"QACA" - One of our favorite acronyms because it sounds so much like a funny duck quack of some sort. It actually stands for "Qualified Automatic Contributions Arrangement". CPA's should develop some understanding of this concept because it is an something that could save certain clients of yours some money in the form of lower matching contributions to their 401(k) Plan.
Quite a number of 401(k) Plan Sponsors have what is known as a Basic Safe Harbor Match. The reason for the Safe Harbor Match in the first place is to motivate employees to save for retirement and to allow those employees who are classified by the Internal Revenue Code as Highly Compensated Employees (HCE's) to not be limited in the amount that they may do as salary deferrals. By providing a Safe Harbor Match program, the Highly Compensated Employees (HCE's) can do the maximum $17,500 in salary deferrals (or $23,000 if over age 50).
HCE's are those employees who are greater than 5% shareholders or owners (and certain family members) or those employees who made over $115,000 in the prior year (the $115,000 will be increased later by a COL increase). For plans that do not offer some form of Safe Harbor contribution, HCE's might be limited in what they can do in salary deferrals because of the average deferrals being done by the Non-Highly Compensated Employees. For example, if the NHCE's average 2.5% of compensation for their salary deferrals, then the HCE's would have to average 4.5% or less - otherwise, refunds may have to be made to some of the HCE's. See one of our other posts explaining the ADP testing in more detail.
There is a fairly new type of Safe Harbor plan that could be used in lieu of the Basic Safe Harbor Match. Probably very, very few Plan Sponsors with the traditional Basic Safe Harbor Match have been presented with a discussion of the QACA alternative by their TPA or financial advisors. I have to imagine they would be most impressed if their proactive CPA brought up the idea, whether adopted or not.
Under the Basic Safe Harbor Match, the matching contribution is 100% of the first 3% plus 50% of the next 2%. So if a participant does a deferral of 3% of pay or less, they would get a dollar-for-dollar matching contribution. If a participant did 5% of pay or more in salary deferrals, then they would get a 4% of pay matching contribution. 100% of the first 3% plus 50% of the next 2% = 4%.
This is a matching contribution program combined with automatic enrollment. Automatic enrollment is no big deal for a company that has a limited number of employees and locations if Human Resources makes sure that everyone is provided with a timely enrollment package and also makes sure that everyone turns in an election form, even if they have decided not to do any salary deferrals. That is not that hard to do for any company with only a few new employees being added each year. If everyone turns in a form, then automatic enrollment is rendered entirely moot.
The required Safe Harbor Match for a QACA is less expensive at most levels than the Basic Safe Harbor Match. Let me say that again, because that is the whole point here. The required Safe Harbor Match for a QACA is less expensive at most levels than the Basic Safe Harbor Match.
The QACA match is 100% of the first 1% plus 50% of the next 5%. So, at the 1% level of salary deferrals, the match under both types of Safe Harbors is the same 1%. But at the 2% salary deferral level, the QACA Match is 1.5% rather than 2% for the Basic Safe Harbor - a savings for the Plan Sponsor of 0.5%. At the 2% to 5% level of salary deferrals (most participants fall in this category, by the way), the savings is a full 1%. For example, for salary deferrals of 5%, the QACA Match is 3% whereas the Basic Safe Harbor Match is 4%.
The point is if the Plan Sponsor wants a Safe Harbor plan so that HCE's are not restricted in their salary deferrals, but they would like a Safe Harbor Plan that is less expensive by as much as 1% of compensation, the QACA should be considered (and nobody has told them about that alternative). Also, you can have a 2 year vesting schedule: 1 year of service, 0% vested and 2 or more years of service, 100% vested. This would result in having no cost of a match for those employees who stay just long enough to get their first matching contribution, but then leave your client or prospect.
You cannot change a Safe Harbor Match method in the middle of a Plan Year, so assuming a Calendar Year as the Plan Year, Plan Sponsors should use the next several months to evaluate making the change before 11/30/2014 for the 2015 Plan Year. Now would be the ideal time for a CPA to discuss this with their clients or to include it in your ongoing communications (newsletter, etc.).
