follow the TSP.

Last, every few years, audit your fees and interview vendors to determine if you can do better. You don't have to switch. You just need to show that you are looking out for the participants.

At the end of the day, you need to do what is best for you and your employees. If it makes you sleep better at night, hire a 3(38) fiduciary. I don't think it's necessary in my case.


Thanks!

gilgamesh
Posts: 725
Joined: Sun Jan 10, 2016 9:29 am

Re: S corp - 401K plan - profit sharing

Postby gilgamesh » Fri Mar 17, 2017 6:01 pm

My sample calculation, for owner and spouse is an employee as well.

Simple IRA $25k, 401k $36k. 3% match in both cases, which cancels out. 0.08% cancels out with taxable tax drag, for ease of calculation.

401k
$11k at 7.2% in 10 years will be $22k

Taxable

$8870 (33% current tax bracket, and $1500 401k fee added back)at 7.2% in 10 years will be $17,740

$4,260 difference, so if capital gains tax is zero, break even retirement tax rate is 19.36%.

So, as I plan to be in 15% tax bracket in retirements, 401k safe harbor is the better choice for me.

With the 0.08% drag, I have to figure out whether rolling all my IRA into 401k and doing backdoor Roth is worth it (I don't know EF offers this, anyways)

P.S: All employees currently participate in 3% match simple IRA and that's why I can assume the non-elective 3% safe harbor would be a wash.

gilgamesh
Posts: 725
Joined: Sun Jan 10, 2016 9:29 am

Re: S corp - 401K plan - profit sharing

Postby gilgamesh » Fri Mar 17, 2017 7:22 pm

I wonder anyone knows the answer to this

I have two businesses, with two different tax ID and two different single owner LLC. However, I have filed the necessary paperwork to file taxes as an S-Corp for 2017 tax return.

For Simple IRA I was told employees from both businesses needs to be included and I of course could only contribute $12.5k between the two. With two different S-Corp with just one owner, will I only be allowed to contribute $18k max with safe harbor 401k? Or could it possibly be $18k for each business (I doubt it very much, but worth asking)

I will run it by my accountant Monday.

Spirit Rider
Posts: 5659
Joined: Fri Mar 02, 2007 2:39 pm

Re: S corp - 401K plan - profit sharing

Postby Spirit Rider » Fri Mar 17, 2017 10:38 pm

gilgamesh wrote:I wonder anyone knows the answer to this

I have two businesses, with two different tax ID and two different single owner LLC. However, I have filed the necessary paperwork to file taxes as an S-Corp for 2017 tax return.

For Simple IRA I was told employees from both businesses needs to be included and I of course could only contribute $12.5k between the two. With two different S-Corp with just one owner, will I only be allowed to contribute $18k max with safe harbor 401k? Or could it possibly be $18k for each business (I doubt it very much, but worth asking)

I will run it by my accountant Monday.

This is a controlled group situation. It wouldn't matter whether it a SIMPLE IRA or safe harbor 401k, the same rules apply. You can only have one plan for both businesses and all eligible employees at both businesses must be included.

Even if you were an owner of your business and employed by a totally separate business there is one employee deferral limit (2017 = $18K) across all plans.

gilgamesh
Posts: 725
Joined: Sun Jan 10, 2016 9:29 am

Re: S corp - 401K plan - profit sharing

Postby gilgamesh » Sat Mar 18, 2017 4:50 am

Spirit Rider wrote:
gilgamesh wrote:I wonder anyone knows the answer to this

I have two businesses, with two different tax ID and two different single owner LLC. However, I have filed the necessary paperwork to file taxes as an S-Corp for 2017 tax return.

For Simple IRA I was told employees from both businesses needs to be included and I of course could only contribute $12.5k between the two. With two different S-Corp with just one owner, will I only be allowed to contribute $18k max with safe harbor 401k? Or could it possibly be $18k for each business (I doubt it very much, but worth asking)

I will run it by my accountant Monday.

