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Part
of the problem that businesses encounter when attempting to
establish employee plans is that their key employees
do not have the same kinds of issues that the remainder of the
employees do. There is a new concept available to businesses of any size that is particularly ideal for small-business owners who want to give their employees all the advantages of a
404(k) while maximizing contributions for themselves and their
key employees.
By pairing a traditional 401(k) plan with a new comparability
profit-sharing plan, a retirement plan is created that lets employers direct a greater share of the
company contributions to key employees whom they most wish to benefit. This concept gives employers all the
tax advantages they'd expect from a qualified plan. Contributions are tax-deductible by the business and plan earnings grow
tax-deferred, yet the plan may allow a group of "preferred" employees to receive a larger proportion of available contributions.
Here's how the concept works. As with any
401(k), employees decide how much to contribute from their own paychecks (up to $11,000 for 2002), and then the employer makes a mandatory 3 percent contribution for all
eligible employees. The employer distributes the remaining eligible contributions to the accounts of the
"preferred" employees (which may be the business owners alone) according to an age-weighted formula.
The attractiveness of this concept is that the employers' mandatory 3 percent contribution makes the "safe harbor" option for the
401(k) available. This serves three purposes: it exempts the plan from ADP and ACP tests; satisfies top-heavy requirements; and counts for cross-testing. This adds up to a double advantage:
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Owners and other highly-paid employees each can shelter up to $11,000 of their pretax pay with no testing restrictions regardless of what other employees put in.
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The company can make extra contributions (beyond 3 percent) for a select group of owners and highly-paid employees-without needing to do so for all employees.
As
with any other business matters, make sure you have the advice
and support of a qualified professional to help you set up
critical business systems and benefits.
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