Friday, August 29, 2014
Sunday, August 17, 2014
Your Successful Professional Clients May Want More Tax Deferred Retirement Savings
Many "Professionals" (surgeons, attorneys, accountants, engineers, successful business owners) would like to put away more than the $57,500 that is allowed when using a 401(k) Plan. A Cash Balance 401(k) Combo might allow them to shelter an additional $100,000 to $200,000 per partner or owner without increasing the cost for employees by a large percentage. Think of the employee cost not being worse that 7.5% of compensation plus about $1,000 - and it could be quite a bit less in the right circumstances. Many of these types of firms may already spend that much on contributions for employees in their 401(k) plan, so there may be no increase in costs.
Our TPA firm, Plan Design Consultants, Inc. can work with you to get illustrations for your client based upon their specific circumstances and objectives. In all likelihood, a Cash Balance Plan could be utilized to provide more in tax shelter for 2014. We are here to help.
Our TPA firm, Plan Design Consultants, Inc. can work with you to get illustrations for your client based upon their specific circumstances and objectives. In all likelihood, a Cash Balance Plan could be utilized to provide more in tax shelter for 2014. We are here to help.
Thursday, July 31, 2014
Adding Cash Balance Solved A Need for a Professional Firm
An engineering firm told us they wanted to continue to use their 401(k) plan for their 42 employees without much change (3% Safe Harbor plus 1.5% Profit Sharing), but that they would be interested in getting more money put away for the Owners and several key people. They gave us a budget of $50,000 additional for two owners; $30,000 for the other two owners and $10,000 each for three key people or $190,000 total.
We included the seven of them for the $190,000 budget and also covered their 10 lowest paid employees and the cost for them to pass all discrimination testing, etc. was only $6,300. So, $190,000 for principals of $196,300 total is 96.8%.
The concept of adding a Cash Balance Plan in combination with a 401(k) Plan is a great tax deferral technique that CPA's should make sure their successful clients evaluate. Have the client send us a census and a statement as to what they would like achieve and we can generate an illustration - there is not fee for doing this - just the expectation that we can compete for their business.
We included the seven of them for the $190,000 budget and also covered their 10 lowest paid employees and the cost for them to pass all discrimination testing, etc. was only $6,300. So, $190,000 for principals of $196,300 total is 96.8%.
The concept of adding a Cash Balance Plan in combination with a 401(k) Plan is a great tax deferral technique that CPA's should make sure their successful clients evaluate. Have the client send us a census and a statement as to what they would like achieve and we can generate an illustration - there is not fee for doing this - just the expectation that we can compete for their business.
Sunday, July 27, 2014
SIMPLE or SEP Plan May Not Be The Most Cost Effective
Many small business owners would do much better by using a Safe Harbor Cross Tested 401(k) Plan instead of a SIMPLE or SEP. For example, suppose the business owner of a corporation takes $260,000 in compensation and wants the maximum contribution of $52,000 in an SEP. That would be a 20% of compensation contribution. In an SEP, if you want to put away 20% for the owner, you generally have to contribute 20% of salary for each eligible employee. If you had just two employees making $50,000 each, that would be $10,000 each or $20,000 total in contributions for them.
Alternatively, with a Safe Harbor Cross Tested 401(k), it might be possible to contribute 5% of pay or less for the support staff while still maxing out for the owner at $52,000. The Cross Tested 401(k) will even be more effective than an SEP for a business owner or partnership with modest self-employment income.
The SEP is an okay solution for many companies but the Safe Harbor Cross Tested 401(k) might be a far better solution for many others. Even with only one or two support employees, the savings could be thousands of dollars. In our example, if the contribution was 5% for each employee, the total would be $5,000. This would be $15,000 in savings. Yes, you would have to pay to administer the 401(k) plan, but if that was $2,000 a year, the business owner would still have $13,000 per year in savings. For the concept to work, we need about half of the employees to be somewhat younger than the business owner.
As a CPA, you may want to identify all of your clients using an SEP, particularly if they have eligible employees, and encourage then to contact us for a free illustration of how a Safe Harbor Cross Tested 401(k) Plan might be far more effective - perhaps saving them a lot in the contributions for staff category.
All we need is a simple census of name, date of hire, date of birth and compensation estimate for their staff and some indication of their expected Schedule C, K-1 or corporate compensation. If deductions beyond $57,500 are desired, then we can show the your client how a Cash Balance 401(k) Combo might work. Depending upon the business owner's age, deductions of $200,000 or more may be possible.