This is a controlled group situation. It wouldn't matter whether it a SIMPLE IRA or safe harbor 401k, the same rules apply. You can only have one plan for both businesses and all eligible employees at both businesses must be included.

Even if you were an owner of your business and employed by a totally separate business there is one employee deferral limit (2017 = $18K) across all plans.


Thank you!

artgerst
Posts: 141
Joined: Tue Jun 23, 2015 8:34 pm

Re: S corp - 401K plan - profit sharing

Postby artgerst » Sat Mar 18, 2017 7:38 am

To answer the original question from the OP we were in a similar situation (the numbers didn't work out for us with profit sharing) and although we also have spouses working which is a great benefit on many levels, we also tried the mega back door roth http://www.madfientist.com/after-tax-contributions/. The benefit is that it gets you (potentially) to your max level. Not pretax benefit on contribution but still another path where there is at least a tax-free growth on the investment. Note that although rarely mentioned in posts on the subject of a mega back door roth, there are compliance requirements (I believe the ACP test) with this. For us, the company did have to contribute a bit to others but still worth it.

gilgamesh
Posts: 725
Joined: Sun Jan 10, 2016 9:29 am

Re: S corp - 401K plan - profit sharing

Postby gilgamesh » Sat Mar 18, 2017 9:58 am

artgerst wrote:To answer the original question from the OP we were in a similar situation (the numbers didn't work out for us with profit sharing) and although we also have spouses working which is a great benefit on many levels, we also tried the mega back door roth http://www.madfientist.com/after-tax-contributions/. The benefit is that it gets you (potentially) to your max level. Not pretax benefit on contribution but still another path where there is at least a tax-free growth on the investment. Note that although rarely mentioned in posts on the subject of a mega back door roth, there are compliance requirements (I believe the ACP test) with this. For us, the company did have to contribute a bit to others but still worth it.


This is an excellent option. In fact I started a thread on this a few months ago...

viewtopic.php?f=1&t=195939&p=2990357#p2990357

Could you please tell me more on how you were able to do this?

It looks like employees have to also contribute towards after-tax 401k, and I assume this cannot be just my wife. Employees don't even max out 18K so they don't need the after-tax portion at all. So, it will not pass ACP test.

Could you please tell me how you were able to do that. Who manages your 401k, is it Employee Fiduciary?

Thank you so much. It would be absolutely amazing if the mega-backdoor Roth is open to me.

artgerst
Posts: 141
Joined: Tue Jun 23, 2015 8:34 pm

Re: S corp - 401K plan - profit sharing

Postby artgerst » Sat Mar 18, 2017 11:20 am

gilgamesh wrote:
Could you please tell me more on how you were able to do this?


Honestly the process of doing this has been a long process, not easy, and I go back and forth on whether or not it was really worth it. Our plan is with TRowePrice. They handle everything (5500, compliance, etc.). The company has a safe harbor plan (auto contribution of a percentage).

As you will read in many posts on the subject the main items are:

1. Change your plan to accept after-tax contributions (I think the cost was $400? or so for a plan change). Note that for a plan change in a safe harbor plan you can't make the changes take effect in the next calendar year.
2. Change the plan to also allow in-service withdrawals. (so you can roll out the post-tax contributions + earnings to a Roth and a TIRA, respectively.
3. (Hard Part) Use a spreadsheet to figure out how much you want to contribute post-tax here. Here you need to do some calculations based on your salary, other post-tax contributors (which you won't know unless you know all of the people in the company and whether or not they might contribute in that year), HCEs (highly compensated employees - calculated either as 5%+ owners, 5%+ owners spouses, employees with salaries from last year > $120k or whatever the current amount is), NHCEs (everyone else).
4. Make post-tax contributions during the year
5. In new year deal with ACP testing. This is where most posts don't talk about this. Assuming that only the (2) owners participate and no NHCEs participate then you will have a 100% chance of contributing some amount of money to NHCE's. If an NHCE contributes then you may not have to. I believe the calculation is something like the average percentage of after tax contributions of HCE's cannot be greater than 2% more than the average of NHCEs. Example would be 5 HCE's and 10 NHCE's. Only 2 owners (HCEs) contribute. Assume 100k salary and 10% contribution of salary to post-tax. So (10%+10%+0%+0%+0%) = 20%/5 HCEs = 4%. For NHCE's it would be 0% if no one did any post tax contributions. So 4% is more than 2% away from 0%. You have to compensate the NHCE's to get up to the 2% mark on the NHCE side. This is (I believe) typically done automatically by the 401k company or compliance company where they choose the least amount to the company by choosing 5 (I think 5 is requirement since you can't just pick one person) NHCE's to get the percentage up. If you happen to have people who start at the company at the very end of the year or people with very small salaries, both provide higher percentages for NHCEs but lower cost. If the NHCEs work full year and just below the 120k mark then the amount is higher.
6. In new year roll out post tax to Roth and post tax earnings to TIRA (lots of notes here like moving into a TIRA might mess up your regular back door roth and also your 401k company needs to have the posttax contributions with their associated earnings in a separate account/bucket. Lots of discussion on this but essentially just asking your 401k company if they keep track of the money like this is probably the test.) There are tax forms to file but I haven't reached that point yet so don't know specifics.

