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.

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.

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.

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.