Alternatively, with a Safe Harbor Cross Tested 401(k), it might be possible to contribute 5% of pay or less for the support staff while still maxing out for the owner at $52,000. The Cross Tested 401(k) will even be more effective than an SEP for a business owner or partnership with modest self-employment income.
The SEP is an okay solution for many companies but the Safe Harbor Cross Tested 401(k) might be a far better solution for many others. Even with only one or two support employees, the savings could be thousands of dollars. In our example, if the contribution was 5% for each employee, the total would be $5,000. This would be $15,000 in savings. Yes, you would have to pay to administer the 401(k) plan, but if that was $2,000 a year, the business owner would still have $13,000 per year in savings. For the concept to work, we need about half of the employees to be somewhat younger than the business owner.
As a CPA, you may want to identify all of your clients using an SEP, particularly if they have eligible employees, and encourage then to contact us for a free illustration of how a Safe Harbor Cross Tested 401(k) Plan might be far more effective - perhaps saving them a lot in the contributions for staff category.
All we need is a simple census of name, date of hire, date of birth and compensation estimate for their staff and some indication of their expected Schedule C, K-1 or corporate compensation. If deductions beyond $57,500 are desired, then we can show the your client how a Cash Balance 401(k) Combo might work. Depending upon the business owner's age, deductions of $200,000 or more may be possible.
Saturday, July 26, 2014
A Overview of Types of Safe Harbor 401(k) Plans
A safe harbor 401(k) plan will eliminate the antidiscrimination testing that often results in the highly paid employees being limited in the amount they can do as salary deferrals. Safe harbor plans must be 100% vested, issue an initial and annual notice and consist of certain required contributions by the Plan Sponsor and you cannot have any allocation conditions such as having to be employed on the last day of the Plan Year.
Traditional Safe Harbors
The Plan Sponsor can make a contribution of a minimum of 3% of compensation to all eligible employees whether they are doing personal salary deferrals or not. This method is the one that should be used if the Plan Sponsor is making additional Profit Sharing contributions to allocation groups (under the "cross-tested method").
Another method is a minimum matching contribution of a 100% match on the first 3% of compensation and a 50% match of contributions above 3%. However no match is required for salary deferrals in excess of 5%. In other words, if an eligible participant does salary deferrals of 3% of his or her compensation, the Plan Sponsor would make a 3% matching contribution. If the participant contributes 5% or more of his or her compensation, the Plan Sponsor would make a match of 4%. If the participant were to contribute 4% of his or her compensation, the Plan Sponsor would make a matching contribution of 3.5% of compensation. Alternatively the Plan Sponsor can have a matching formula of 100% of salary deferrals of up to 6% of compensation. For example, the safe harbor match could be 100% of deferrals of up to 4% or 100% of deferrals of up to 6%, etc. This is called an "Enhanced Safe Harbor Match".
The safe harbor contribution must be 100% vested. Profit Sharing contributions over and above the safe harbor can be subjected to a vesting schedule.
Qualified Automatic Contribution Arrangement (QACA) Safe Harbor
The QACA safe harbor is similar to the traditional safe harbor match but the QACA contribution for Plan Sponors is a minimum match of 100% on salary deferrals up to 1% of compensation and 50% on deferrals between 1% and 6%. At most salary deferral levels, this approach can save the Plan Sponsor a full 1% in matching contributions. Plan Sponsors may alternatively make a 3% contribution to each participant, regardless of whether the participant makes contributions to the plan.
A QACA must also involve automatic enrollment of a minimum of 3% of compensation from the participant’s entry date and through the next full plan year. This rate is generally increased by 1% each plan year until participants contribute 6% of compensation to the plan. Employees can, of course, elect a different salary deferral amount or even elect not to have any salary deferrals. QACA safe harbor contributions must fully vest within two years.