Positives:
- Once plan changes you are set
- TRowePrice was pretty good with everything

Negatives:
- ACP test. You really don't know how this will work out if you don't have any NHCE's making after-tax contributions. Interested to hear others thoughts on this.

Full disclosure that I am new to this myself and don't rely 100% on what I said without getting more info from others. I hope this helps.

gilgamesh
Posts: 725
Joined: Sun Jan 10, 2016 9:29 am

Re: S corp - 401K plan - profit sharing

Postby gilgamesh » Sat Mar 18, 2017 11:57 am

artgerst wrote:
gilgamesh wrote:
Could you please tell me more on how you were able to do this?


Honestly the process of doing this has been a long process, not easy, and I go back and forth on whether or not it was really worth it. Our plan is with TRowePrice. They handle everything (5500, compliance, etc.). The company has a safe harbor plan (auto contribution of a percentage).

As you will read in many posts on the subject the main items are:

1. Change your plan to accept after-tax contributions (I think the cost was $400? or so for a plan change). Note that for a plan change in a safe harbor plan you can't make the changes take effect in the next calendar year.
2. Change the plan to also allow in-service withdrawals. (so you can roll out the post-tax contributions + earnings to a Roth and a TIRA, respectively.
3. (Hard Part) Use a spreadsheet to figure out how much you want to contribute post-tax here. Here you need to do some calculations based on your salary, other post-tax contributors (which you won't know unless you know all of the people in the company and whether or not they might contribute in that year), HCEs (highly compensated employees - calculated either as 5%+ owners, 5%+ owners spouses, employees with salaries from last year > $120k or whatever the current amount is), NHCEs (everyone else).
4. Make post-tax contributions during the year
5. In new year deal with ACP testing. This is where most posts don't talk about this. Assuming that only the (2) owners participate and no NHCEs participate then you will have a 100% chance of contributing some amount of money to NHCE's. If an NHCE contributes then you may not have to. I believe the calculation is something like the average percentage of after tax contributions of HCE's cannot be greater than 2% more than the average of NHCEs. Example would be 5 HCE's and 10 NHCE's. Only 2 owners (HCEs) contribute. Assume 100k salary and 10% contribution of salary to post-tax. So (10%+10%+0%+0%+0%) = 20%/5 HCEs = 4%. For NHCE's it would be 0% if no one did any post tax contributions. So 4% is more than 2% away from 0%. You have to compensate the NHCE's to get up to the 2% mark on the NHCE side. This is (I believe) typically done automatically by the 401k company or compliance company where they choose the least amount to the company by choosing 5 (I think 5 is requirement since you can't just pick one person) NHCE's to get the percentage up. If you happen to have people who start at the company at the very end of the year or people with very small salaries, both provide higher percentages for NHCEs but lower cost. If the NHCEs work full year and just below the 120k mark then the amount is higher.
6. In new year roll out post tax to Roth and post tax earnings to TIRA (lots of notes here like moving into a TIRA might mess up your regular back door roth and also your 401k company needs to have the posttax contributions with their associated earnings in a separate account/bucket. Lots of discussion on this but essentially just asking your 401k company if they keep track of the money like this is probably the test.) There are tax forms to file but I haven't reached that point yet so don't know specifics.

