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.

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.