How does a QACA match compare with the older Basic Safe Harbor match? At 1% of salary deferrals the match for both is 1%. At the 2% level, the match for a QACA is 1.5% vs. 2% (or 25% less). At the 3% salary deferral level the match for the QACA is 2% vs 3% for the Basic (or 33% less). At the 4% level of deferrals the QACA match is 2.5% vs 3.5% for the Basic match (or 28% less). At 5% in deferrals, the QACA is 3% vs 4% for the Basic match (or 25% less expensive). Even at the 6% level, the QACA match is maxed out at 3.5% vs the Basic match max of 4% - so it is 12.5% less expensive (0.5% difference divided by 4% = 12.5%). This potential savings could be a real door opener for the Advisor who searches 5500's for plans that probably have a Basic Safe Harbor Match.
Some Additional Points About Safe Harbor Plans
An existing 401(k) Plan cannot become a Safe Harbor Plan during the Plan Year. It can be amended into a Safe Harbor as of the first day of the next Plan Year. You need to plan ahead because a Safe Harbor Notice should be issued 30 days before the new Plan Year starts. A new 401(k) Plan can start as late as October 1 (for a Calendar Year Plan) and still be a Safe Harbor plan for the first short year.
Roth 401(k) contributions can be made to a Safe Harbor 401(k).
If you have any questions about how Safe Harbor 401(k) Plans work, please me (Paul Carlson) at (650) 425-7912. I would be delighted to help.
Traditional Safe Harbors
The Plan Sponsor can make a contribution of a minimum of 3% of compensation to all eligible employees whether they are doing personal salary deferrals or not. This method is the one that should be used if the Plan Sponsor is making additional Profit Sharing contributions to allocation groups (under the "cross-tested method").
Another method is a minimum matching contribution of a 100% match on the first 3% of compensation and a 50% match of contributions above 3%. However no match is required for salary deferrals in excess of 5%. In other words, if an eligible participant does salary deferrals of 3% of his or her compensation, the Plan Sponsor would make a 3% matching contribution. If the participant contributes 5% or more of his or her compensation, the Plan Sponsor would make a match of 4%. If the participant were to contribute 4% of his or her compensation, the Plan Sponsor would make a matching contribution of 3.5% of compensation. Alternatively the Plan Sponsor can have a matching formula of 100% of salary deferrals of up to 6% of compensation. For example, the safe harbor match could be 100% of deferrals of up to 4% or 100% of deferrals of up to 6%, etc. This is called an "Enhanced Safe Harbor Match".
The safe harbor contribution must be 100% vested. Profit Sharing contributions over and above the safe harbor can be subjected to a vesting schedule.
Qualified Automatic Contribution Arrangement (QACA) Safe Harbor
The QACA safe harbor is similar to the traditional safe harbor match but the QACA contribution for Plan Sponors is a minimum match of 100% on salary deferrals up to 1% of compensation and 50% on deferrals between 1% and 6%. At most salary deferral levels, this approach can save the Plan Sponsor a full 1% in matching contributions. Plan Sponsors may alternatively make a 3% contribution to each participant, regardless of whether the participant makes contributions to the plan.
A QACA must also involve automatic enrollment of a minimum of 3% of compensation from the participant’s entry date and through the next full plan year. This rate is generally increased by 1% each plan year until participants contribute 6% of compensation to the plan. Employees can, of course, elect a different salary deferral amount or even elect not to have any salary deferrals. QACA safe harbor contributions must fully vest within two years.
How does a QACA match compare with the older Basic Safe Harbor match? At 1% of salary deferrals the match for both is 1%. At the 2% level, the match for a QACA is 1.5% vs. 2% (or 25% less). At the 3% salary deferral level the match for the QACA is 2% vs 3% for the Basic (or 33% less). At the 4% level of deferrals the QACA match is 2.5% vs 3.5% for the Basic match (or 28% less). At 5% in deferrals, the QACA is 3% vs 4% for the Basic match (or 25% less expensive). Even at the 6% level, the QACA match is maxed out at 3.5% vs the Basic match max of 4% - so it is 12.5% less expensive (0.5% difference divided by 4% = 12.5%). This potential savings could be a real door opener for the Advisor who searches 5500's for plans that probably have a Basic Safe Harbor Match.
Some Additional Points About Safe Harbor Plans
An existing 401(k) Plan cannot become a Safe Harbor Plan during the Plan Year. It can be amended into a Safe Harbor as of the first day of the next Plan Year. You need to plan ahead because a Safe Harbor Notice should be issued 30 days before the new Plan Year starts. A new 401(k) Plan can start as late as October 1 (for a Calendar Year Plan) and still be a Safe Harbor plan for the first short year.