Positives:
- Once plan changes you are set
- TRowePrice was pretty good with everything

Negatives:
- ACP test. You really don't know how this will work out if you don't have any NHCE's making after-tax contributions. Interested to hear others thoughts on this.

Full disclosure that I am new to this myself and don't rely 100% on what I said without getting more info from others. I hope this helps.


It's extremely helpful. I fully understand your disclosure, but it's a good starting point. Thank you!

Spirit Rider
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Re: S corp - 401K plan - profit sharing

Postby Spirit Rider » Sat Mar 18, 2017 12:23 pm

I believe your ACP testing is a little off and I believe this is how the testing is done, but I am not a professional and while I have been subject to a failure, I have never been privy to the actual calculation.

First, you calculate the HCE and NHCE average percentages separately. Then one of the following tests must pass.

1.25 Test: HCE% <= NHCE% * 1.25

2.00 Test: Lesser of HCE% <= NHCE% * 2.00 or HCE% <= NHCE% + 2.00

For example: 5 HCEs @ $120K, 10 NHCEs @ $44K. 2 HCEs contribute 10%, no NHCEs contribute.

HCE% = total HCE contributions / total HCE compensation
NHCE% = total NHCE contributions / total NHCE compensation

Assume this is a safe harbor plan with 3% non-elective contribution The ACP testing might look like this with only two out of the five HCEs making 10% after-tax contribution ($120K * 2 * 10%) = $24K.

The HCE ACP calculation is ($600K * 3% = 18K + $24K = $42K/ $600K = 7%.
The NHCE ACP calcualtion is $440K * 3% = 13.2K / $440K = 3%.

Allowed HCE% = 3% + 2% = 5%, HCE = 7% = failure. You need to either return 2% salary to each HCE contributor or make an after-tax contribution to each NHCE of 2%.

Now you understand why the benefit of after-tax contributions can be elusive for small business owners with employees. You need some combination of HCEs other than you making less after-tax contributions and your NHCEs making more. How likely is that?

artgerst
Posts: 141
Joined: Tue Jun 23, 2015 8:34 pm

Re: S corp - 401K plan - profit sharing

Postby artgerst » Sat Mar 18, 2017 1:29 pm

I think you are much closer than I was on the calculation. Thank you.

The two points I do know from experience that are a little different from what you said are:
- the non-elective contribution (3% in your case) is not part of the calculation. I thought it was too but after going through this process I found out it wasn't part of the calculation. Makes a little difference in the end result.
- also the "or make an after-tax contribution to each NHCE of 2%" is not exactly correct. i.e., I believe they select some number of people (I think at least 5) and each person might have a different percentage to fix the compliance issue. I believe most companies will be the best allocation across those 5+ to give the company the least amount for correction. That was the case for us.

You are spot on with the comment about "benefit of after-tax contributions can be elusive for small business owners with employees"

ERISA Stone
Posts: 1203
Joined: Tue Jun 24, 2014 8:54 am

Re: S corp - 401K plan - profit sharing

Postby ERISA Stone » Sat Mar 18, 2017 2:54 pm

Spirit Rider wrote:
gilgamesh wrote:I wonder anyone knows the answer to this

I have two businesses, with two different tax ID and two different single owner LLC. However, I have filed the necessary paperwork to file taxes as an S-Corp for 2017 tax return.

For Simple IRA I was told employees from both businesses needs to be included and I of course could only contribute $12.5k between the two. With two different S-Corp with just one owner, will I only be allowed to contribute $18k max with safe harbor 401k? Or could it possibly be $18k for each business (I doubt it very much, but worth asking)

I will run it by my accountant Monday.

