A successful retirement plan can help attract and retain great employees and promote retirement readiness while at the same time offering substantial tax benefits for employers. At TSC we believe that for a plan to be truly successful, it must meet the unique needs and goals of each client. While a one-size-fits-all approach to retirement plans might be easy for service providers, it is rarely in the best interest of employers and their employees. By learning about the employee demographics, business and personal goals, financial resources, and tax objectives each client, we are able to offer a customized plan that is specifically designed to meet the client’s needs and goals.
Like 401(k) deferrals and matching contributions, the allocation of employer profit sharing contributions must not disproportionately benefit owners and other highly-compensated employees (HCEs). Typically this is established by passing the general nondiscrimination test which compares profit sharing contributions made to HCEs to those made to non-HCEs. However, in many instances, HCEs will be better served by testing profit sharing contributions based on the benefits the contributions would theoretically provide at retirement. This method of testing is known as new comparability or cross-testing.
Component Plans Testing
Component plans testing is another way to test profit sharing contributions. This method separates eligible employees into two or more component groups. Each group is then tested on its own using either contribution-based testing or cross-testing.
Safe harbor provisions in a 401(k) plan eliminate the testing requirement for employee 401(k) deferrals and, in some cases, employer matching contributions. This is especially useful when HCEs are unable to maximize their contributions because of nondiscrimination test limitations. To have a safe harbor plan employers must make either a particular matching contribution or a specified employer non-elective contribution.
Automatic Enrollment / Automatic Increase
Automatic enrollment provisions make it easy for employees to save for retirement. With this feature, a predetermined percentage of pay is automatically deducted from each paycheck and deposited into a default investment account for the employee. In addition to automatic enrollment, a plan can include automatic increase under which the amount deducted from the paycheck will be increased on an annual basis. Employees can opt out of these automatic provisions at any time.
Contractors working on government projects subject to the Davis Bacon Act or other “prevailing wage” laws can benefit greatly by contributing “fringe benefits” to a retirement plan. By contributing fringe benefits to a retirement plan, the contractor can save on payroll taxes while at the same time making contributions that improve the plan’s nondiscrimination testing results allowing HCEs to contribute more to the plan.