Roth 401(k) contributions can be made to a Safe Harbor 401(k).
If you have any questions about how Safe Harbor 401(k) Plans work, please me (Paul Carlson) at (650) 425-7912. I would be delighted to help.
Thursday, July 24, 2014
Ideal Retirement Plan Design for Very Small Employers
CPA's should be aware of a special retirement plan design approach that their small clients might find very effective in slanting the plan in favor of the business owner.
For a business owner over age 45, one of the best designs for a 401(k) Plan if there are a number of younger employees (as compared to the age of the owner), would be a "Safe Harbor Cross Tested 401(k) Plan."
The way this may be able to work in 2014 for your client is a 4.4% of pay contribution for the non-owners (consisting of a 3% Safe Harbor and a 1.4% additional Profit Sharing). This will allow the business owner to do either $17,500 or $23,000 in Salary Deferrals (depending upon whether or not they are 50 years of age by the last day of the year) plus $34,500 in Profit Sharing for the $57,500 limit. This assumes the business owner is making over $260,000 in salary or income after all contributions and that the allocations pass certain discrimination testing based on projected benefits. Not bad - 13.3% Profit Sharing allocation for the owner or partners while only doing 4.4% for support staff.
Should the owner be able to afford more than the $57,500, they should consider using a 401(k) Cash Balance Combo Plan where an owner in their 50's might be able to put away an additional $100,000 to $180,000 depending upon their age.
Have the client submit census information consisting of name, date of birth, date of hire, ownership and annual compensation estimate to us and we can do a no cost illustration. There is a strong possibility that the change could still be implemented for 2014 - depends upon some current plan document language.
For a business owner over age 45, one of the best designs for a 401(k) Plan if there are a number of younger employees (as compared to the age of the owner), would be a "Safe Harbor Cross Tested 401(k) Plan."
The way this may be able to work in 2014 for your client is a 4.4% of pay contribution for the non-owners (consisting of a 3% Safe Harbor and a 1.4% additional Profit Sharing). This will allow the business owner to do either $17,500 or $23,000 in Salary Deferrals (depending upon whether or not they are 50 years of age by the last day of the year) plus $34,500 in Profit Sharing for the $57,500 limit. This assumes the business owner is making over $260,000 in salary or income after all contributions and that the allocations pass certain discrimination testing based on projected benefits. Not bad - 13.3% Profit Sharing allocation for the owner or partners while only doing 4.4% for support staff.
Should the owner be able to afford more than the $57,500, they should consider using a 401(k) Cash Balance Combo Plan where an owner in their 50's might be able to put away an additional $100,000 to $180,000 depending upon their age.
Have the client submit census information consisting of name, date of birth, date of hire, ownership and annual compensation estimate to us and we can do a no cost illustration. There is a strong possibility that the change could still be implemented for 2014 - depends upon some current plan document language.
Wednesday, July 23, 2014
Is Your Client's 401(k) "Top Heavy" or Will It Become "Top Heavy"
401(k) Plan Sponsors need to understand the implications of their Plan being Top Heavy. Slipping into the Top Heavy category can bring a nasty surprise to a client that does not want to be committed to making employer contributions.
For a Plan to be Top Heavy for a given Plan Year the Key Employees have more than 60% of the total account balances as of the last day of the prior Plan Year. I won't go into it here, but the Key Employee definition is not quite the same as the definition of Highly Compensated Employees.
Being a Top Heavy Plan is not problem as long as times are good and the company contributes 3% of pay or more each year as a Profit Sharing contribution. Top Heavy is also not a problem for a client who maintains a Safe Harbor 401(k) Plan. But many companies maintain the 401(k) Plan simply to allow employees to make salary deferrals with no intention of adding company contributions or at some point they decided to stop making company contributions due to a business downturn. Unfortunately if over time the Key Employees take advantage of doing salary deferrals more than the rest of the staff and the percentage of plan assets for Key Employees creeps over the 60% level as of the last day of the year, then the Employer can be in for a very nasty surprise for the next Plan Year.
If a 401(k) Plan is Top Heavy and if ANY of the Key Employees engage in salary deferrals, then the company is going to be faced with making Top Heavy minimum contributions, whether they can afford to or not. Ouch!