This is a controlled group situation. It wouldn't matter whether it a SIMPLE IRA or safe harbor 401k, the same rules apply. You can only have one plan for both businesses and all eligible employees at both businesses must be included.

Even if you were an owner of your business and employed by a totally separate business there is one employee deferral limit (2017 = $18K) across all plans.


He can have multiple plans but nondiscrimination testing must pass for both plans using employees from both businesses. He can also exclude employees from one company as long as all testing passes. Also limits for both plans are treated as one plan. This can get really expensive to administer.

ETA I'm not sure if we are only discussing SIMPLE, and not a 401k plan. I assume he would have to cover everyone in a SIMPLE.

gilgamesh
Posts: 725
Joined: Sun Jan 10, 2016 9:29 am

Re: S corp - 401K plan - profit sharing

Postby gilgamesh » Sat Mar 18, 2017 3:04 pm

Spirit Rider wrote:I believe your ACP testing is a little off and I believe this is how the testing is done, but I am not a professional and while I have been subject to a failure, I have never been privy to the actual calculation.

First, you calculate the HCE and NHCE average percentages separately. Then one of the following tests must pass.

1.25 Test: HCE% <= NHCE% * 1.25

2.00 Test: Lesser of HCE% <= NHCE% * 2.00 or HCE% <= NHCE% + 2.00

For example: 5 HCEs @ $120K, 10 NHCEs @ $44K. 2 HCEs contribute 10%, no NHCEs contribute.

HCE% = total HCE contributions / total HCE compensation
NHCE% = total NHCE contributions / total NHCE compensation

Assume this is a safe harbor plan with 3% non-elective contribution The ACP testing might look like this with only two out of the five HCEs making 10% after-tax contribution ($120K * 2 * 10%) = $24K.

The HCE ACP calculation is ($600K * 3% = 18K + $24K = $42K/ $600K = 7%.
The NHCE ACP calcualtion is $440K * 3% = 13.2K / $440K = 3%.

Allowed HCE% = 3% + 2% = 5%, HCE = 7% = failure. You need to either return 2% salary to each HCE contributor or make an after-tax contribution to each NHCE of 2%.

Now you understand why the benefit of after-tax contributions can be elusive for small business owners with employees. You need some combination of HCEs other than you making less after-tax contributions and your NHCEs making more. How likely is that?


Thanks!....yeah! That's not happening.

gilgamesh
Posts: 725
Joined: Sun Jan 10, 2016 9:29 am

Re: S corp - 401K plan - profit sharing

Postby gilgamesh » Sat Mar 18, 2017 3:05 pm

ERISA Stone wrote:
Spirit Rider wrote:
gilgamesh wrote:I wonder anyone knows the answer to this

I have two businesses, with two different tax ID and two different single owner LLC. However, I have filed the necessary paperwork to file taxes as an S-Corp for 2017 tax return.

For Simple IRA I was told employees from both businesses needs to be included and I of course could only contribute $12.5k between the two. With two different S-Corp with just one owner, will I only be allowed to contribute $18k max with safe harbor 401k? Or could it possibly be $18k for each business (I doubt it very much, but worth asking)

I will run it by my accountant Monday.

This is a controlled group situation. It wouldn't matter whether it a SIMPLE IRA or safe harbor 401k, the same rules apply. You can only have one plan for both businesses and all eligible employees at both businesses must be included.

Even if you were an owner of your business and employed by a totally separate business there is one employee deferral limit (2017 = $18K) across all plans.


He can have multiple plans but nondiscrimination testing must pass for both plans using employees from both businesses. He can also exclude employees from one company as long as all testing passes. Also limits for both plans are treated as one plan. This can get really expensive to administer.

ETA I'm not sure if we are only discussing SIMPLE, and not a 401k plan. I assume he would have to cover everyone in a SIMPLE.


If limits are treated as one plan, then there's no need to have multiple plans. I am definitely including all employees. Will setting up just one plan for both businesses also be really expensive to administer?

investor999
Posts: 87
Joined: Tue Jan 24, 2017 11:43 am

Re: S corp - 401K plan - profit sharing

Postby investor999 » Sat Mar 18, 2017 3:14 pm

Thought I would throw my two cents here on safe harbor 401k plans for small businesses. I am signing up for guideline.com safe harbor for my 6 employee S-Corp.

