For Small Business Owners and Executives

If you are an owner of a business with few employees and are looking to compensate just a few key employees or just yourself, you may want to consider a New Comparability Profit-Sharing Plan.

A New Comparability Profit-Sharing Plan allows for the largest possible share of the company"s contribution to be allocated to the owner and/or key employees by allowing contributions to be allocated according to employee classification groups.

401K Plans

Traditional 401K Plans
Vesting
Nondiscrimination Testing
Safe Harbor 401K Plans
SIMPLE 401K Plans
Automatic 401K Plans

401K Plans are Qualified Employer Sponsored Retirement Plans whereby the employer contributes a set percentage of the employee"s salary either through salary deferral or at the employer"s expense to the account set up for each participating employee. The written plan must provide that each participant receive all benefits by April 1st of the calendar year that the participant retires or by April 1st of the calendar year after the participant turns 70 1/2.

Features:

Participant's retirement benefits based on participant"s account balance
May allow employees to contribute through salary deferrals
Depending on the type of plan, employer may be required to make annual minimum contributions
Total contributions (both of employer and employee) and earnings to any employee"s account in any one year are limited to the lesser of 100&% of compensation or $49,000
Must meet minimum coverage tests but can exclude some employees
More complex to set up and operate
Annual return usually required
May require annual nondiscrimination testing (see nondiscrimination testing below)
Greater design flexibility
Loans and hardship withdrawals allowed
May delay vesting (see vesting below) of some employer contributions

Traditional 401(k) Plan

If the company decides to contribute to the 401(k) plan it can contribute a percentage of each employee"s compensation to the participant"s account (called a nonelective contribution), or it can match the amount the employee decides to contribute (within the limits of current law) or it can do both.

Other features of the plan are:

the employer may change the amount of nonelective contributions each year,
a vesting schedule may be applied to employer contributions,
annual discrimination testing is required, and
employee contributions are limited to $16,500 for 2009 and 2010 with an additional catch up contributions allowed of $5,500 for participants 50 and over.

Vesting

Vesting refers to ownership. If an employee is 100 percent vested in his account he owns all benefits in the account and the employer may not take it back even if the employee is terminated. Often an employer may, depending on the type of plan, apply a vesting schedule such that an increasing percent of the employer"s contributions are vested each year until the employee owns 100 percent of the account.

Nondiscrimination Testing

For a 401(k) plan to qualify for tax benefits the plan must provide benefits for rank-and-file employees, not just business owners and managers. These requirements are called nondiscrimination rules and compare plan participation and contributions of rank-and-file employees to owners/managers.

Safe Harbor 401(k) Plan

Under a Safe Harbor plan the company can match each eligible employee"s contribution, up to 3 percent of the employee"s compensation, and 50 cents on the dollar for the employee"s contribution that exceeds 3 percent, but not 5 percent, of the employee"s compensation or it can make a nonelective contribution equal to 3 percent of compensation to each eligible employee"s account, but it must make either the matching contributions or the nonelective contributions. In addition:

required employer contributions are 100% vested, and
employee contributions are limited to $16,500 for 2009 and 2010 with additional catch up contributions allowed of $5,500 for participants 50 and over.

SIMPLE 401(k) Plan

Employer contributions to a SIMPLE 401(k) plan are limited to either a dollar-for-dollar matching contribution, up to 3 percent of pay or a nonelective contribution of 2 percent of pay for each eligible employee. Also

no other employer contributions can be made to a SIMPLE 401(k) plan, and employees cannot participate in any other retirement plan of the employer,
the maximum amount that employees can contribute to their SIMPLE 401(k) accounts is $11,500 in 2009 and 2010,
an additional catch-up contribution up to $2,500 for 2009 and 2010 is allowed for employees aged 50 and over, and
required employer contributions are 100% vested.

Automatic 401(k) Plan

A 401(k) plan that includes an automatic enrollment feature which permits the employer to automatically reduce the employee’s wages by a fixed percentage or amount and contribute that amount to the 401(k) plan unless the employee has affirmatively chosen not to have his salary reduced. Also:

the initial automatic employee contribution must be at least 3 percent of compensation,
if initial employee contributions are less than 6 percent they must be set to automatically increase so that, by the fifth year, employee contribution is at least 6 percent of compensation,
employee contributions are limited to $16,500 for 2009 and 2010 with additional catch up contributions allowed of $5,500 for participants 50 and over, and
employer contributions must be at least a matching contribution, up to 1 percent of pay and a 50 percent match for all salary deferrals above 1 percent but no more than 6 percent of compensation; or a nonelective contribution of 3 percent of pay to all participants.