If any of the Key Employees have made salary deferrals of 3% of pay or more, then the Top Heavy minimum contribution is 3% of the pay of all of the Non-Key Employees. So, for example, if a small company had a payroll of $1,000,000 for all of the Non-Key employees, the Top Heavy minimum contribution would be $30,000. This is not something the business owner is very happy about finding out when it is too late to do anything about it.
It takes a bit of forward planning to avoid the nasty surprise. First, you have to be aware of whether or not the Key Employees might have more than 60% of the total assets as of the last day of a Plan Year. If it appears likely that the plan will be Top Heavy, to avoid the Top Heavy Minimum, the Plan Sponsor will need to tell all of the Key Employees to cease their salary deferrals as of the first day of the Top Heavy year. They can do salary deferrals later in the year if it is determined that the company will be able to afford a Profit Sharing contribution of 3% of pay or more for everybody.
If the plan is close to being Top Heavy, the Plan Sponsor may want to routinely cease the salary deferrals of all Key Employees at the beginning of each plan year until it is determined by the TPA or record keeping vendor if that year is Top Heavy or not. The business owner will tend to blame everybody for not proactively warning them that this might be an issue.
It would be a good idea if you are the CPA for some clients who sponsor 401(k) Plans to have the client ask the TPA how close they are to being Top Heavy and for those that are close, take the protective action described above. If a client finds out they are Top Heavy already, then they need to gain a full understanding of the implications.
If you know certain clients do have a 401(k) Plan, you might consider sending them an email link to this blog post - just a little service "above and beyond" for them from their proactive CPA.
For a Plan to be Top Heavy for a given Plan Year the Key Employees have more than 60% of the total account balances as of the last day of the prior Plan Year. I won't go into it here, but the Key Employee definition is not quite the same as the definition of Highly Compensated Employees.
Being a Top Heavy Plan is not problem as long as times are good and the company contributes 3% of pay or more each year as a Profit Sharing contribution. Top Heavy is also not a problem for a client who maintains a Safe Harbor 401(k) Plan. But many companies maintain the 401(k) Plan simply to allow employees to make salary deferrals with no intention of adding company contributions or at some point they decided to stop making company contributions due to a business downturn. Unfortunately if over time the Key Employees take advantage of doing salary deferrals more than the rest of the staff and the percentage of plan assets for Key Employees creeps over the 60% level as of the last day of the year, then the Employer can be in for a very nasty surprise for the next Plan Year.
If a 401(k) Plan is Top Heavy and if ANY of the Key Employees engage in salary deferrals, then the company is going to be faced with making Top Heavy minimum contributions, whether they can afford to or not. Ouch!
If any of the Key Employees have made salary deferrals of 3% of pay or more, then the Top Heavy minimum contribution is 3% of the pay of all of the Non-Key Employees. So, for example, if a small company had a payroll of $1,000,000 for all of the Non-Key employees, the Top Heavy minimum contribution would be $30,000. This is not something the business owner is very happy about finding out when it is too late to do anything about it.
It takes a bit of forward planning to avoid the nasty surprise. First, you have to be aware of whether or not the Key Employees might have more than 60% of the total assets as of the last day of a Plan Year. If it appears likely that the plan will be Top Heavy, to avoid the Top Heavy Minimum, the Plan Sponsor will need to tell all of the Key Employees to cease their salary deferrals as of the first day of the Top Heavy year. They can do salary deferrals later in the year if it is determined that the company will be able to afford a Profit Sharing contribution of 3% of pay or more for everybody.
If the plan is close to being Top Heavy, the Plan Sponsor may want to routinely cease the salary deferrals of all Key Employees at the beginning of each plan year until it is determined by the TPA or record keeping vendor if that year is Top Heavy or not. The business owner will tend to blame everybody for not proactively warning them that this might be an issue.
It would be a good idea if you are the CPA for some clients who sponsor 401(k) Plans to have the client ask the TPA how close they are to being Top Heavy and for those that are close, take the protective action described above. If a client finds out they are Top Heavy already, then they need to gain a full understanding of the implications.
If you know certain clients do have a 401(k) Plan, you might consider sending them an email link to this blog post - just a little service "above and beyond" for them from their proactive CPA.