$40 per month or ($8.00 per employee)
They carry Fiduciary responsibility
3 bp AUM fee.
$500 setup fee
$1000 termination fee within first 2 years.
Access to Admiral Shares of most VG funds with no minimum. Also have some DFA, T.Rowe, etc.

I can't find the catch, would love someone else on the forum to find it! I have no relationship with the company other than soon to be a client.

ERISA Stone
Posts: 1203
Joined: Tue Jun 24, 2014 8:54 am

Re: S corp - 401K plan - profit sharing

Postby ERISA Stone » Sat Mar 18, 2017 3:16 pm

gilgamesh wrote:
ERISA Stone wrote:
Spirit Rider wrote:
gilgamesh wrote:I wonder anyone knows the answer to this

I have two businesses, with two different tax ID and two different single owner LLC. However, I have filed the necessary paperwork to file taxes as an S-Corp for 2017 tax return.

For Simple IRA I was told employees from both businesses needs to be included and I of course could only contribute $12.5k between the two. With two different S-Corp with just one owner, will I only be allowed to contribute $18k max with safe harbor 401k? Or could it possibly be $18k for each business (I doubt it very much, but worth asking)

I will run it by my accountant Monday.

This is a controlled group situation. It wouldn't matter whether it a SIMPLE IRA or safe harbor 401k, the same rules apply. You can only have one plan for both businesses and all eligible employees at both businesses must be included.

Even if you were an owner of your business and employed by a totally separate business there is one employee deferral limit (2017 = $18K) across all plans.


He can have multiple plans but nondiscrimination testing must pass for both plans using employees from both businesses. He can also exclude employees from one company as long as all testing passes. Also limits for both plans are treated as one plan. This can get really expensive to administer.

ETA I'm not sure if we are only discussing SIMPLE, and not a 401k plan. I assume he would have to cover everyone in a SIMPLE.


If limits are treated as one plan, then there's no need to have multiple plans. I am definitely including all employees. Will setting up just one plan for both businesses also be really expensive to administer?


I don't think it should. To include the 2nd company you will need to include the company in the plan document. If you don't include the 2nd company in the document, the participants are not eligible for the plan.

ERISA Stone
Posts: 1203
Joined: Tue Jun 24, 2014 8:54 am

Re: S corp - 401K plan - profit sharing

Postby ERISA Stone » Sat Mar 18, 2017 3:19 pm

[quote="investor999"]Thought I would throw my two cents here on safe harbor 401k plans for small businesses. I am signing up for guideline.com safe harbor for my 6 employee S-Corp.

$40 per month or ($8.00 per employee)
They carry Fiduciary responsibility
3 bp AUM fee.
$500 setup fee
$1000 termination fee within first 2 years.
Access to Admiral Shares of most VG funds with no minimum. Also have some DFA, T.Rowe, etc.

I can't find the catch, would love someone else on the forum to find it! I have no relationship with the company other than soon to be a client.[/quote

If guideline is the company I am thinking of, there are few options for plan design. I think they require a safe harbor match. Also I don't think you can add any eligibility restrictions.

gilgamesh
Posts: 725
Joined: Sun Jan 10, 2016 9:29 am

Re: S corp - 401K plan - profit sharing

Postby gilgamesh » Sat Mar 18, 2017 4:00 pm

ERISA Stone wrote:
gilgamesh wrote:
ERISA Stone wrote:
Spirit Rider wrote:
gilgamesh wrote:I wonder anyone knows the answer to this

I have two businesses, with two different tax ID and two different single owner LLC. However, I have filed the necessary paperwork to file taxes as an S-Corp for 2017 tax return.

For Simple IRA I was told employees from both businesses needs to be included and I of course could only contribute $12.5k between the two. With two different S-Corp with just one owner, will I only be allowed to contribute $18k max with safe harbor 401k? Or could it possibly be $18k for each business (I doubt it very much, but worth asking)

I will run it by my accountant Monday.

This is a controlled group situation. It wouldn't matter whether it a SIMPLE IRA or safe harbor 401k, the same rules apply. You can only have one plan for both businesses and all eligible employees at both businesses must be included.

Even if you were an owner of your business and employed by a totally separate business there is one employee deferral limit (2017 = $18K) across all plans.


He can have multiple plans but nondiscrimination testing must pass for both plans using employees from both businesses. He can also exclude employees from one company as long as all testing passes. Also limits for both plans are treated as one plan. This can get really expensive to administer.

ETA I'm not sure if we are only discussing SIMPLE, and not a 401k plan. I assume he would have to cover everyone in a SIMPLE.


If limits are treated as one plan, then there's no need to have multiple plans. I am definitely including all employees. Will setting up just one plan for both businesses also be really expensive to administer?


I don't think it should. To include the 2nd company you will need to include the company in the plan document. If you don't include the 2nd company in the document, the participants are not eligible for the plan.


Ok thanks.

Not that I want to, but is it legal not to include the second company and its employees from the 3% Match?

Also, if I do Simple IRA for one and safe harbor 401k for the other, my max contribution can still be a total of $18k right?

gilgamesh
Posts: 725
Joined: Sun Jan 10, 2016 9:29 am

Re: S corp - 401K plan - profit sharing

Postby gilgamesh » Sat Mar 18, 2017 4:05 pm

investor999 wrote:Thought I would throw my two cents here on safe harbor 401k plans for small businesses. I am signing up for guideline.com safe harbor for my 6 employee S-Corp.

$40 per month or ($8.00 per employee)
They carry Fiduciary responsibility
3 bp AUM fee.
$500 setup fee
$1000 termination fee within first 2 years.
Access to Admiral Shares of most VG funds with no minimum. Also have some DFA, T.Rowe, etc.

I can't find the catch, would love someone else on the forum to find it! I have no relationship with the company other than soon to be a client.


Wow! That sounds awesome. Thats cheaper than EF. I am fine with offering a string of VG funds. Thanks for mentioning it, could save me more than 2 cents lol

gilgamesh
Posts: 725
Joined: Sun Jan 10, 2016 9:29 am

Re: S corp - 401K plan - profit sharing

Postby gilgamesh » Sat Mar 18, 2017 4:07 pm

ERISA Stone wrote:
investor999 wrote:Thought I would throw my two cents here on safe harbor 401k plans for small businesses. I am signing up for guideline.com safe harbor for my 6 employee S-Corp.

$40 per month or ($8.00 per employee)
They carry Fiduciary responsibility
3 bp AUM fee.
$500 setup fee
$1000 termination fee within first 2 years.
Access to Admiral Shares of most VG funds with no minimum. Also have some DFA, T.Rowe, etc.

I can't find the catch, would love someone else on the forum to find it! I have no relationship with the company other than soon to be a client.[/quote

If guideline is the company I am thinking of, there are few options for plan design. I think they require a safe harbor match. Also I don't think you can add any eligibility restrictions.


What are eligibility restrictions. I am planning to offer safe harbor with 3% match to every employee. I want all current employees to be immediately eligible. However, if it's legal I would like new employees to have to wait as long as legally possible. Is this the eligibility restrictions, you mention?

investor999
Posts: 87
Joined: Tue Jan 24, 2017 11:43 am

Re: S corp - 401K plan - profit sharing

Postby investor999 » Sat Mar 18, 2017 4:24 pm

Here are my options from the application. Hope this clarifies. I am going with 6 months.