Tuesday, July 22, 2014
Retirement Plan Limits for 2014
Here is a brief recap of the retirement plan limits for 2014:
Salary Deferral Limit for 401(k) and 403(b) Plans is $17,500. Additional Salary Deferral for someone Age 50 by 12/31/2014 is $5,500. Therefore a 50 year old can defer up to $23,000. The maximum amount of compensation counted for plan purposes is $260,000. Maximum Annual Additions Limit from all contributions is $52,000 and you can add $5,500 if age 50 or more if salary deferrals available. The maximum Defined Benefit Plan retirement amount is $210,000 per year. The amount of compensation in 2014 that would make someone an HCE in 2015 is $115,000. The Social Security Taxable Wage Base for 2014 is $117,000.
For a more complete chart go here:
http://401kacademy.com/storage/Copy%20of%20limitations2014_Orange.pdf
Salary Deferral Limit for 401(k) and 403(b) Plans is $17,500. Additional Salary Deferral for someone Age 50 by 12/31/2014 is $5,500. Therefore a 50 year old can defer up to $23,000. The maximum amount of compensation counted for plan purposes is $260,000. Maximum Annual Additions Limit from all contributions is $52,000 and you can add $5,500 if age 50 or more if salary deferrals available. The maximum Defined Benefit Plan retirement amount is $210,000 per year. The amount of compensation in 2014 that would make someone an HCE in 2015 is $115,000. The Social Security Taxable Wage Base for 2014 is $117,000.
For a more complete chart go here:
http://401kacademy.com/storage/Copy%20of%20limitations2014_Orange.pdf
Tuesday, April 15, 2014
Did Your Client Fail Their ADP Testing and Have to Take Refunds of Salary Deferrals?
Most 401(k) plans are run on a Calendar Year basis. Unless the plan is a Safe Harbor plan, the infamous ADP (average Actual Deferred Percentage) test is performed in the first couple of months following plan year end. So, most plan sponsors have recently been informed as to whether or not the test was passed for the prior year and some of your client's key people may have been forced to take refunds of some of their salary deferrals. They are never happy about that!
If you are not familiar with the annual ADP test, see our 401k) Primer: Click Here to Download the 401(k) Primer.
If the ADP test is not passed, then the Plan Sponsor will have to either return salary deferrals to some of their most important employees or make additional contributions for the Non-Highly Compensated Employees. Either way, the Plan Sponsor is not happy. Plan Sponsors are looking for solutions.
The possible solutions (and it may take several) may involve adding automatic enrollment, considering a small incentive match, re-energizing the employees by having some really effective enrollment meetings, explaining why now is the ideal time to get a lot of money into to the market at the earliest age possible so time is on their side. It might be even time to change the entire program to a new, more exciting vendor - reboot the plan by making some major changes.
Of course, the most obvious solution is to convert the plan into a Safe Harbor plan - see the Primer mentioned above to educate yourself on the Safe Harbor options. The Plan Sponsor will not be able to implement a Safe Harbor in the middle of a year, so that might only work for the next Plan Year.
As a CPA, if you client is complaining about the 401(k) Plan not working as they had hoped, encourage them to see a fresh new opinion about how their program is structured.
If you are not familiar with the annual ADP test, see our 401k) Primer: Click Here to Download the 401(k) Primer.
If the ADP test is not passed, then the Plan Sponsor will have to either return salary deferrals to some of their most important employees or make additional contributions for the Non-Highly Compensated Employees. Either way, the Plan Sponsor is not happy. Plan Sponsors are looking for solutions.
The possible solutions (and it may take several) may involve adding automatic enrollment, considering a small incentive match, re-energizing the employees by having some really effective enrollment meetings, explaining why now is the ideal time to get a lot of money into to the market at the earliest age possible so time is on their side. It might be even time to change the entire program to a new, more exciting vendor - reboot the plan by making some major changes.
Of course, the most obvious solution is to convert the plan into a Safe Harbor plan - see the Primer mentioned above to educate yourself on the Safe Harbor options. The Plan Sponsor will not be able to implement a Safe Harbor in the middle of a year, so that might only work for the next Plan Year.
As a CPA, if you client is complaining about the 401(k) Plan not working as they had hoped, encourage them to see a fresh new opinion about how their program is structured.
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