Eligibility Requirements
Minimum Age: 18, 19, 20, or 21 years old (Choose one)
Minimum Service: 0, 3, 6, or 12 months of service (Choose One)
Safe Harbor
Choose one of the following:
Basic: 100% of the first 3% of deferred W-2 income, 50% of the next 2% of deferred W-2 income
Enhanced: 100% up to 4%, 5% or 6% of deferred W-2 income
Non-Elective Contribution: a minimum of 3% of W-2 income to every eligible employee’s 401(k)
No Safe Harbor: Please refer to discretionary matching and profit sharing below.

gilgamesh
Posts: 725
Joined: Sun Jan 10, 2016 9:29 am

Re: S corp - 401K plan - profit sharing

Postby gilgamesh » Sat Mar 18, 2017 4:31 pm

investor999 wrote:Here are my options from the application. Hope this clarifies. I am going with 6 months.

Eligibility Requirements
Minimum Age: 18, 19, 20, or 21 years old (Choose one)
Minimum Service: 0, 3, 6, or 12 months of service (Choose One)
Safe Harbor
Choose one of the following:
Basic: 100% of the first 3% of deferred W-2 income, 50% of the next 2% of deferred W-2 income
Enhanced: 100% up to 4%, 5% or 6% of deferred W-2 income
Non-Elective Contribution: a minimum of 3% of W-2 income to every eligible employee’s 401(k)
No Safe Harbor: Please refer to discretionary matching and profit sharing below.


Thanks!

gilgamesh
Posts: 725
Joined: Sun Jan 10, 2016 9:29 am

Re: S corp - 401K plan - profit sharing

Postby gilgamesh » Sat Mar 18, 2017 5:13 pm

ERISA Stone wrote:
investor999 wrote:Thought I would throw my two cents here on safe harbor 401k plans for small businesses. I am signing up for guideline.com safe harbor for my 6 employee S-Corp.

$40 per month or ($8.00 per employee)
They carry Fiduciary responsibility
3 bp AUM fee.
$500 setup fee
$1000 termination fee within first 2 years.
Access to Admiral Shares of most VG funds with no minimum. Also have some DFA, T.Rowe, etc.

I can't find the catch, would love someone else on the forum to find it! I have no relationship with the company other than soon to be a client.[/quote

If guideline is the company I am thinking of, there are few options for plan design. I think they require a safe harbor match. Also I don't think you can add any eligibility restrictions.


Do you know what happens if a 401k company goes bankrupt?

investor999
Posts: 87
Joined: Tue Jan 24, 2017 11:43 am

Re: S corp - 401K plan - profit sharing

Postby investor999 » Sat Mar 18, 2017 5:23 pm

The custodian is SIPC protected. You'd still have your assets. They have a pretty good FAQ that you could ask them for. I was comfortable enough to give it a go. They are about 3 years old.

smitcat
Posts: 365
Joined: Mon Nov 07, 2016 10:51 am

Re: S corp - 401K plan - profit sharing

Postby smitcat » Sat Mar 18, 2017 5:33 pm

"Thought I would throw my two cents here on safe harbor 401k plans for small businesses. I am signing up for guideline.com safe harbor for my 6 employee S-Corp.
$40 per month or ($8.00 per employee)
They carry Fiduciary responsibility
3 bp AUM fee.
$500 setup fee
$1000 termination fee within first 2 years.
Access to Admiral Shares of most VG funds with no minimum. Also have some DFA, T.Rowe, etc.
I can't find the catch, would love someone else on the forum to find it! I have no relationship with the company other than soon to be a client."


It appears that you are limited to 8 predetermined plans - I may be wrong but that's what I get form the website so far.

artgerst
Posts: 141
Joined: Tue Jun 23, 2015 8:34 pm

Re: S corp - 401K plan - profit sharing

Postby artgerst » Sat Mar 18, 2017 5:55 pm

Can someone explain to me why so many people mention Employee Fiduciary (and now guideline.com)? I'm asking from the perspective of someone with a company (S-Corp) who had used Vanguard at one point for our 401k, but then was turned away because we were too small (20 employees) so landed on TRowePrice because they charged nothing (initially or yearly) to the employer and employee and handles pretty much everything. Note that I am not promoting TRowePrice, but I feel like I'm missing something. I can see that these other companies allow you to use Vanguard funds (which I can understand that is the draw) or is it that TRowePrice has fees that I'm not noticing.


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